Shariaa Standards

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1388 The Accounting and Auditing Organization for Islamic Financial Institutions, 2015 King Fahd National Library Cataloging-in-Publication Data The Accounting and Auditing Organization for Islamic Financial Institutions Shariah Standards. / The Accounting and Auditing Organization for Islamic Financial Institutions.- Manama, 2015 1262p ; 2417 cm ISBN: 6-9616-01-603-978 -1 Finance (Islamic Law) 275.5 dc L.D. no. 168/1437 ISBN: 6-9616-01-603-978 |- Title 171/1437 ACCOUNTING AND AUDITING ORGANIZATION FOR ISLAMIC FINANCIAL INSTITUTIONS P.O. Box 1176, Manama, Kingdom of Bahrain Telephone: :(17375400 (973+ Fax: (17250194 (973+ Exclusive Sponsor of AAOIFIs Shariah Standards Online Version SABB Worldwide Distribution: Dar AlMaiman for Publishing & Distributing For online shopping, visit our website: www.daralmaiman.com For more information Email us: info@daralmaiman.com Connect with us via twitter: @DarAlMaiman Phone : +966 11 4627336 Fax : +966 11 4612163 Mobile : +966 500004568 Mobile : +966 505455097 No Unauthorized Photocopying All rights reserved for Accounting and Auditing Organization for Islamic Financial Institutions. Without permission in writing, no part of this publication may be translated, reprinted or reproduced or utilized in any form either in whole or in part or by any electronic, mechanical or other means, now known or hereafter invented, including photocopying and recording, or in any information storage and retrieval system. AAOIFIs Shariah Standards are published both in Arabic and English. In case of any difference between the two texts, the Arabic text shall prevail. Accounting and Auditing Organization for Islamic Financial Institutions is not responsible for any negative consequences occasioned to any person acting or refraining from action as a result of any material in this publication due to its usage. Foreword by AAOIFI Secretary General Praise be to Allah, Lord of the Worlds, and Allahs blessings and peace be upon the noblest of Messengers, Prophet Muhammad, and upon his household and the companions, and those who follow their example with good conduct until the Day of Judgment. It is of Allahs Grace that He bestowed on us the great religion of Islam, and made us the best Ummah raised up for mankind, one that is graced with the noblest of Prophets and Heavenly Books and religious codes. This comprehensive religious code encompassed and ordained all things beneficial to humankind in this life and in the Hereafter, and prohibited and banned all evils and vices, as made clear in the Noble Quran: (...Today, I have perfected your religion for you, and completed My favour upon you, and have granted Islam as a religion for you...).(1)(1) favour upon you, and have granted Islam as a religion for you...). One of the basic pillars of Islamic Faith is the belief in, and perseverance towards, the preservation of the well-being of people, and solid establishment of markets, trade, finances, and to distance all of which from prohibitions sanctioned in the Quran and the Sunnah; namely, Riba, Gharar, gambling, illegal appropriation of peoples wealth, etc. This is also embodied in the keenness to observe prohibitions in the area of financial transactions and contracts, especially when it comes to honoring obligations, honesty and straightforwardness, mutual consent of contracting parties, and so on. Based on this set of norms and values, the Islamic finance industry was established and has attained its current paramount status, as manifested in its growth at a pace greater than that of all other financial sectors. By so doing, it will hopefully be a boon for all peoples and nations of the world. The cornerstone of the Islamic finance industry is, and will always be, the adherence to, and compliance with, the rules and principles of Shariah, , the adherence to, and compliance with, the rules and principles of Shariah [Al-Maidah (The Table): 3] (1)(1) [Al-Maidah (The Table): 3] 5 Foreword by AAOIFI Secretary General under the broader collective reasoning by prominent Shariah scholars and jurists, and based on evidences found in the Quran and the Sunnah, in an attempt to deduce Shariah rulings that fit current-day reality and prac- tices. In this regard, the volume of Shariah Standards has become the major compilation of contemporary Fiqh reasoning in the area of Muamalat Fiqh al-Muamalat compilation of contemporary Fiqh reasoning in the area of Fiqh al- (Jurisprudence of Financial Transactions) around the globe. The standards cover a large array of Islamic financial contracts and products, including those pertaining to banking, Islamic insurance, investment banking, capital markets, financing, and so on. These standards have acclaimed wide popularity within the global Islamic finance industry, and are deemed the most outstanding Shariah reference for this industry and its various stakeholders, including legislative bodies, regulatory authorities, and financial institutions, and other professional entities such as law firms, accounting and consultancy firms, in addition to universities, academic institutions and research centers and Fatwa issuing bodies. Currently, AAOIFI Standards are officially adopted by a number of central banks and financial authorities on a mandatory basis or as guidance. Hence, these standards are viewed as a major hallmark for the Islamic finance industry and one of its principal accomplishments. These standards would have not achieved such a prominence and outreach, with Allahs Grace and Guidance first and utmost, had there been no great efforts exerted by the Shariah scholars and Fuqaha and a host of experts and professionals, volunteering a great deal of their time towards this great cause. The success of these standards can be attributed to a set of factors, primarily the thorough scholarly methodology (the due process) that AAOIFI follows in its efforts to develop and issue the standards. The development process is carried out through more than ten stages, commencing with the commissioning of consultants to prepare the exposure drafts. The exposure draft is then submitted to the respective Shariah Standards Committee which discusses and reviews it, and then forwards it to the Shariah Board to 6 Foreword by AAOIFI Secretary General further discuss and review it, coming up with the draft standard. The draft (one or more) where the Islamic hearing (one or more) where the Islamic public hearing standard is then presented at a public standard is then presented at a finance institutions can discuss it with Fuqaha, experts and professionals hailing from these institutions in order to make certain the draft standard is meticulous and of high quality, covering all practical aspects and emerging practices faced by the industry practitioners. The remarks and comments presented at the will be discussed by the Shariah Board to hearing will be discussed by the Shariah Board to presented at the public introduce the changes it deemed suitable and finally adopt the standard. At this stage, the standard is presented to the drafting committee to edit its text for publication. public hearing One of the major strengths of these standards is reflected in the collective efforts made by the Shariah Board which consists of 20 prominent Shariah scholars from around the world. This ensures globality and wide geographical outreach of these standards in addition to accounting for various localities, jurisdictions, applications and customary practices, etc. The standards also embody the scholarly background diversification among board members, as all major schools of Islamic Law are duly represented, and various specializations are taken into consideration in its formation (from judiciary to Fatwa issuing, consultancy, research, authorship, law, and economic and financial advisory, etc.). These standards also pay special attention to noting down classical Fiqh compendiums across ages, in the area of financial transactions, select- ing the most practical and convenient out of these references, and giving preponderance to specific rulings in the form of a classified and typified standard. Furthermore, the standards account for modern applications of Islamic financial contracts and products and relevant emerging matters. They also grant special consideration to the use of unified terminology and disambiguation of its different components and aspects: technical, legal, accounting, financial, etc. Moreover, the standards involve the pro- cess of deriving Shariah rulings to address all pertaining matters and to provide guidance to the process of differentiation between impermissible and permissible transactions and practices all in one neat, summarized compilation. The Shariah Board has made incumbent upon itself, in view of the fast pace of development and change in the Islamic finance industry, to review 7 Foreword by AAOIFI Secretary General existing standards. It formed from amongst its members a special committee for that purpose. The committee reviews all remarks and comments raised by scholars and experts on the form and substance of the standards. The reviews, in a bid to address the industrys requirements as to emerging matters, have resulted in three classes of standards: (I) Standards whose items and paragraphs were updated to remove ambiguity and clarify their meanings and the rulings embedded therein, or to present more precise presentation of content and so on. (II) Standards to which new paragraphs were added or existing paragraphs were merged or omitted, so that the general structure of the standard is maintained. (III) Standards which the board deemed in need of a new preparation and development, in order to account for the sizable emerging matters and changes relating to the topic of the standard such as the Shariah Standards on Sukuk, Debit Card, Charge Card and Credit Card, and so on. The development process for such standards has commenced and is under way. The new version of AAOIFI Shariah Standards has included a number of reviewed and revised standards (of types 1 and 2, as mentioned above). These standards are labeled with a Revised Standard designation. We are ever thankful to Allah that issuance of the new version in its elegant layout has been completed both in hardcopy and digital formats. A total of 15 new Shariah standards have been translated and added to the English volume. As such, all Shariah standards, included in this edition, have been issued both in Arabic and English. New standards are also under preparation and are currently at different stages of the due process. The newly translated standards that have been added to this edition went through three extensive stages in implementation of proper quality control measures. The first stage constituted institutional efforts made by the control measures. The first stage constituted institutional efforts made by the International Shariah Research Academy for Islamic Finance (ISRA) and the Islamic Development Bank (IDB). The second stage involved revision by a legal expert (lawyer) who examined the translation from the angle of accuracy and faithfulness to the original text and legal vocabulary. Finally, in the third stage, the Translation Committee, consisting of the Honorable Chairman of the Shariah Board and four esteemed members, edited and 8 Foreword by AAOIFI Secretary General fine-tuned the translation through ten meetings, some of which spanned 3 successive days. To all of them, we extend our sincere appreciation and best wishes. I would also like to thank my colleague Mr. Mohammad Majd Bakir (Corporate Development Manager, AAOIFI) for his outstanding efforts to accomplish this project. We warmly welcome your remarks and feedback, including errata, on existing standards and your proposals as to new standards, on our email: sharia@aaoifi.com With sincere wishes and best regards, Dr. Hamed Hassan Merah 23 Dhul-Qadah, 1436 A.H., 7 September 2015 A.D. 9 Foreword by Shariah Boards Chairman Praise be to Allah, Lord of the Worlds, and peace be upon our master Muhammad, the last-sent Prophet and the leader of Prophets, and on all his household and the companions, and those who follow their example in good conduct till the Day of Judgment. As to what follows, Islamic banking does considerably differ from its conventional counterpart in terms of principles, norms, values, and practices. The specialty of Islamic in terms of principles, norms, values, and practices. The specialty of Islamic banking and the soundness of its transactions must be clearly reflected in accounting treatments so that no confusion arises, and no mistakes are committed in practice. Conventional accounting cannot serve the purpose, as it is based on a different set of norms and values. Therefore, it was vital that Islamic banks and financial institutions (IFIs) have their own accounting standards, rather than conventional ones. The development of the standards was and is still a gigantic task that draws on the great efforts exerted by Shariah scholars and professional experts alike. Since inception in 1411 A.H. (corresponding to 1991 A.D.), AAOIFI has been exerting a lot of efforts in the preparation of accounting standards for Islamic financial institutions and auspiciously the standards have been well received by the industry, especially in the area of Islamic banking where Islamic banks follow them on a mandatory basis or as guidance, based on regulatory enforcement by central banks in many countries around the globe. Subsequently, AAOIFI decided to issue Shariah standards in the same way it had issued its accounting standards, in order to provide a reference for Islamic banks and financial institutions to comply with Shariah in their transactions and products and to harmonize various Fatwas issued by different Shariah Supervisory Boards (SSBs). To that end, AAOIFI formed its Shariah Board in 1419 A.H. (corresponding to Fiqh al-Muaamalat 1999 A.D.) consisting of Shariah scholars versed with Fiqh al-Muaamalat 1999 A.D.) consisting of Shariah scholars versed with and financial jurisprudence), especially in the area (Islamic commercial and financial jurisprudence), especially in the area (Islamic commercial 1010 Foreword by Shariah Boards Chairman of Islamic banking. The Board, with Allahs Grace, has managed to issue more than 54 standards hitherto, covering a wide array of Shariah rules pertaining to financial transactions of Islamic financial institutions (IFIs). pertaining to financial transactions of Islamic financial institutions (IFIs). These standards have become a reliable reference for the Islamic banking industry, and an essential part of academic curricula in universities, colleges and schools offering education on Islamic banking. The Board exerts due diligence to develop these standards through the due process which initiatives with commissioning of a consultant/scholar knowledgeable in the area relevant to the topic of the standard. An additional study will be conducted to take into consideration all relevant issues in light of the Noble Quran, the Sunnah, and major schools of Islamic Law, setting out Shariah basis and newly emerging matters along with contemporary Fiqh views. Then, an exposure draft is prepared for the prospective standard. The study and exposure draft will be submitted to a committee formed from amongst the Board members in addition to a number of external, specialized scholars. For that purpose, the Board formed four committees that convene to review the exposure draft and prepare it for submission to the Shariah Board. The Board used to convene every week and other week in Makkah Al-Mukarramah and Al-Madinah Al-Munawwarah, in turns. It currently convenes only four times a year at least, two in the Two Holy Cities, and two elsewhere. Afterward, the exposure drafts reviewed by the committees are discussed manner, line in line out in the Boards meetings in a deliberate and unhindered manner, line in line out in the Boards meetings in a deliberate and unhindered until a standard is adopted based on consensus or the opinion of the majority. Thereafter, AAOIFI holds a public hearing to present and discuss the proposed standard with a host of scholars and practitioners who voice their views and opinions, whether in the form of deletions, additions, or amendment. The feedback will be presented to the Board again in its next meeting for discussion. This will represent an opportunity for the Board to discuss the standard for the last time before issuance, where it can add or delete or amend it as deemed appropriate after extensive discussions. At this stage, the due process completes and the standard is officially adopted and issued. 1111 Foreword by Shariah Boards Chairman In this regard, two important facts are worth noting: First, these standards are issued by the Board, not by an individual or an ad-hoc group of individuals. Hence, the rulings and provisions reached at in the standards shall not be attributed to a specific member in his personal capacity. The Board follows a professional methodology as do most similar international bodies. Its decisions are taken by the majority of members, while those members with opposing views or reservations will be referred to along with their views or reservations in the minutes of meetings. The decisions will be issued under the name of the Board and points of incongruity will not be mentioned. Most of the provisions in the standards issued by the Board are typically agreed on by all members. It is not unusual, however, that different points of view often emerge as to Ijtihad), especially in relation rulings developed on the basis of reasoning ( ), especially in relation rulings developed on the basis of reasoning (Ijtihad ). If incongruity on some issues Nawazil). If incongruity on some issues to new occurrences and issues (Nawazil to new occurrences and issues ( lingers on after open deliberations, the Board would take its decisions based on the majority of views, and the points of incongruity would be noted down in the minutes as is the usual procedure without referring in the body of the standard. thereto in the body of the standard. thereto Second, despite the above-mentioned steps followed by the Board in its keenness to take prudent measures in the process of standards issuance, this all remains a human endeavor that is fallible by nature, where mistakes and oversight are not completely ruled out, and infallibility only belongs to Prophets and Messengers (peace be upon them). Therefore, the Board formed a review committee to look into its existing standards. Should a mistake or oversight be pinpointed, or should there be any suggestion for improvement of the standards, we would be thankful to receive feedback from scholars (please address them to AAOIFIs General Secretariat, which will submit them in turn to the Board through the review committee, Allahs Willing). Lastly, I would like to extend my appreciation to all Board members for their invaluable efforts and contributions to the realization of this splendid achievement, purely dedicated to Allah, and also for the spirit of under- standing they exhibited during constructive scholarly deliberations. I would also like to thank AAOIFI for its remarkable initiative embodied in this 1212 Foreword by Shariah Boards Chairman outstanding accomplishment and for its unwavering efforts to support and facilitate the errand of the Board as it saved no means to arrange the Boards meetings, to iron out all obstacles and difficulties, and to follow up on the Boards resolutions and communicate them to all parties concerned. I do supplicate to Allah to amply reward all those who sincerely contributed to- wards this work, and I pray that Allah accept it and extend its benefits to people everywhere. And praise be to Allah, first and foremost, Muhammad Taqi Usmani 1313 Table of Contents Subject PagePage .............................................. Foreword by AAOIFI Secretary General .............................................. Foreword by AAOIFI Secretary General Foreword by Shariah Boards Chairman .............................................. Foreword by Shariah Boards Chairman .............................................. .......................................................................................... Introduction .......................................................................................... Introduction .............................................................................. Organizational Structure .............................................................................. Organizational Structure Shariah Standards

1. SS (1): Trading in Currencies ................................................................ SS (1): Trading in Currencies ................................................................
1. SSSS (2): Debit Card, Charge Card and Credit Card ............................... (2): Debit Card, Charge Card and Credit Card ...............................
1. SSSS (3): Procrastinating Debtor ................................................................ (3): Procrastinating Debtor ................................................................
1. SSSS (4): Settlement of Debt by Set-Off ..................................................... (4): Settlement of Debt by Set-Off .....................................................
1. SSSS (5): Guarantees .................................................................................... (5): Guarantees ....................................................................................
1. SSSS (6): Conversion of a Conventional Bank to an Islamic Bank ........ (6): Conversion of a Conventional Bank to an Islamic Bank ........
1. SSSS (7): Hawalah ......................................................................................... (7): Hawalah .........................................................................................
1. SSSS (8): Murabahah .................................................................................... (8): Murabahah ....................................................................................
1. SSSS (9): Ijarah and Ijarah Muntahia Bittamleek ..................................... (9): Ijarah and Ijarah Muntahia Bittamleek .....................................
1. SSSS (10): Salam and Parallel Salam ............................................................ (10): Salam and Parallel Salam ............................................................
1. SSSS (11): (11): Istisnaa and Parallel Istisnaa ..................................................... Istisnaa and Parallel Istisnaa..................................................... ............. (12): Sharikah (Musharakah) and Modern Corporations .............
1. SSSS (12): Sharikah (Musharakah) and Modern Corporations
1. SSSS (13): Mudarabah
1. SSSS (14): Documentary Credit ................................................................. (14): Documentary Credit ................................................................. ................................................................................... (13): Mudarabah ...................................................................................
1. SSSS (15): Jualah ........................................................................................... (15): Jualah ...........................................................................................
1. SSSS (16): Commercial Papers .................................................................... (16): Commercial Papers ....................................................................
1. SSSS (17): Investment Sukuk ...................................................................... (17): Investment Sukuk ......................................................................
1. SSSS (18): Possession (Qabd) ...................................................................... (18): Possession (Qabd) ......................................................................
1. SSSS (19): (19): Loan ................................................................................ Loan (QardQard) ................................................................................
1. SSSS (20): Sale of Commodities in Organized Markets .......................... (20): Sale of Commodities in Organized Markets .......................... 1515 5 1010 1919 2626 4747 6767 8383 103103 119119 147147 171171 195195 233233 267267 291291 321321 365365 391391 421421 439439 463463 489489 513513 535535 Table of Contents
1. SSSS (21): Financial Paper (Shares and Bonds) ........................................ (21): Financial Paper (Shares and Bonds) ........................................ ................................................................ (22): Concession Contracts ................................................................ (23): Agency and the Act of an Uncommissioned Agent (Fodooli) Agency and the Act of an Uncommissioned Agent (Fodooli) .. ..
1. SSSS (22): Concession Contracts
1. SSSS (23):
1. SSSS (24): Syndicated Financing ................................................................. (24): Syndicated Financing.................................................................
1. SSSS (25): Combination of Contracts .......................................................... (25): Combination of Contracts ..........................................................
1. SSSS (26): Islamic Insurance ......................................................................... (26): Islamic Insurance .........................................................................
1. SSSS (27): Indices
1. SSSS (28): Banking Services in Islamic Banks 29.29. SSSS (29): (27): Indices ............................................................................................ ............................................................................................ ............................................ (28): Banking Services in Islamic Banks............................................ (29): Stipulations and Ethics of Fatwa in the Institutional Frame- Stipulations and Ethics of Fatwa in the Institutional Frame- ............................................................................................... workwork ...............................................................................................
1. SSSS (30): Monetization ( (30): Monetization (Tawarruq ........................................................... Tawarruq) ...........................................................
1. SSSS (31): Controls on Gharar in Financial Transactions ....................... (31): Controls on Gharar in Financial Transactions .......................
1. SSSS (32): Arbitration .................................................................................... (32): Arbitration ....................................................................................
1. SSSS (33): Waqf ............................................................................................... (33): Waqf ...............................................................................................
1. SSSS (34): Hiring of Persons ......................................................................... (34): Hiring of Persons .........................................................................
1. SSSS (35): Zakah ............................................................................................. (35): Zakah .............................................................................................
1. SSSS (36): Impact of Contingent Incidents on Commitments ................ (36): Impact of Contingent Incidents on Commitments ................
1. SSSS (37): Credit Agreement ........................................................................ (37): Credit Agreement ........................................................................
1. SSSS (38): Online Financial Dealings .......................................................... (38): Online Financial Dealings ..........................................................
1. SSSS (39): Mortgage and its Contemporary Applications 40.40. SSSS (40): ........................ (39): Mortgage and its Contemporary Applications........................ (40): Distribution of Profit in Mudarabah-Based Investment Distribution of Profit in Mudarabah-Based Investment Accounts....................................................................................... 41.41. SSSS (41): Islamic Reinsurance 42.42. SSSS (42): ..................................................................... (41): Islamic Reinsurance ..................................................................... (42): Financial Rights and How They Are Exercised and Trans- Financial Rights and How They Are Exercised and Trans- ferred .............................................................................................. ferred .............................................................................................. Insolvency .................................................................................... (43): Insolvency .................................................................................... .......................................... Obtaining and Deploying Liquidity .......................................... (44): Obtaining and Deploying Liquidity (45): Protection of Capital and Investments ..................................... Protection of Capital and Investments ..................................... (46): Al-Wakalah Bi Al-Istithmar (Investment Agency) ................. Al-Wakalah Bi Al-Istithmar (Investment Agency)................. (47): Rules for Calculating Profit in Financial Transactions .......... Rules for Calculating Profit in Financial Transactions .......... (48): Options to Terminate Due to Breach of Trust (Trust-Based Options to Terminate Due to Breach of Trust (Trust-Based ........................................................................................ Options ........................................................................................ Options 49.49. SSSS (49): (49): Unilateral and Bilateral Promise ................................................ Unilateral and Bilateral Promise ................................................ 1616 43.43. SSSS (43): 44.44. SSSS (44): 45.45. SSSS (45): 46.46. SSSS (46): 47.47. SSSS (47): 48.48. SSSS (48): 555555 583583 605605 629629 647647 673673 701701 719719 733733 753753 767767 789789 809809 839839 865865 905905 921921 943943 963963 989989 1013 1061 1083 1097 1115 1133 1145 1159 1175 1197 1213 1231 1245 1259 Table of Contents 50.50. SSSS (50): (50): Irrigation Partnership (Musaqat) ............................................... Irrigation Partnership (Musaqat) ............................................... 51.51. SSSS (51): 52.52. SSSS (52): Options to Revoke Contracts Due to Incomplete Performance .. .. (51): Options to Revoke Contracts Due to Incomplete Performance (52): Options to Reconsider (Cooling-Off Options, Either-Or Options, Options to Reconsider (Cooling-Off Options, Either-Or Options, and Options to Revoke Due to Non-Payment) .............................. .............................. and Options to Revoke Due to Non-Payment) ............................................................ Arboun (Earnest Money) ............................................................ (53): Arboun (Earnest Money) 53.53. SSSS (53): 54.54. SSSS (54): (54): Revocation of Contracts by Exercise of a Cooling-Off Option Revocation of Contracts by Exercise of a Cooling-Off Option ... ... ............................................................ Overview: Publication Sponsor ............................................................ Overview: Publication Sponsor 1717 Introduction The Accounting and Auditing Organization for Islamic Financial Insti- Insti- The Accounting and Auditing Organization for Islamic Financial tutions (AAOIFI), formerly known as Financial Accounting Organization for Islamic Banks and Financial Institutions, was established in accordance with the Agreement of Association which was signed by Islamic financial institutions on 1 Safar 1410 A.H., corresponding to 26 February 1990 A.D., in Algiers. AAOIFI was registered on 11 Ramadan 1411 A.H., corresponding to 27 March 1991 A.D., in the Kingdom of Bahrain as an international auton- omous non-profit making corporate body. Objectives of AAOIFI are:
To develop accounting and auditing thoughts relevant to Islamic financial institutions;
To disseminate accounting and auditing thoughts relevant to Islamic financial institutions and their applications through training, seminars, publication of periodical newsletters, carrying out and commissioning of research and other means;
To prepare, promulgate and interpret accounting and auditing standards for Islamic financial institutions; and
To review and amend accounting and auditing standards for Islamic financial institutions. AAOIFI carries out these objectives in accordance with the precepts of Islamic Shariah which represents a comprehensive system for all aspects of life, in conformity with the environment in which Islamic financial institutions have developed. This activity is intended both to enhance the confidence of users of the financial statements of Islamic financial institutions in the information that is produced about these institutions, and to encourage these users to invest or deposit their funds in Islamic financial institutions and to use their services. Before the establishment of AAOIFI, intensive efforts were made on both administrative and technical levels beginning with the working paper that 2121 Introduction was presented by the Islamic Development Bank during the annual meeting of its board of governors in Istanbul in March 1987. Thereafter, a number of committees were formed to examine the appropriate methods of preparing accounting standards for Islamic financial institutions. These committees produced several research studies and reports.(1)(1) produced several research studies and reports. Since its establishment in 1411 A.H., corresponding to 1991 A.D. and until 1415 A.H., corresponding to 1995 A.D., the organizational structure of AAOIFI comprised the Supervisory Committee which consisted of seventeen members, the Financial Accounting Standards Board which consisted of twenty one members, an Executive Committee appointed from within the members of the Standards Board, and a Shariah Committee of four members. After four years of work, the Supervisory Committee decided to form a review committee to look into the statute of AAOIFI and its organizational structure. The amendments that were later introduced in the statute, which were approved by the Supervisory Committee, included the renaming of the Organization and the changing of its organizational structure. The revised structure consisted of a General Assembly, a Board of Trustees (which replaced the supervisory committee), an Accounting and Auditing Standards Board (which replaced the former board that was confined to accounting standards only), an Executive Committee, a Shariah Board and a General Secretariat to be headed by a Secretary-General. The amendment of the statute also included changing the method of financing AAOIFI. In the past, AAOIFI was financed by contributions paid by the founding members (Islamic Development Bank, Dar Al-Maal Al-Islami Group, Al Rajhi Banking & Investment Corporation, Dallah Al Baraka and Kuwait Finance House). The revised statute calls for the establishment of a Waqf (endowment) and charity fund to be financed from membership fee that is paid only once by institutions joining AAOIFI. The proceeds from this fund, the annual subscription fees, grants, donations, bequests and others are the sources from which AAOIFI funds its activities. (1)(1) These studies and reports are compiled in five volumes and were lodged in the library These studies and reports are compiled in five volumes and were lodged in the library of the Islamic Research and Training Institute of the Islamic Development Bank in Jeddah - Saudi Arabia under serial no. (332/121021). 2222 Introduction The amendment of the statute also included changing the membership of AAOIFI. It consisted of: Founding members, Founding members, Non-founding members, Non-founding members, Observing members. Observing members. Attached is an updated list of AAOIFIs members. In 1419 A.H., corresponding to 1998 A.D., additional amendments were made in AAOIFIs statute. These amendments included, among other things, the broadening of AAOIFIs objectives. Article (4) of the amended statute states that AAOIFI shall:
Develop the accounting, auditing and banking practices thought relating to the activities of Islamic financial institutions.
Disseminate the accounting and auditing thought relating to the activities of Islamic financial institutions and their applications through training, seminars, publication of periodical newsletters, preparation of research and other means.
Prepare, promulgate and interpret accounting and auditing standards for Islamic financial institutions in order to harmonize the accounting practices adopted by these institutions in the preparation of their financial statements, as well as to harmonize the auditing procedures adopted in auditing the financial statements prepared by Islamic financial institutions.
Review and amend the accounting and auditing standards for Islamic financial institutions to cope with developments in the accounting and auditing thought and practices.
Prepare, issue, review and adjust the statements and guidelines on the banking, investment and insurance practices of the Islamic financial institutions.
Approach the concerned regulatory bodies, Islamic financial institu- tions, other financial institutions that offer Islamic financial services, and accounting and auditing firms in order to implement the accoun- ting and auditing standards, as well as the statements and guidelines on the banking, investment and insurance practices of Islamic financial institutions that are published by AAOIFI. 2323 Introduction The amendments also included the renaming of non-founding members to be Associate Members. Article (3) of the amended statute states that associate members shall comprise the following:
Islamic financial institutions that comply with Islamic Shariah rules and principles in all their transactions.
Regulatory and supervisory authorities that supervise Islamic financial institutions. Regulatory and supervisory authorities include central banks, monetary agencies and other similar authorities.
Islamic Fiqh academies and authorities that have corporate entity. The Observing Members shall comprise the following:
Organizations and associations responsible for regulating the accoun- ting and auditing profession and/or those responsible for preparing accounting and auditing standards.
Practicing certified accounting and auditing firms that have interest in the accounting and auditing practices of Islamic financial institutions.
Financial institutions engaged in financial activities of Islamic insti- tutions.
Users of financial statements of Islamic financial institutions both individual and corporate. The conditions of membership specified in Article (8) of the amended statute stipulate that every member should pay the prescribed membership fee and the annual subscription fee. A member should also comply with AAOIFIs statute and bylaws. The amendment of the statute also included the formation of a Shariah Board instead of Shariah Committee. Details of the Shariah Board are shown below in the organizational structure. In 1425 A.H., corresponding to 2004 A.D., additional amendments were made in AAOIFIs statute. These amendments included expanding the membership category to include supporting members, which comprise users of financial statements of Islamic financial institutions both individuals and corporate. It also comprises all the local and international financial institutions that already have or intend to have relations with Islamic financial institutions products. 2424 Introduction The changes also include AAOIFI ability to offer a testing and certification programme in the areas of accounting, auditing, financial analysis, and Islamic banking, conducted either by AAOIFI or in cooperation with other Islamic banking, conducted either by AAOIFI or in cooperation with other parties. 2525 Introduction Organizational Structure a) General Secretariat The General Secretariat consists of the Secretary-General and the technical technical The General Secretariat consists of the Secretary-General and the executive director and administrative units. The Secretary-General is the executive director and administrative units. The Secretary-General is the of AAOIFI. He coordinates the activities of General Assembly, the Board of Trustees, the Standards Board, Shariah Board, the Executive Committee and the subcommittees and acts as their rapporteur. He runs the day-to-day affairs and activities as well as coordinating and supervising the studies related to the preparation of statements, standards and guidelines promulgated by AAOIFI. The responsibilities of the Secretary-General also include strengthening ties between AAOIFI and other organizations and representing AAOIFI at conferences, seminars and scientific meetings. b) Board of Trustees The Board of Trustees is composed of nineteen part-time members, in addition to the Secretary General, who are appointed by the General Assembly for a five-year term. Members of the Board of Trustees represent the following various categories: regulatory and supervisory bodies, financial institutions, Shariah Supervisory Boards, organizations Islamic financial institutions, Shariah Supervisory Boards, organizations Islamic and associations responsible for regulating the accounting profession and/ and associations responsible for regulating the accounting profession and/ or responsible for preparing accounting and auditing standards, certified accountants, and users of the financial statements of Islamic financial institutions. The conditions of electing these members are specified in Article (11) of the statute. The Board of Trustees meets at least once a year. With the exception of the proposals to amend the statute of AAOIFI which requires the vote of three quarters of the members of the Board of Trustees, decisions in all matters before the Board are adopted by the majority of the members voting. In case of a tie, the Chairman shall have the casting vote. 2626 Introduction The powers of the Board of Trustees include, among others, the fol- lowing:
Appointment of members of AAOIFIs Boards and termination of their membership, in accordance with the provisions of the statute.
Arrangement of sources of finance for AAOIFI and investing those resources.
Appointment of two members from amongst the members of the Board of Trustees to the Executive Committee.
Appointment of the Secretary-General. Notwithstanding the provisions of the statute concerning the Board of Trustees powers and authorities, neither the Board of Trustees nor any of its sub-committees including the Executive Committee, has the right to interfere directly or indirectly in the work of the other Boards of AAOIFI or influence them in any manner whatsoever. c) Executive Committee The Executive Committee is composed of five members: The Chairman and one member from of the Board of Trustees, the Secretary General, the Chairman of the Accounting and Auditing Standards Board and the Chairman of the Shariah Board. The Executive Committee has the power to discuss, among other things, the work plan, the annual budget, financial statements, and the report of the external auditor. The Executive Committee also has the power to approve the employment bylaws and financial regulations of AAOIFI. The Executive Committee meets at least twice at the request of the Secretary General or as and when required at the request of either its Chairman or the SecretaryGeneral. d) General Assembly The General Assembly is composed of all founding and associate mem- bers, members representing regulatory and supervisory authorities, observer members and supporting members. Observer and supporting members have the right to participate in the meetings of the General Assembly but without a right to vote. The General Assembly is the supreme authority and convenes at least once a year. 2727 e) Shariah Board Introduction The Shariah Board is composed of not more than twenty members to be appointed by the Board of Trustees for a four-year term from among Fiqh scholars who represent Shariah Supervisory Boards in the Islamic financial institutions that are members of AAOIFI, and Shariah supervisory boards in central banks, in addition to the Secretary General. The powers of the Shariah Board include, among others, the following:
Achieving harmonization and convergence in the concepts and ap- plication among the Shariah Supervisory Boards of Islamic finan- cial institutions to avoid contradiction or inconsistency between the Fatwas and applications by these institutions, thereby providing a pro-active role for the Shariah Supervisory Boards of Islamic financial institutions and central banks.
Helping in the development of Shariah approved instruments, thereby enabling Islamic financial institutions to cope with the developments taking place in instruments and formulas in fields of finance, investment and other banking services.
Examining any inquiries referred to the Shariah Board from Islamic financial institutions or from their Shariah Supervisory Boards, either to give the Shariah opinion in matters requiring collective Ijtihad (reasoning), or to settle divergent points of view, or to act as an arbitrator.
Reviewing the standards which AAOIFI issues in accounting, auditing and code of ethics and related statements throughout the various stages and code of ethics and related statements throughout the various stages of the due process, to ensure that these issues are in compliance with the rules and principles of Islamic Shariah. f) Accounting and Auditing Standards Board The Standards Board is composed of twenty part-time members who are appointed by the Board of Trustees for a four-year term, in addition to the Secretary General. Members of the Standards Board represent the following various categories: Regulatory and supervisory bodies, Islamic financial institutions, Shariah Supervisory Boards, university professors, organizations and associations responsible for regulating the accounting 2828 Introduction profession and/or responsible for preparing accounting and auditing standards, certified accountants, and users of the financial statements of Islamic financial institutions. The powers of the Standards Board include, among others, the following:
To prepare, adopt and interpret accounting and auditing statements, standards and guidelines for Islamic financial institutions.
To prepare and adopt code of ethics and educational standards related to the activities of Islamic financial institutions.
To review with the aim of making additions, deletions or amendments to any accounting and auditing statements, standards and guidelines.
To prepare and adopt the due process for the preparation of standards, as well as regulations and bylaws of the Standards Board. The Standards Board meets at least twice every year and its resolutions are adopted by the majority of the votes of the members voting. In case of a tie, the Chairman of the Standards Board shall have the casting vote. 2929 Introduction Board of Trustees NAME POSITION STATUS H.E Shaikh Ebrahim Bin Khalifa Al Khalifa H. E. Sheikh Saleh Abdullah Kamel Tan Sri Dr. Munir Majid Mr. Ahmed al Gebali Mr. Shadi Zahran H. E. Muliaman D Hadad Mr. Khalid Hamad Mr. Saeed Ahmed Mr. Abdulmohsen Abdulaziz Al- Fares Mr. Tirad M. Mahmoud Mr. Abdulbasit Ahmed A. Al- Shaibei Mr. Irfan Siddiqui Mr. Abdulrazak Mohammed Elkhraijy Former Minister of Housing, Kingdom of Bahrain President, Dallah Al Baraka Group, Kingdom of Saudi Arabia Chairman, Bank Muamalat, Malaysia Director, Islamic Development Bank Group Chief Financial Officer, Kuwait Finance House Chairman, Financial Services Authority of Indonesia Executive Director, Banking Supervision, Central Bank of Bahrain Deputy Governor, State Bank of Pakistan Chief Executive Officer, Alinma Bank, Kingdom of Saudi Arabia Chief Executive Officer, Abu Dhabi Islamic Bank, United Arab Emirates Chief Executive Officer, Qatar International Islamic Bank, QatarQatar President & Chief Executive Officer, Meezan Bank, Pakistan Head of Islamic Banking Development Group, National Commercial Bank, Kingdom of Saudi Arabia Chairman Deputy Chairman Member 3030 Sh. Dr. Sayyed Mohammad Al- Sayyid Abdul Razzaq Al-Tabtabae Sh. Yousif Khalawi Mr. Noor ur Rahman Abid Mr. Ahmad Fayez Al Shamsi Prof. Dr. Necdet Sensoy Introduction Shariah Scholar, Kuwait Member Shariah Scholar, Kingdom of Saudi Arabia Former Managing Partner, Auditing and Assurance Business Services, Middle East, EY, Kingdom of Bahrain Chairman, Maayer Consulting and Auditing, United Arab Emirates (and former Chief Financial Officer, Emirates Islamic Bank) Member of the Board, Central Bank of the Republic of Turkey (and former Professor of Accounting in Universities in Malaysia and Turkey) Member Member & Rapporteur Dr. Hamed Hassan Merah Secretary General, AAOIFI Secretary-General Dr. Hamed Hassan Merah 3131 Introduction Shariah Board NAME POSITION STATUS Sheikh Muhammad Taqi Usmani Vice-President Darul-Uloom Karachi, Pakistan, and Permanent Member, OIC Fiqh Academy, Jeddah, Kingdom of Saudi Arabia Chairman Sheikh Abdulla Bin Sulaiman Al Manea Member, Council of Senior Scholars, and Advisor to the Royal Court, Kingdom of Saudi Arabia Deputy Chairman Sheikh Dr. Abdul Sattar Abu Ghuddah Sheikh Dr. Hussein Hamid Hassan Sheikh Abdulla Bin Mohamed Al Mutlaq Sheikh Dr. Ahmad Ali Abdulla Sheikh Nizam Yaquby President and General Secretary of the Unified Shariah Board of Al Baraka Banking Group, Kingdom of Saudi Arabia International Expert and Advisor, Chairman and Member of IFIs Shariah Supervisory Boards, Arab Republic of Egypt Member, Council of Senior Scholars, and Member, Permanent Committee of Ifta, and Advisor to the Royal Court, Kingdom of Saudi Arabia Secretary General, The Higher Council of the Shariah Supervisory Board, Sudan Chairman and Member, IFIs Shariah Supervisory Boards, Kingdom of Bahrain Member Sheikh Dr. Mohamed Ali Al Qari Chairman and Member, IFIs Shariah Supervisory Boards, Saudi Arabia Member Sheikh Dr. Yousef Abdullah Al-Shubaily Chairman and Member, IFIs Shariah Supervisory Board, Bank Albilad, Kingdom of Saudi Arabia Member 3232 Introduction Sheikh Dr. Ahmed Bin Abdulaziz Al Hadad Senior Mufti, Supreme Committee of Iftaa, Director, Dar Al Iftaa, Department of Islamic Affairs and Charitable Activities United Arab Emirates Member Sheikh Dr. Mahmoud Al Sartawi Chairman, Shariah Supervisory Board, Jordan Islamic Bank, Jordan Member Sheikh Dr. Ayashi Faddad Shariah Advisor, Islamic Development BankBank Member Sheikh Dr. Esam Anezi Chairman, Shariah Supervisory Board, Investment Dar, Kuwait. Sheikh Dr. Mohammed Akram Laldin Executive Director, The International Shariah Research Academy for Islamic Finance, Member Sheikh Waleed Bin Hadi Head of Shariah Compliance, Qatar Islamic Bank, Qatar Member Sheikh Aflah Alkahalili Head of Studies and Research, Grand Mufti Office, Sultanate of Oman Member Mr. Abdulla Bin Humood Al Ezzi Member, Ulama Society, Yemen Member Sheikh Mohsen Al Asfoor Member, Shariah Supervisory Board, Ithmaar Bank, Kingdom of Bahrain Member Dr. Hamed Hassan MerahMerah Secretary-General, AAOIFI Member & Rapporteur 3333 Introduction Former Shariah Board Members Sheikh Prof. Dr. Wahbe Mustafa al Zuhaili Sheikh Prof. Dr. Nazih Hammad Sheikh Abdul Razzaq Naser Mohammed Sheikh Ghazali Bin Abdul Rahman Sheikh Yousif Mohammed Mahmoud QasimQasim Sheikh Dr. Abdul Rahman Bin Saleh Al AtramAtram Sheikh Dato Haji Mohammed Hashim Bin Yehia Sheikh Prof. Dr. Alsidiq Mohammed Al Dharir Sheikh Yusuf Talal De Lorenzo Sheikh Prof. Dr. Ali Mohi Eldinne Alqoradaghi Sheikh Dr. Mohammad Daud Bakr Sheikh Mohammed Ali Taskhiri Sheikh Dr. Mohammed Abdul Rahim Sultan Al Ulama Sheikh Prof. Dr. Ajeel Jasim Al-Nashmi Sheikh Dr. Saleh Bin Abdulla Lihaidan 3434 Introduction Shariah Standards Review Committee NAME POSITION STATUS Sheikh Dr. Abdul Sattar Abu Ghuddah Sheikh Dr. Ayashi Faddad Sheikh Waleed Bin Hadi Sheikh Dr. Yousef Abdullah Al- Shubaily Sheikh Dr. Esam Anezi President and General Secretary of the Unified Shariah Board of Al Baraka Banking Group, Kingdom of Saudi Arabia Shariah Advisor, Islamic Development Bank, Saudi Arabia Member Head of Shariah Compliance, Qatar Islamic Bank, Qatar Member Member, Shariah Supervisory Board, Bank Albilad, Kingdom of Saudi Arabia Chairman, Shariah Supervisory Board, Investment Dar, Kuwait. Member Dr. Hamed Hassan Merah Secretary-General, AAOIFI Member 3535 Introduction Shariah Standards Drafting Committee NAME POSITION STATUS Sheikh Dr. Abdul Sattar Abu Ghuddah President and General Secretary of the Unified Shariah Board of Al Baraka Banking Group, Kingdom of Saudi Arabia Sheikh Dr. Mohamed Ali Al Qari Chairman and Member of IFIs Shariah Supervisory Boards, Kingdom of Saudi Arabia Sheikh Dr. Yousef Abdullah Al-Shubaily Member, Shariah Supervisory Board, Bank Albilad, Kingdom of Saudi Arabia Member 3636 Introduction Shariah Standards Translation Committee NAME POSITION STATUS Sheikh Muhammad Taqi Usmani Sheikh Nizam Yaquby Sheikh Dr. Mohamed Ali Al QariQari Sheikh Essam Mohammed Ishaq Sheikh Dr. Mohammed Akram Laldin Vice-President, Darul-Uloom Karachi, Pakistan, and Permanent Member, OIC Fiqh Academy, Kingdom of Saudi Arabia Chairman Chairman and Member of IFIs Shariah Supervisory Boards, Kingdom of Bahrain Chairman and Member of IFIs Shariah Supervisory Boards, Kingdom of Saudi Arabia Shariah Advisor & Board Member, Discover Islam Centre, Kingdom of Bahrain. Executive Director, The International Shariah Research Academy for Islamic Finance, Member 3737 Introduction Shariah Standards Committee (1) Kuwait NAME POSITION STATUS Sheikh Dr. Esam Anezi Chairman, Shariah Supervisory Board, Investment Dar, Kuwait. Chairman Sheikh Dr. Muhammad Anas Al Zarka Senior Advisor, Shura Shariah Consultancy Dr. Mohammed Awd Ali Alfezee Dr. Ali Ebrahim Al Rashid Director, Shariah Compliance Department, Alimtiaz Investment, Kuwait Shariah Consultant, Al Raya Consulting and Training, Kuwait Sheikh Abdul Sattar al QattanQattan General Manager, Shura Shariah Conslutancy, Kuwait Dr. Abdul Aziz Al Qassar Professor, College of Shariah, University of Kuwait, Kuwait Member Dr. Hamed Hassan Merah Secretary General, AAOIFI Member Dr. Abdul Rahman Abdulla Al Saadi Advisor, AAOIFI Rapporteur 3838 Introduction Shariah Standards Committee (2) Jeddah, Kingdom of Saudi Arabia NAME POSITION STATUS Sheikh Dr. Ayashi Faddad Sheikh Dr. Mohamed Ali Al QariQari Sheikh Dr. Yousef Abdullah Al-Shubaily Dr. Mosa Adam Essa Shariah Advisor, Islamic Development Bank, Kingdom of Saudi Arabia Chairman and Member of IFIs Shariah Supervisory Boards, Kingdom of Saudi Arabia Member, Shariah Supervisory Board, Bank Albilad, Kingdom of Saudi Arabia Head of Shariah Compliance, National Commercial Bank, Kingdom of Saudi Arabia Dr. Sami Al-Suwailem Head, Financial Product Development Centre Dr. Abdulla al Omrani Dr. Adel Qouteh Faculty Member, College of Shariah, Al-Imam Muhammad Ibn Saud Islamic University, Kingdom of Saudi Arabia King Abdul Aziz University, Jeddah, Kingdom of Saudi Arabia Chairman Member Dr. Hamed Hassan Merah Secretary General, AAOIFI Member Dr. Abdul Rahman Abdulla Al Saadi Advisor, AAOIFI Rapporteur 3939 Introduction Shariah Standards Committee (3) Dubai, United Arab Emirates NAME POSITION STATUS Sheikh Dr. Abdul Sattar Abu Ghuddah President and General Secretary of the Unified Shariah Board of Al Baraka Banking Group, Kingdom of Saudi Arabia Chairman Dr. Osaid Mohammed Adeeb Kilani Head of Shariah at Abu Dhabi Islamic Bank Member Dr. M. Imran Usmani Dr. Abdul Sattar Khuwaylidi Dr. Amin Fatih Sheikh Nizam Yaquby Resident Shariah Board Member, Meezan Bank, Pakistan Member Secretary General, International Islamic Center for Reconciliation and Arbitration, United Arab Emirates Member General Manager, Minhaj Advisory, United Arab Emirates Member Chairman and Member of IFIs Shariah Supervisory Boards, Kingdom of Bahrain Member Sheikh Yusuf Talal De Lorenzo Chief Shariah Officer, Shariah Capital, United States Member Dr. Hamed Hassan Merah Secretary General, AAOIFI Member Dr. Abdul Rahman Abdulla Al Saadi Advisor, AAOIFI Rapporteur 4040 Introduction Shariah Standards Committee (4) Karachi, Pakistan NAME POSITION STATUS Sheikh Muhammad Taqi Usmani Dr. M. Imran Usmani Mufti. M. Hassan Kaleem Vice-President, Darul-Uloom Karachi, Pakistan, and Permanent Member, OIC Fiqh Academy, Kingdom of Saudi Arabia Resident Shariah Board Member, Meezan Bank, Pakistan Resident Shariah Board Member, Dubai Islamic Bank Pakistan Limited, and Shariah Advisor, Deloitte Mufti. Irshad Ahmad Aijaz Chairman, Shariah Supervisory Board, Bank Islami Pakistan Dr. Khalil Ahmed Azami Shariah Advisor, Al Falah Bank Limited, Pakistan Dr. Mohammed Zubair Al Usmani Mufti. Abdullah Najeeb Ul Haq Siddiqui Darul-Uloom Karachi, Member of Shariah Board, Habib Bank Limited, Pakistan Resident Shariah Board Member, Al Baraka Bank (Pakistan) Limited, Pakistan Chairman Member Secretary General, AAOIFI Dr. Hamed Hassan Merah Secretary General, AAOIFI Dr. Hamed Hassan Merah Member 4141 Introduction Accounting and Auditing Standards Board NAME POSITION STATUS Mr. Hamad Abdulla EqabEqab Senior Vice President, Head of Financial Control, Al Baraka Banking Group, Kingdom of Bahrain. Chairman of Accounting and Auditing Standards Board Mr. Jalil Al-Aali Partner, KPMG Fakhro, Kingdom of Bahrain Mr. Jamil Darras Sheikh Dr. Abdul Sattar Abu Ghuddah Sheikh Essam Mohammed Ishaq Mr. Firas S Hamdan Head, Central Accounting Section, Finance Department, Islamic Development Bank, Kingdom of Saudi Arabia. President and General Secretary of the Unified Shariah Board of Al Baraka Banking Group, Kingdom of Saudi Arabia Shariah Advisor & Board Member, Discover Islam Centre, Kingdom of Bahrain. Accounting Department, Banque du Liban (Central Bank of Lebanon), Lebanon. Dr. Hussein Said Saifan Assistant General Manager, Jordan Islamic Bank, Jordan Chairman of Accounting Standards Committee Chairman of Auditing and Governance Standards Committee Member Dr. Nordin Mohammed Zain Mr. Fawad Laique Deloitte Kassimchan, Malaysia Member Partner, EY , Kingdom of Bahrain. Member 4242 Mr. Oliver Agha Mr. Qudeer Latif Mr. Mohamed Said El SakaSaka Introduction Managing Partner, Agha & Co, United Arab Emirates Partner, Clifford Chance LLP, Dubai, United Arab Emirates. General Manager, Financial Control and Planning Department, Kuwait International Bank, Kuwait Member Dr. Hamed Hassan MerahMerah Secretary-General, AAOIFI Member & Rapporteur 4343 Introduction Accounting Standards Committee NAME POSITION STATUS Mr. Jalil Al-Aali Partner, KPMG Fakhro, Kingdom of Bahrain Chairman Mr. Firas S Hamdan Accounting Department, Banque du Liban (Central Bank of Lebanon), Lebanon. Mr. Fawad Laique Partner, EY & Young, Kingdom of Bahrain. Mr. Imtiaz Ibrahim Partner, EY, Qatar Member Mr. Aly El Azhary Deloitte & Touch Bakr Albulkhair & Co., Kingdom of Saudi Arabia Member Mr.Mahesh Balasubramaniam Partner, KPMG Fakhro, Kingdom of Bahrain Member Mr. Madhukar Shenoy Partner, PwC, Kingdom of Bahrain Member Mr. Irshad Mahmood Director, PwC, Kingdom of Bahrain Member Mr. Issam Z Al-Tawari Dr. Hamed Hassan MerahMerah Vice Chairman & Chief Executive Officer, Rasameel Structured Finance Co., Kuwait. Member Secretary-General, AAOIFI Member 4444 Introduction Auditing and Governance Standards Committee NAME POSITION STATUS Mr. Jamil Darras Sheikh Essam Mohammed Ishaq Head, Central Accounting Section, Finance Department, Islamic Development Bank, Kingdom of Saudi Arabia. Shariah Advisor & Board Member, Discover Islam Centre, Kingdom of Bahrain. Dr. Hussein Said Saifan Assistant General Manager, Jordan Islamic Bank, Jordan Mr. Oliver Agha Managing Partner, Agha & Co, United Arab Emirates Mr. Qudeer Latif Partner, Clifford Chance LLP, Dubai, United Arab Emirates. Chairman Member Dr. Hatim El-Tahir Member Director, Deloitte, Kingdom of Bahrain Member Director, Deloitte, Kingdom of Bahrain Dr. Hamed Hassan MerahMerah Secretary-General, AAOIFI Member 4545 Shariah Standard No. (1) Trading in Currencies Contents Subject ................................................................................................... Preface ................................................................................................... Preface ..................................................................... Statement of the Standard ..................................................................... Statement of the Standard
Scope of the Standard ..............................................................................
Scope of the Standard .............................................................................. Shariah Ruling on Trading in Currencies ......................................
1. Shariah Ruling on Trading in Currencies ...................................... ............................................................
Date of Issuance of the Standard ............................................................
Date of Issuance of the Standard ...................................................................... Adoption of the Standard ...................................................................... Adoption of the Standard Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (b): The The Shariah Basis for the Standard Appendix (b): ...................................... Shariah Basis for the Standard...................................... PagePage 5151 5252 5858 5959 6060 6262 4949 IN THE NAME OF ALLAH, THE ALL-MERCIFUL, THE MOST MERCIFUL All praise be to Allah, the Lord of all the worlds, and blessings and peace be upon our master, Muhammad, and his household and all his companions Preface The purpose of this standard is to explain the Shariah rulings relating to trading in currencies, as well as the conditions and precepts laid down by the Shariah as to what is permissible in currency trading and what is not. The standard also explains some of the practices being applied by Islamic financial Institutions.(1)(1) financial Institutions. The word (Institution/Institutions) is used here to refer, in short, to Islamic financial (1)(1) The word (Institution/Institutions) is used here to refer, in short, to Islamic financial institutions including Islamic Banks. 5151 Shariah Standard No. (1): Trading in Currencies Statement of the Standard
Scope of the Standard This standard covers issues of both actual and constructive possession of currencies, the use of modern means of communication in currency trading, exchange of currencies in the context of the bilateral settlement of debts owed by the parties to the exchange, dealing in currencies in money markets, bilateral promises to buy and sell currencies, deferment of the delivery of one of two countervalues in currency trading, and some cases practised by the Institutions. The standard does not cover the following cases: those where there are no trading in currencies; the effect of goldsmithery in selling gold and silver; transfers of debts that do not involve exchanges of currency; and the discounting of bills of exchange.
Shariah Ruling on Trading in Currencies 2/1 It is permissible to trade in currencies, provided that it is done in compliance with the following Shariah rules and precepts: 2/1/1 Both parties must take possession of the countervalues before dispersing, such possession being either actual or constructive. 2/1/2 The countervalues of the same currency must be of equal amount, even if one of them is in paper money and the other is in coin of the same country, like a note of one pound for a coin of one pound. 2/1/3 The contract shall not contain any conditional option or defer- ment clause regarding the delivery of one or both countervalues. 2/1/4 The dealing in currencies shall not aim at establishing a mo- nopoly position, nor should it entail any evil consequences to the interest of individuals or societies. 5252 Shariah Standard No. (1): Trading in Currencies 2/1/5 Currency transactions shall not be carried out on the forward or futures market. 2/2 It is prohibited to enter into forward currency contracts. This rule applies whether such contracts are effected through the exchange of applies whether such contracts are effected through the exchange of deferred transfers of debt or through the execution of a deferred contract in which the concurrent possession of both of the countervalues by both parties does not take place. 2/3 It is also prohibited to deal in the forward currency market even if the purpose is hedging to avoid a loss of profit on a particular transaction effected in a currency whose value is expected to decline. 2/4 It is permissible for the Institution to hedge against the future de- valuation of the currency by recourse to the following: 2/4/1 To execute back to back interest free loans using different cur- rencies without receiving or giving any extra benefit, provided these two loans are not contractually connected to each other. 2/4/2 Where the exposure is in respect of an account payable, to sell goods on credit or by Murabahah in the currency of the exposure. 2/5 It is permissible for the Institution and the customer to agree, at the time of settlement of the instalments of a credit transaction (such as a Murabahah), that the payment shall be made in another currency applying the spot exchange rate on the day of payment. 2/6 Possession in sales of currencies 2/6/1 When a contract is concluded for the sale of an amount of currency, possession must be taken for the whole amount that is the subject matter of the contract at the closing of the transaction. 2/6/2 Taking possession of one of the countervalues by one party without taking possession of the other is not enough to without taking possession of the other is not enough to make make a currency dealing transaction permissible. Likewise, taking partial possession is not sufficient. Taking possession of part 5353 Shariah Standard No. (1): Trading in Currencies of a countervalue is valid only in respect of the part, posses- of which is complete, whereas the remaining part of the sion of which is complete, whereas the remaining part of the sion transaction remains invalid. 2/6/3 Possession may take place either physically or constructively. The form of taking possession of assets differs according to their nature and customary business practices. 2/6/4 Physical possession takes place by means of simultaneous delivery by hand. 2/6/5 Constructive possession of an asset is deemed to have taken place by the seller enabling the other party to take its delivery and dispose of it, even if there is no physical taking of posses- sion. Among other forms of constructive possession that are approved by both Shariah and business customary practices are the following: a) To credit a sum of money to the account of the customer in the following situations:
When the Institution deposits to the credit of a customers account a sum of money directly or through a bank transfer.
When the customer enters into a spot contract of currency exchange between himself and the Institution, in the case of the purchase of a currency against another currency already deposited in the account of the customer.
When the Institution debits by the order of the customer a sum of money to the latters account and credits it to another account in a different currency, either in the same Institution or another Institution, for the benefit of the customer or any other payee. In following such a procedure, the Institution shall adhere to the principles of Islamic law regarding currency exchange. A delay in making the transfer is allowed to the Institution, consistent with the practice whereby a payee may obtain actual in currency receipt according to prevailing business practices in currency receipt according to prevailing business practices 5454 Shariah Standard No. (1): Trading in Currencies markets. However, the payee is not entitled to dispose of the currency during the transfer period, unless and until the effect of the bank transfer has taken effect so that the payee is able to make an actual delivery of the currency to a third party. b) Receipt of a cheque constitutes constructive possession, provid- ed the balance payable is available in the account of the issuer in the currency of the cheque and the Institution has blocked such a balance for payment. c) The receipt of a voucher by a merchant, signed by the credit card holder (buyer), is constructive possession of the amount that the of currency entered as payable on the coupon provided that the of currency entered as payable on the coupon provided card issuing Institution pays the amount without deferment to the merchant accepting the card. 2/7 Agency in trading in currencies 2/7/1 It is permissible to appoint an agent to execute a contract of sale of a currency with authorisation to take possession of and deliver the countervalue. 2/7/2 It is permissible to appoint an agent to sell currencies without authorizing him to take possession of the amount sold, provided the principal or another agent takes possession at the closing of the transaction, before the principal parties are dispersed. 2/7/3 It is permissible to authorise taking possession of the counter- values after the execution of a contract of currency exchange, provided such possession is completed by the authorised agents at the closing of the transaction, before the principal parties are dispersed. 2/8 Use of modern means of communication for currency trading 2/8/1 Bilateral contracting between two parties at different remote places using modern communication means has the same juristic consequences as execution of the contract in one and ame place. 5555 Shariah Standard No. (1): Trading in Currencies 2/8/2 An offer made for a stated period, which is transmitted by one of the prescribed means of communication, remains binding on the offeror during that period. The contract is not completed until acceptance by the offeree, and taking possession of the countervalues (either actual or constructive) by both parties, has taken place. 2/9 Bilateral promise to purchase and sell currencies 2/9/1 A bilateral promise to purchase and sell currencies is forbidden if the promise is binding, even for the purpose of hedging against currency devaluation risk. However, a promise from one party is permissible even if the promise is binding. 2/9/2 Parallel purchase and sale of currencies is not permissible, as it incorporates one of the following invalidating factors: a) There is no delivery and receipt of the two currencies bought and sold, and thus the contract amounts to a deferred sale of currency. b) Making a contract of currency exchange conditional on another contract of currency exchange. c) A bilateral promise that is binding on both parties to the contract of currency exchange, and this is not permissible. 2/9/3 It is not permissible 2/9/3 It is not for one of the partners in Musharakah or permissible for one of the partners in Musharakah or Mudarabah to be a guarantor for the other partner, to protect the latter from the risks of dealing in currencies. However, it is permissible for a third party to volunteer being a guarantor for that purpose, provided this guarantee is not stated in the contract. 2/10 Exchange of currencies that are debts owed by the parties An exchange of amounts denominated in currencies that are debts established as an obligation on the debtor is permissible, if this results in the settlement of the two debts in place of a bilateral exchange of currencies, and in the fulfilment of the obligations in respect of these debts. This covers the following cases: 5656 Shariah Standard No. (1): Trading in Currencies 2/10/1 Discharge of two debts when one party owes an amount from another party denominated in (say) dinar and the other party owes an amount from the first party denominated in (say) dirham. In this context, both may agree on the rate of exchange between the dinar and the dirham in order to extinguish the debts, wholly or partially. This type of transaction is known as al-Muqassah transaction is known as (set-off). al-Muqassah (set-off). 2/10/2 The creditors making payment of a debt due to him in a currency different from that in which the debt was incurred, provided the settlement is effected as a spot transaction at the spot exchange rate on the day of settlement. 2/11 Combination of currency exchange and transfer of money It is permissible to execute a financial transfer of money (remittances) in a currency different from that presented by the applicant for the transfer. This transaction consists of a currency exchange effected through actual or constructive possession by delivering an amount of currency that is evidenced by a bank draft, followed by the transfer of the amount using currency that is bought by the applicant for the transfer of money. It is permissible for the Institution to charge a fee for the transfer. 2/12 Forms of dealing in currencies via Institutions 2/12/1 Among the forms that are not permitted is the customer of an Institution entering into currency trading for an amount of money exceeding the amount of money he owns, using credit facilities granted by the Institution which handles the currency trading, thus enabling the customer to enter into a transaction for an amount in excess of what he would otherwise be able to pay for. 2/12/2 It is not permitted for the Institution to lend the customer a sum of money on the condition that currency dealing must be effected with that Institution and not with any other. If there is no such condition, then there is no Shariah prohibition. 5757 Shariah Standard No. (1): Trading in Currencies
Date of Issuance of the Standard This Standard was issued on 27 Safar 1421 A.H., corresponding to 31 May 2000 A.D. 5858 Shariah Standard No. (1): Trading in Currencies Adoption of the Standard The Shariah Standard on Trading in Currencies was adopted by the Shariah Board in its meeting No. (4) held on 25-27 Safar 1420 A.H., corresponding to 29-31 May 2000 A.D. 5959 Shariah Standard No. (1): Trading in Currencies Appendix (A) Brief History of the Preparation of the Standard In its meeting No. (1) held in Bahrain on Saturday 11 Dhul-Qadah 1419 A.H., corresponding to 27 February 1998 A.D., the Shariah Board decided to give priority to the preparation of a Shariah standard on Trading in Currencies. On Saturday 11 Dhul-Qadah 1419 A.H., corresponding to 27 February 1999 A.D., a Shariah consultant was commissioned to prepare a juristic study and an exposure draft. In its meeting held in Bahrain on 13-16 Rabi I, 1420 A.H., corresponding to 27-30 June 1999 A.D., the Shariah Committee discussed the juristic study and made certain amendments to it. The committee also discussed the exposure draft of the standard in its meeting No. (3) held in Bahrain on 9-11 Rajab 1420 A.H., corresponding to 18-20 October 1999 A.D., and asked the consultant to make some amendments in light of the comments made by the members. The revised exposure draft of the standard was presented to the Shariah Board in its meeting No. (2) held in Mecca on 10-15 Ramadan 1420 A.H., corresponding to 18-22 December 1999 A.D. The Shariah Board made further amendments to the exposure draft of the standard and decided that it should be distributed to specialists and interested parties in order to obtain their comments in order to discuss them in a public hearing. A public hearing was held in Bahrain on 2930 Dhul-Hajjah 1421 A.H., corresponding to 4-5 April 2000 A.D. The Public hearing was attended by more than 30 participants representing central banks, Institutions, ac- counting firms, Shariah scholars, academics and others who are interested in this field. Members of the Shariah Studies Committee responded in the 6060 Shariah Standard No. (1): Trading in Currencies public hearing to the written comments as well as to the oral comments that were expressed in the public hearing. The Shariah Studies Committee held its meeting No. (5) on 22-24 Muharram 1421 A.H., corresponding to 26-28 April 2000 A.D, to discuss the comments made about the exposure draft. The Committee made the necessary amendments, which it deemed necessary in light of both the discussions that took place in the public hearing and the written comments that were received. The Shariah Board in its meeting No. (4) on 2527 Safar 1421 A.H., corresponding to 2931 May 2000 A.D., in Al-Madinah Al-Munawwarah discussed the amendments made by the Shariah Studies Committee, and made the necessary amendments, which it deemed necessary. The standard was adopted by the majority vote of the members of the Shariah Board, as recorded in the minutes of the Shariah Board. 6161 Shariah Standard No. (1): Trading in Currencies Appendix (B) The Shariah Basis for the Standard Available Evidence Pertaining to the Exchange of Currencies In the Hadiths of the Prophet, there are many Hadiths which govern the rules regarding the exchange of currencies. The best known Hadith is the one reported on the authority of Ubadah Ibn Al-Samit (may Allah Gold be pleased with him) that the Prophet (peace be upon him) said: Gold be pleased with him) that the Prophet (peace be upon him) said: for gold, silver for silver until he said - equal for equal, like for like, hand to hand, if the kinds of assets differ, you may sell them as you wish provided it is hand to hand..(2)(2) The other Hadith, reported on the authority of Abu The other Hadith, reported on the authority of Abu it is hand to hand Said Al-Khudri, is that the Prophet (peace be upon him) said: Do not Said Al-Khudri, is that the Prophet (peace be upon him) said: Do not sell gold for gold except equal for equal and do not sell what is deferred for a spot exchange.(3)(3) These two Hadiths show clearly enough that gold is of These two Hadiths show clearly enough that gold is of a spot exchange. one kind and the silver is of another. A few decisions have been issued by Islamic Fiqh organizations(4)(4) in accordance with the Shariah ruling by Islamic Fiqh organizations in accordance with the Shariah ruling that has been already accepted amongst the jurists, namely that dinars are of a different kind from dirhams. Contemporary Islamic Fiqh scholars have made an analogy between paper and coin money and gold and silver money referred to in the prophetic Hadith. The currency of each (2)(2) Related by Muslim in his Related by Muslim in his Sahih Muslim Sahih Muslim. Related by Al-Bukhari in his Sahih Al-Bukhari (3)(3) Related by Al-Bukhari in his Sahih Al-Bukhari. Among other examples is the one issued by the General council of Fatwa in Kuwait as (4)(4) Among other examples is the one issued by the General council of Fatwa in Kuwait as follows: It is permissible to sell currencies that are different from each other because every currency is considered as a kind of money on its own, like that of gold and silver, and therefore it is permissible to sell a particular currency such as dollar, for another currency such as Indian Rupee even for inequality as it is permissible to sell gold for silver for a different weight, provided the bilateral taking possession of the two counter values ( two currencies) must take place in the session of the contract. However, if a certain amount of a particular currency is sold for the same currency such as Indian Majmuat Al-Fatawa rupee for Indian rupee, then the inequality is impermissible (Majmuat Al-Fatawa rupee for Indian rupee, then the inequality is impermissible ( , Adminsitration of Fatwa of Kuwait 3/160 no. 788). Al-Shariyyah, Adminsitration of Fatwa of Kuwait 3/160 no. 788). Al-Shariyyah 6262 Shariah Standard No. (1): Trading in Currencies country is considered as being of a kind that is different from that of other countries as they are constructive money according to the decision of the International Islamic Fiqh Academy.(5)(5) Therefore, these currencies differ International Islamic Fiqh Academy. Therefore, these currencies differ in kind according to the authority that considers them as money. On this basis, it has been a condition, in the exchange of currencies that are of the same kind, that equality in amount as well as taking possession of the two countervalues before the two contracting parties depart the place of the closing of the contract. However, if the kind of the currencies to be exchanged is different, then it is permissible for the amounts to be different, but the condition of taking possession of the countervalues before the two contracting parties leave the place of signature of the contract shall prevail. Shariah Ruling on Trading in Currencies The original ruling on trading in currencies is that it is permissible, as it falls under the general Islamic provisions regarding the permissibility of selling gold, silver and money because this is one means of earning a profit. This ruling is applicable as long as there is no reason for considering the dealing as prohibited or objectionable. The basis of this ruling is the Hadith that are available with regard to exchange of currencies and the general ruling that is derived from these Hadith as decided by the jurists in the chapter on currency exchange. Whenever one of the Shariah precepts is not met, then the dealing is not permissible. Stipulation of Equality and Taking Possession While equality of the countervalues and concurrent taking of possession are required in the exchange of two similar kinds of currencies, only bilateral taking of possession is required in the exchange of two dissimilar kinds, based on the basis stated in (1) above. Constructive Possession Constructive possession as in the forms mentioned in the standard is on an equal footing with actual possession, because the Shariah never prescribed a particular method for taking possession. Therefore, reference must be made to the prevailing custom in the business community which The International Islamic Fiqh Academy Resolution No. 21 (9/3). (5)(5) The International Islamic Fiqh Academy Resolution No. 21 (9/3). 6363 Shariah Standard No. (1): Trading in Currencies results in the ability to dispose of the currency for the intended purpose and transfer of the risk of the currency to the transferee, as in the forms mentioned in the standard. As for the various forms of constructive possession, there is a decision issued by the International Islamic Fiqh Academy,(6)(6) and the various Fatwa and the various Fatwa issued by the International Islamic Fiqh Academy, Committees have added to these forms some others, such as the credit card settlement coupon.(7)(7) settlement coupon. The Ninth Seminar of Al Baraka(8)(8) has confirmed the prohibition of giving has confirmed the prohibition of giving The Ninth Seminar of Al Baraka a guarantee by one of the parties in Mudarabah or Musharakah transactions to the other party, to indemnify him against currency risks. Agency in Exchange of Currencies and Issue of Taking Possession Agency in exchange of currencies is permissible because agency is permissible with regard to an activity that the principal could undertake personally. As one could undertake the exchange himself, then it is also permissible for him to authorise its undertaking by others on his behalf. However, since taking possession of the countervalues immediately after concluding the contract has been a juristic condition, the juristic requirement in the case of agency would be the taking possession by the parties to the contract of exchange, whether through principal or agent. When the agency is for the purpose of taking possession only, the juristic rule relates to the leaving of the place of execution of the contract by both principals before possession is taken, and not to the agents doing so. Use of Modern Means of Communication for Trading in Currencies The International Islamic Fiqh Academy(9)(9) issued a decision on the sub- issued a decision on the sub- The International Islamic Fiqh Academy ject of those means of communication. This is a reinforcement of what has already been approved by the jurists on the permissibility of concluding (6)(6) International Islamic Fiqh Academy Resolution No. 53 (3/6); International Islamic Fiqh Academy Resolution No. 53 (3/6); Majallat Al-Majma Majallat Al-Majma, , vol. 6 [2: 785]. (7)(7) Fatwa No. (12/6) of Al Baraka Seminar No. (12), stating: A payment slip signed by the Fatwa No. (12/6) of Al Baraka Seminar No. (12), stating: A payment slip signed by the cardholder is tantamount to receipt, by means of a cheque. In this respect it is stronger than a cheque, as stated by experts, because it is binding on the trader and it discharges the cardholder of the debt immediately, and he may not protest the collection of the amount thereof. Al Baraka Seminar No. 9 (9/5). (8)(8) Al Baraka Seminar No. 9 (9/5). The International Islamic Fiqh Academy Resolution No. 52 (3/6). (9)(9) The International Islamic Fiqh Academy Resolution No. 52 (3/6). 6464 Shariah Standard No. (1): Trading in Currencies a contract via writing and communications that can be understood. This would cover all contemporary means such as telex, fax, internet, etc. Bilateral Promise in Exchange of Currencies The prohibition of a binding bilateral promise in an exchange of currencies is supported by the majority of Shariah jurists, because binding bilateral promises from two parties are equivalent to a contract, and also for the reason that the bilateral promise is not immediately followed by taking possession of the countervalues, since it is not the wish of the parties to take possession at that time. Financial Institutions have a customary practice of treating promises as binding, even when formally they are not. A promise from one party only (as opposed to a bilateral promise) is permissible in currency exchange, even if it is binding. Exchange of Currencies that Are Owed by the Parties The basis of the permissibility of an exchange of amounts denominated in currencies that are debts established as an obligation of the debtor, on the condition that the two obligations are thereby settled, is that this would entail the settlement of the debt by discharging it. This does not involve any prohibited transaction pertaining to debts either with regard to sale or purchase. As for some of the forms mentioned in the standard, there are texts to support them, inter alia, the Hadith reported on the authority of Ibn Umar (may Allah be pleased with him) who said: I have met the Prophet (peace be upon him) at the house of Hafsah (may Allah be pleased with her). And I said to him: O Prophet of Allah, I would like to ask you; I sell a camel in Al-Baqi for a price quoted in dinar but I take dirham, and I sell for a price quoted in dirham but I take dinars, I take this from this and I give this from this. The Prophet (peace be upon him) replied: There is no objection to your taking the Prophet (peace be upon him) replied: There is no objection to your taking the other currency based on the price of the day, provided you do not leave each (10) Some of the other with something remaining owed as a debt between you.(10) Some of the other with something remaining owed as a debt between you. forms in the standard are a kind of set-off and this is permissible. (10) Related by Abu Dawud, Al-Tirmidhi, Al-Nassai, Ibn Majah and Al-Hakim, who Related by Abu Dawud, Al-Tirmidhi, Al-Nassai, Ibn Majah and Al-Hakim, who (10) deemed it a sound Hadith, as confirmed by Al-Dhahabi. It was also narrated without a chain of narrators, quoting only Ibn Umar (Al-Talkhis Al Habir a chain of narrators, quoting only Ibn Umar ( [3: 26]). Al-Talkhis Al Habir [3: 26]). 6565 Shariah Standard No. (1): Trading in Currencies Combination of Currency Exchange and Transfer of Money The basis of the permissibility of the combination of currency exchange and transfer of money is the achievement of constructive possession by virtue of a bank draft for the amount that is given in one currency in return for an amount paid in another currency for the purpose of its transfer. In this regard, there is a decision by the International Islamic Academy of Fiqh that reads: If a transfer of money is to be made in a currency different from the currency of the amount paid by the applicant, then the transaction is based on currency exchange and transfer of money. The currency exchange takes place before the transfer, that is, the customer pays the amount of money to the bank and the bank, after agreeing on the currency exchange rate that is printed on the receipt delivered to the customer, issues a bank draft on the (11) basis of transfer of debt in the sense that has been mentioned.(11) basis of transfer of debt in the sense that has been mentioned. Forms of Trading in Currencies The following form is not permissible: providing a type of financial facility to a customer who wishes to engage in currency trading which enables him to deal in amounts that he does not own and to sell amounts that he does not own. An alternative and permissible form is that the Institution lends the money to the customer so that the latter would then deal in amounts that he owns. However, this would not be permissible if the Institution made it a condition of the loan that the customer must carry out the currency trading with the Institution, as this would involve a combination of both loan and contract of exchange. This is not permissible because it results in a benefit condition is imposed, there is no prohibition. to the lender. Where no such condition is imposed, there is no prohibition. to the lender. Where no such International Islamic Fiqh Academy Resolution No. 48 (1/9) (11) International Islamic Fiqh Academy Resolution No. 48 (1/9) (11) 6666 Shariah Standard No. (2) Debit Card, Charge Card and Credit Card Contents Subject PagePage ................................................................................................... Preface ................................................................................................... Preface ..................................................................... Statement of the Standard ..................................................................... Statement of the Standard ..............................................................................
Scope of the Standard ..............................................................................
Scope of the Standard ............................................
Characteristics of Different Types of Card ............................................
Characteristics of Different Types of Card ...................................................... 2/1 Characteristics of the debit card ...................................................... 2/1 Characteristics of the debit card 2/2 Characteristics of the charge card .................................................... 2/2 Characteristics of the charge card .................................................... ..................................................... 2/3 Characteristics of the credit card ..................................................... 2/3 Characteristics of the credit card ........................................
Shariah Rulings for Different Types of Card ........................................
Shariah Rulings for Different Types of Card ...................................................................................
General Provisions ...................................................................................
General Provisions ............................................................
Date of Issuance of the Standard ............................................................
Date of Issuance of the Standard ...................................................................... Adoption of the Standard ...................................................................... Adoption of the Standard Appendices Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (b): TheThe Shariah Basis for the Standard Appendix (b): Shariah Basis for the Standard ........... ......................... ........... ......................... 7171 7272 7373 7474 7575 7676 7777 7878 8080 6969 IN THE NAME OF ALLAH, THE ALL-MERCIFUL, THE MOST MERCIFUL All praise be to Allah, the Lord of all the worlds, and blessings and peace be upon our master, Muhammad, and his household and all his companions Preface The purpose of the standard on debit card, charge card and credit card is to explain their types and characteristics, and to lay down the Shariah principles for dealing with the three types of card by both Islamic financial Institutions(1)(1) and their customers who hold their cards and use them. The Institutions and their customers who hold their cards and use them. The standard also explains the Shariah rulings on the use of the cards in various circumstances. (1) The word (Institution/Institutions) is used here to refer, in short, to Islamic financial institutions including Islamic Banks. 7171 Shariah Standard No. (2): Debit Card, Charge Card and Credit Card Statement of the Standard
Scope of the Standard The standard covers debit cards, charge cards and credit cards that are issued by Institutions to their customers to enable the latter, by using the cards, either to withdraw cash from their accounts or to obtain credit or to pay for goods or services purchased. These cards include the following types: Debit card Debit card Charge card Charge card Credit card Credit card
Characteristics of Different Types of Card While some of the characteristics are common to more than one type of card, some are specific to a particular type of card. 2/1 Characteristics of the debit card 2/1/1 The Institution issues the card to a customer with available funds in his account. 2/1/2 The card confers on its holder the right to withdraw cash from his account or to pay for goods or services purchased up to the limit of the available funds (credit balance) on his account. The debit to the customers account will be immediate, and the card does not provide him with any credit. 2/1/3 The customer will not normally pay any charges for using this card, except when it is used to withdraw cash or to purchase another currency through another Institution different from the Institution that has issued the card. 2/1/4 The issuing Institution may charge a fee for issuing the card, or may make no charge for issuing it. 7272 Shariah Standard No. (2): Debit Card, Charge Card and Credit Card 2/1/5 Some Institutions charge the party accepting payment by means of the card a commission calculated as a percentage of such payments. 2/2 Characteristics of the charge card 2/2/1 The card provides a credit facility up to certain ceiling for a specified period of time, as well as providing a means of repayment. 2/2/2 The card is used to pay for goods and services and to obtain cash. 2/2/3 This card does not provide revolving credit facilities to the cardholder, insofar as the cardholder is obliged to make payment for the purchased goods or services by the end of a prescribed credit period following receipt of a statement sent by the Institution issuing the card. 2/2/4 If the cardholder delays payment of the amount due beyond the period of free credit, an interest charge is imposed on the cardholder but none is imposed by the Institutions. 2/2/5 The Institution issuing the card does not charge the card- holder any percentage commission on purchases, but receives a percentage commission from the party accepting the card on purchases made by using the card. 2/2/6 The Institution issuing the card is obliged to pay the party accepting the card for purchases made by the cardholder, within a specified transaction credit limit (or the agreed increase thereon). This obligation on the card issuer to pay for the cardholders purchases is direct, and is independent of the relationship between the party accepting the card and the cardholder. 2/2/7 The Institution issuing the card has a personal and direct right against the cardholder to be reimbursed for any payments made on his behalf. The issuers right is absolute and independent of 7373 Shariah Standard No. (2): Debit Card, Charge Card and Credit Card the relationship between the cardholder and the party accepting the card in accordance with the contract between them. 2/3 Characteristics of the credit card 2/3/1 This card provides a revolving credit facility within the credit limit and credit period determined by the issuer of the card. It is also a means of payment. 2/3/2 The holder of a credit card is able to pay for purchases of goods and services and to withdraw cash, within the approved credit limit. 2/3/3 When purchasing goods or services, the cardholder is given a free credit period during which the amount due should be paid and no interest is chargeable. The cardholder is also al- lowed to defer paying the amount due and is charged interest for the duration of the credit. In the case of a cash withdrawal, there is no free credit period. 2/3/4 The conditions set out in items 2/2 (e), (f) and (g) above are equally applicable to this type of card.
Shariah Rulings for Different Types of Card 3/1 Debit card It is permissible for Institutions to issue debit cards, as long as the cardholder does not exceed the balance available on his account and no interest charge arises out of the transaction. 3/2 Charge card It is permissible for Institutions to issue charge cards on the following conditions: 3/2/1 The cardholder is not obliged to pay interest in the case of delay in paying the amount due. 3/2/2 If the Institution obliges the cardholder to deposit a sum of money as a guarantee and this amount is not available for the use of the card holder, then it must be made clear that the In- 7474 Shariah Standard No. (2): Debit Card, Charge Card and Credit Card stitution will invest the money for the benefit of the cardhold- stitution will invest the money for the benefit of the cardhold- er on the basis of Mudarabah and that any profit accruing on this amount will be shared between the cardholder and the Institution according to a specified percentage. 3/2/3 The Institution must stipulate that the cardholder may not use the card for purposes prohibited by the Shariah and that the Institution has the right to withdraw the card in case such a condition is violated. 3/3 Credit card It is not permissible for an Institution to issue credit cards that provide an interest-bearing revolving credit facility, whereby the cardholder pays interest for being allowed to pay off the debt in instalments.
General Provisions 4/1 The affiliation of the Institution to membership of international card regulatory organizations 4/1/1 It is permissible for Institutions to join the membership of inter- It is permissible for Institutions to join the membership of inter- 4/1/1 national card regulatory organizations, provided the Institutions avoid any infringements of Shariah that may be prescribed by those organizations. 4/1/2 It is permissible for the Institutions to pay membership fees, service charges and other fees to international card regulatory organizations, so long as these do not include interest payments, even in an indirect way, such as in the case of increasing the service charge to cater for the granted credit. 4/2 Commission to the card issuer payable by merchants accepting the card It is permissible for the Institution issuing the card to charge a com- mission to the party accepting the card, at a percentage of the purchase price of the items and services purchased using the card. 4/3 Fees charged by the Institution to the cardholder It is permissible for the Institution issuing the card to charge the fees. cardholder membership fees, renewal fees and replacement fees. cardholder membership fees, renewal fees and replacement 7575 Shariah Standard No. (2): Debit Card, Charge Card and Credit Card 4/4 Purchasing gold, silver and currency with cards It is permissible to purchase gold, silver or currency with a debit card or a charge card, in cases where the issuing Institution is able to settle the amount due to the party accepting the card without any delay. 4/5 Cash withdrawal using a card 4/5/1 It is permissible for the cardholder to withdraw an amount of cash within the limit of his available funds, or more with the agreement of the Institution issuing the card, provided no interest is charged. 4/5/2 It is permissible for the Institution issuing the card to charge a flat service fee for cash withdrawal, proportionate to the service offered, but not a fee that varies with the amount withdrawn. 4/6 Privileges granted by card issuing parties 4/6/1 It is not permissible for Institutions to grant the cardholder privileges prohibited by the Shariah, such as conventional life insurance, entrance to prohibited places or prohibited gifts. 4/6/2 It is permissible to grant privileges to the cardholder that are not prohibited by the Shariah, such as a priority right to services or discounts on hotel, airline or restaurant reservations and the like.
Date of Issuance of the Standard The Standard was issued on 27 Safar 1421 A.H., corresponding to 31 May 2000 A.D. 7676 Shariah Standard No. (2): Debit Card, Charge Card and Credit Card Adoption of the Standard The Shariah Standard on Debit Card, Charge Card and Credit Card was adopted by the Shariah Board in its meeting No. (4) held on 25-27 Safar 1421 A.H., corresponding to 29-31 May 2000 A.D. 7777 Shariah Standard No. (2): Debit Card, Charge Card and Credit Card Appendix (A) Brief History of the Preparation of the Standard In its meeting No. (1) In its meeting held in Bahrain on Saturday 11 Dhul-Qadah 1419 No. (1) held in Bahrain on Saturday 11 Dhul-Qadah 1419 A.H., corresponding to 27 February 1998 A.D., the Shariah Board decided to give priority to the preparation of a Shariah standard on debit card, charge card and credit card. On Saturday 11 Dhul-Qadah 1419 A.H., corresponding to 27 February 1999 A.D., a Shariah consultant was commissioned to prepare a juristic study and an exposure draft. In its meeting held in Bahrain on 13-16 Rabi I, 1420 A.H., corresponding to 27-30 June 1999 A.D., the Shariah Studies Committee discussed the juristic study and inserted certain amendments to it. The committee also discussed the exposure draft of the standard in its meeting No. (3) held in Bahrain on 9-11 Rajab 1420 A.H., corresponding to 18-20 October 1999 A.D. and, asked the consultant to make the necessary amendments in light of the comments made by the members. The revised exposure draft of the standard was presented to the Shariah Board in its meeting No. (2) held in Mecca on 10-15 Ramadan 1420 A.H., corresponding to 18-22 December 1999 A.D. The Shariah Board made further amendments to the exposure draft of the standard and decided that it should be distributed to specialists and interested parties to obtain their comments in order to discuss them in a public hearing. A public hearing was held in Bahrain on 2930 Dhul-Hajjah 1421 A.H., corresponding to 4-5 April 2000 A.D. The public hearing was attended by more than 30 participants representing central banks, Institutions, accounting firms, Shariah scholars, academics and others who are interested in this field. Members of the Shariah Studies Committee responded in the 7878 Shariah Standard No. (2): Debit Card, Charge Card and Credit Card public hearing to the written comments as well as to the oral comments public hearing to the written comments as well as to the oral comments that were expressed in the public hearing. The Shariah Studies Committee held its meeting No. (5) on 22-24 Muharram 1421 A.H., corresponding to 26-28 April 2000 A.D., to discuss the comments made about the exposure draft. The committee made the necessary amendments, which it deemed necessary in light of both the discussions that took place in the public hearing, and the written comments that were received. The Shariah Board in its meeting No. (4) The Shariah Board in its meeting held on 2527 Safar 1421 A.H., No. (4) held on 2527 Safar 1421 A.H., corresponding to 2931 May 2000 A.D., in Al-Madinah Al-Munawwarah discussed the amendments made by the Shariah Studies Committee, and made the necessary amendments, which it deemed necessary. Some paragraphs of the standard were adopted by the unanimous vote of the members of the Shariah Board, while the other paragraphs were adopted by the majority vote of the members, as recorded in the minutes of the Shariah Board. 7979 Shariah Standard No. (2): Debit Card, Charge Card and Credit Card Appendix (B) The Shariah Basis for the Standard
Debit Cards It is permissible to issue debit cards subject to the conditions mentioned in the standard, because such issuance does not incur any Shariah prohibition.
Charge card It is permissible to issue charge cards subject to the conditions mentioned in the standard, because such issuance does not incur Shariah prohibition and because the contract involved does not grant credit facilities to the cardholder in exchange for interest. Prohibition might be caused by conditions incorporated in the contract, or by dealings of the cardholder, which contravene the Shariah.
Credit card It is prohibited to issue credit cards, as mentioned in the standard, where such issuance is based on a contract granting the cardholder the right to a revolving credit on terms that involve interest, because Riba is prohibited in terms of either taking or giving. The prohibition of Riba is established through Quranic Texts, direct and certain Hadiths of the Prophet (peace be upon him) and the consensus of Muslim scholars, rendering its prohibition well known in the Muslim community as self-evident. However, the issuance of credit cards free from Riba, or from any other legal prohibition, is permissible.
Institutions affiliation to membership of international card regulatory organizations is permissible because the contracts of the Institutions with those organizations are free from Shariah infringements. The fees that the companies pay are the charges for the services rendered by international organizations, by granting a license, carrying out set- the international organizations, by granting a license, carrying out set- the 8080 Shariah Standard No. (2): Debit Card, Charge Card and Credit Card off in transactions and other services. The transactions do not relate to off in transactions and other services. The transactions do not relate to the advance of loans interest, since the dealings of the Institutions are confined to debit and charge cards that are free from any requirement to pay interest. These dealings do not involve credit cards of the type that are not permissible for the reason given above.
It is permissible for Institutions to charge the party accepting a card commission based on the prices of purchases or services made with the card, as this can be considered as partly a brokerage and marketing fee as well as a service charge for the collection of the debt.
It is permissible for Institutions to charge the cardholder membership or renewal or replacement fees, because these fees are in exchange for the right given to the customer to carry the card and to benefit from its services.
Purchasing with a debit card constitutes constructive possession as endorsed by the Shariah. When the purchaser receives gold or silver or currencies which he is buying, uses the card and signs the payment coupon for the account of the party accepting the card, then constructive possession takes place. This ruling is extracted from the decision of the International Islamic Fiqh Academy(2)(2) which states that an accounting International Islamic Fiqh Academy which states that an accounting entry is considered to be constructive possession. Thus, the legal condition of taking possession is satisfied when using cards to purchase gold or silver or currencies.
It is permissible for the cardholder to withdraw cash from his available funds at the bank using the card, because this is to withdraw his own for him to withdraw more than his permissible for him to withdraw more than his money. Likewise, it is permissible money. Likewise, it is available funds from the Institution, if the latter has agreed that he may do so and has not stipulated that interest is payable on the such amounts. This is a permissible loan.
In the case of the Institution stipulating that the cardholder must deposit a sum of money prior to receiving approval to use the card, then it is not International Islamic Fiqh Academy Resolution No. 53 (4/6). (2)(2) International Islamic Fiqh Academy Resolution No. 53 (4/6). 8181 Shariah Standard No. (2): Debit Card, Charge Card and Credit Card permitted for the Institution to prevent the cardholder from investing the amount deposited in his account, as this would be tantamount to a loan that draws extra benefit. For that reason, the appropriate alternative is for amounts so deposited to be invested for the benefit of the cardholder on the basis of profit and loss sharing. 8282 Shariah Standard No. (3) Procrastinating Debtor (Revised Standard) Contents Subject ................................................................................................... Preface ................................................................................................... Preface ..................................................................... Statement of the Standard ..................................................................... Statement of the Standard ..............................................................................
Scope of the Standard ..............................................................................
Scope of the Standard ..........................................................................................
Shariah Ruling ..........................................................................................
Shariah Ruling ....................................................... 2/1 Default in payment by a debtor ....................................................... 2/1 Default in payment by a debtor ........................................................................................... 2/2 Guarantor ........................................................................................... 2/2 Guarantor .......................................................................................... 2/3 Contractor .......................................................................................... 2/3 Contractor ..................... 2/4 Non-material punishments for default in payment ..................... 2/4 Non-material punishments for default in payment .................................................................................. 2/5 General rulings .................................................................................. 2/5 General rulings .............................................. 2/6 Establishment of default in payment .............................................. 2/6 Establishment of default in payment ............................................................
Date of Issuance of the Standard ............................................................
Date of Issuance of the Standard ...................................................................... Adoption of the Standard ...................................................................... Adoption of the Standard Appendices Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (b): Appendix (b): TheThe Shariah Basis for the Standard .................................... Shariah Basis for the Standard.................................... Appendix (c): Definitions............................................................................. Appendix (c): Definitions............................................................................. PagePage 8787 8888 8989 9090 9191 9292 9494 101101 8585 IN THE NAME OF ALLAH, THE ALL-MERCIFUL, THE MOST MERCIFUL All praise be to Allah, the Lord of all the worlds, and blessings and peace be upon our master, Muhammad, and his household and all his companions Preface The purpose of this standard is to explain the Shariah rulings applicable to the transactions of Islamic financial Institutions(1)(1) relating to solvent to the transactions of Islamic financial Institutions relating to solvent and debtors and/or guarantors procrastinating in settling their obligations and debtors and/or guarantors procrastinating in settling their obligations contractors delaying in fulfilment of their obligations, which invokes penalty contractors delaying in fulfilment of their obligations, which invokes penalty stipulated in the contract. The word (Institution/Institutions) is used here to refer, in short, to Islamic financial (1)(1) The word (Institution/Institutions) is used here to refer, in short, to Islamic financial institutions including Islamic Banks. 8787 Shariah Standard No. (3): Procrastinating Debtor Statement of the Standard
Scope of the Standard This standard covers cases of default on the part of a solvent debtor or solvent guarantor, and the case of a contractor or concessionaire who is a a solvent guarantor, and the case of a contractor or concessionaire who is late in completing work and thus becomes a debtor by virtue of a penalty clause. The standard does not cover debtors who are insolvent or bankrupt, or debtors who delay payment for an established Shariah reason.
Shariah Ruling 2/1 Default in payment by a debtor 2/1/1 Default in payment by a debtor who is capable of paying the (prohibited). debt is HaramHaram (prohibited). debt is 2/1/2 It is not permitted to stipulate any financial compensation, either in cash or in other consideration, as a penalty clause in respect of a delay by a debtor in settling his debt, whether or not the amount of such compensation is pre-determined; this applies both to compensation in respect of loss of income (opportunity loss) and in respect of a loss due to a change in the value of the currency of the debt. 2/1/3 It is not permitted to make a judicial demand on a debtor in default to pay financial compensation, in the form either of cash or of other consideration, for a delay in settling his debt. 2/1/4 The procrastinating debtor is liable for legal and other expenses incurred by the creditor in order to recover his debt. 2/1/5 The creditor is entitled to apply for the sale of any asset mortgaged as collateral for the debt, for the liquidation of the debt. He is equally entitled to stipulate that the debtor must give a mandate 8888 Shariah Standard No. (3): Procrastinating Debtor to the creditor to sell the mortgaged asset without recourse to the courts. 2/1/6 Unless failure to pay was caused by force majeure, it is permis- sible to stipulate that all outstanding instalments become due once the procrastinating debtor fails to pay an instalment. It is preferable that this clause is implemented only after notifying the debtor and after the lapse of a reasonable period of time. [see Shariah Standard No. (5) on Guarantees (item 5/1)] 2/1/7 In the case of a Murabahah sale, if the asset that was sold is still available in the condition in which it was sold, and the buyer has defaulted in the settlement of the price and has later become bankrupt, then the seller (the Institution) is entitled to repossess the asset instead of initiating procedures to obtain a bankruptcy order. 2/1/8 It is permissible in contracts involving indebtedness (such as as Murabahah) to stipulate an undertaking by the debtor, that Murabahah) to stipulate an undertaking by the debtor, that of procrastinating in payment, the latter will donate an in case of procrastinating in payment, the latter will donate an in case amount or a percentage of the debt to be spent for charitable causes through the Institution. 2/2 Guarantor a) It is permissible for a creditor to demand that a debt be settled by the debtor or the guarantor of the debtor, unless the guarantor stipulated that the settlement must first be sought from the debtor. b) All rulings applicable to debtors in default are equally applicable to guarantors in default. 2/3 Contractor It is permissible to include penalty clauses in contracts for construction, Istisnaa and supply contracts. In case of a refusal to pay the amount due under a penalty clause, the rulings relating to default by a debtor would be applicable. It is permitted to deduct the amount from outstanding amounts due to the contractor. 8989 Shariah Standard No. (3): Procrastinating Debtor 2/4 Non-material punishments for default in payment The Institution is entitled to include the name of a debtor in default in a list of undesirable customers (black list) and to send a warning admonition to other companies about the defaulting debtor, either when there is an inquiry from other companies about the debtor or when such black lists are exchanged between companies directly. 2/5 General rulings 2/5/1 The Institution is entitled to [monitor and] investigate [the financial status and activities] of a defaulting debtor through all permissible and legitimate means. 2/5/2 The Institution may accept a payment from a debtor who is in default that is in excess of the amount of the debt, provided there is no contractual condition whether written or verbal, or custom or mutual agreement relating to this additional amount. 2/5/3 It is permissible for the Institution to stipulate in a contract dealing with indebtedness that, if the debtor is late in making payment, the Institution is entitled to recoup the amount due from any of the accounts of the customer with the Institution, whether current accounts or investment accounts. This may be done without getting any further consent of the debtor provided the balance in the account is of the same currency as that of the debt. If, however, the currency is different, then the rate of exchange to be used must be the then prevailing rate of exchange. 2/6 Establishment of default in payment Default in payment is established when, following a normal demand for payment, a debtor who has not proved that he is insolvent fails to settle the debt on its due date.
Date of Issuance of the Standard The Standard was issued on 27 Safar 1421 A.H., corresponding to 31 May 2000 A.D. 9090 Shariah Standard No. (3): Procrastinating Debtor Adoption of the Standard The Shariah Standard on Procrastinating Debtor was adopted by the Shariah Board in its meeting No. (4) held on 25-27 Safar 1421 A.H., corresponding to 29-31 May 2000 A.D. 9191 Shariah Standard No. (3): Procrastinating Debtor Appendix (A) Brief History of the Preparation of the Standard In its meeting No. (1) held in Bahrain on Saturday 11 Dhul-Qadah 1419 A.H., corresponding to 27 February 1998 A.D., the Shariah Board decided to give priority to the preparation of a Shariah standard on procrastinating debtor. On Saturday 11 Dhul-Qadah 1419 A.H., corresponding to 27 February 1999 A.D., a Shariah consultant was commissioned to prepare a juristic study and an exposure draft. In its meeting held in Bahrain on 13-16 Rabi I, 1420 A.H., corresponding to 27-30 June 1999 A.D., the Shariah Studies Committee discussed the juristic study and introduced certain amendments to it. The Committee further discussed the exposure draft of the standard in its meeting No. (3) held in Bahrain on 9-11 Rajab 1420 A.H., corresponding to 18-20 October 1999 A.D., and asked the consultant to make additional amendments to reflect the comments made by the members. The revised exposure draft of the standard was presented to the Shariah Board in its meeting No. (2) held in Mecca on 10-15 Ramadan 1420 A.H., corresponding to 18-22 December 1999 A.D. The Shariah Board made further amendments to the exposure draft of the standard, and decided that the amended exposure draft should be distributed to specialists and interested parties to obtain their comments in order to discuss them in a public hearing. A public hearing was held in Bahrain on 2930 Dhul-Hajjah 1421 A.H., corresponding to 4-5 April 2000 A.D. The public hearing was attended by more than 30 participants representing central banks, Institutions, ac- are interested counting firms, Shariah scholars, academics and others who are interested counting firms, Shariah scholars, academics and others who 9292 Shariah Standard No. (3): Procrastinating Debtor in this field. Members of the Shariah Studies Committee responded to the written comments that were sent prior to the public hearing as well as to the oral comments that were expressed in the public hearing. The Shariah Studies Committee held its meeting No. (5) on 22-24 Muharram 1421 A.H., corresponding to 26-28 April 2000 A.D., to discuss the comments made about the exposure draft. The Committee made the necessary amendments, which it deemed necessary in light of both the discussions that took place in the public hearing, and the written comments that were received. The Shariah Board in its meeting No. (4) held on 2527 Safar 1421 A.H., corresponding to 26-28 May 2000 A.D., in Al-Madinah Al-Munawwarah discussed the amendments made by the Shariah Studies Committee, and made the necessary amendments, which deemed necessary. Some paragraphs of the standard were adopted by the unanimous vote of the members of the Shariah Board, while the other paragraphs were adopted by the majority vote of the members, as recorded in the minutes of the Shariah Board. The Shariah Standards Review Committee reviewed the standard in its meeting held in Muharram 1433 A.H., corresponding to November 2011 A.D., in the State of Qatar, and proposed after deliberation a set of amend- ments (additions, deletions, and rephrasing) as deemed necessary, and then submitted the proposed amendments to the Shariah Board for approval as it deemed necessary. In its meeting No. (38) held in Al-Madinah Al-Munawwarah, Kingdom of Saudi Arabia on 28 Shaban - 1 Ramadan 1435 A.H., corresponding to 26- 28 June 2014 A.D., the Shariah Board discussed the proposed amendments submitted by the Shariah Standards Review Committee. After deliberation, the Shariah Board approved the necessary amendments, and the standard was adopted in its current amended version. 9393 Shariah Standard No. (3): Procrastinating Debtor Appendix (B) The Shariah Basis for the Standard Default on the Part of a Debtor The debtor must settle his debt when it is due. Default in payment by a debtor who is able to settle the debt is prohibited. The Prophet (peace be upon him) says: Default in payment on the part of a solvent debtor is be upon him) says: Default in payment on the part of a solvent debtor is unjust.(2)(2) He (peace be upon him) also says: Delay in payment by a solvent He (peace be upon him) also says: Delay in payment by a solvent unjust. debtor would be a legal ground for his being publicly dishonoured and punished..(3)(3) Moreover, he (peace be upon him) approved the statement punished Moreover, he (peace be upon him) approved the statement of Salman Al-Farisi to Abu Al-Darda saying: Give everyone his right.(4)(4) of Salman Al-Farisi to Abu Al-Darda saying: Give everyone his right. Muslim scholars have agreed on the permissibility of a debtor being punished in such circumstances.(5)(5) However, an insolvent debtor should punished in such circumstances. However, an insolvent debtor should be granted a grace period. (3)(3) Related by Ahmad in his (2)(2) Related by Al-Bukhari in his Sahih [2: 999], Dar Al-Qalam edition, Damascus, 1401 [2: 999], Dar Al-Qalam edition, Damascus, 1401 Related by Al-Bukhari in his Sahih A.H./1981 A.D.; Muslim in his [10: 288], Al-Maktabah Al-Misriyyah edition Sahih [10: 288], Al-Maktabah Al-Misriyyah edition A.H./1981 A.D.; Muslim in his Sahih with the commentary of Al-Nawawi, Cairo, 1349 A.H./1930 A.D.; and Ahmad in his Musnad [2: 71 and 345], Al-Maktab Al-Islami edition, Damascus. Musnad [2: 71 and 345], Al-Maktab Al-Islami edition, Damascus. Related by Ahmad in his Musnad [4: 388-399], and all relators of Hadith except Musnad [4: 388-399], and all relators of Hadith except Al-Tirmidhi, Al-Bayhaqi, Al-Hakim and Ibn Hibban who deemed it authentic. Al- , Ibn Hajar has said: Its chain of Fath Al-Bari, Ibn Hajar has said: Its chain of Bukhari deemed it suspended. In his Fath Al-Bari Bukhari deemed it suspended. In his Nayl Al-Awtar [5: 240], Mustafa Al-Babi Al-Halabi edition, transmission is good: [5: 240], Mustafa Al-Babi Al-Halabi edition, transmission is good: Nayl Al-Awtar Cairo, 1378 A.H./1951 A.D.; and [5: 400], Mustafa Muhammad Fayd Al-Qadir [5: 400], Mustafa Muhammad Cairo, 1378 A.H./1951 A.D.; and Fayd Al-Qadir edition. Cairo, 1371 A.H./1938 A.D. (4)(4) Related by Al-Tirmidhi from Abu Juhayfah quoting the statement of Salman (may Related by Al-Tirmidhi from Abu Juhayfah quoting the statement of Salman (may Allah be pleased with him) which the Prophet (peace be upon him) approved when mentioned to him saying: Al-Tirmidhi said: It is an Salman has said the truth. Al-Tirmidhi said: It is an mentioned to him saying: Salman has said the truth. Sunan Al-Tirmidhi [2: 66], Bulaq Edition. [2: 66], Bulaq Edition. authentic Hadith: authentic Hadith: Sunan Al-Tirmidhi [7: 173], Dar Al-Kitab Al-Arabi, Beirut, 1982 A.D.; Al-Muhadhdhab Al-Muhadhdhab Badai Al-Sanai [7: 173], Dar Al-Kitab Al-Arabi, Beirut, 1982 A.D.; (5)(5) Badai Al-Sanai [4: 501], Al-Mughni [4: 501], [3: 245], Dar Al-Qalam edition, Damascus, 1417 A.H./1996 A.D.; Al-Mughni [3: 245], Dar Al-Qalam edition, Damascus, 1417 A.H./1996 A.D.; Hashiyat Qalyubi [2: 288], Dar Al-Fikr edition, [2: 288], Dar Al-Fikr edition, Maktabat Riyad Al-Hadithah, Riyadh; Maktabat Riyad Al-Hadithah, Riyadh; Hashiyat Qalyubi Mujam Al-Mustalahat Al-Iqtisadiyyah, (P. 314); The International Beirut, no date; , (P. 314); The International Beirut, no date; Mujam Al-Mustalahat Al-Iqtisadiyyah Institute of Islamic Thought edition, Virginia, USA, 1415 A.H./1995 A.D.; and Dalil Institute of Islamic Thought edition, Virginia, USA, 1415 A.H./1995 A.D.; and Dalil , (P. 274), Kuwait Finance House edition, Al-Mustalahat Al-Fiqhiyyah Al-Iqtisadiyyah, (P. 274), Kuwait Finance House edition, Al-Mustalahat Al-Fiqhiyyah Al-Iqtisadiyyah Kuwait, 1412 A.H./1992A.D. 9494 Shariah Standard No. (3): Procrastinating Debtor Stipulation of, or Legal Claim for, Compensation for Late Payment of the Debt It is not permitted to stipulate as a condition of a contract involving indebtedness that in case of default the debtor should pay compensation, or to have a legal claim for compensation against a defaulting debtor, whether such arrangements are made at the beginning of the contract or on its maturity, since this would constitute Riba and any such stipulation or arrangement is null and void. This is because the Prophet (peace be Muslims are bound by their contractual conditions, except upon him) says: Muslims are bound by their contractual conditions, except upon him) says: those that render impermissible what is permissible or render permissible what is impermissible.(6)(6) There is also the reason that, during the pre- what is impermissible. There is also the reason that, during the pre- Islamic period, lenders who charged interest used to say to their debtors: Do you want to settle now or to pay an additional amount for a further period of credit?. The prohibition of any loan which requires a payment in excess of the amount lent has also been reported on the authority of many companions from the Prophet (peace be upon him). On this basis, a decision was reached by the International Islamic Fiqh Academy which reads as follows: It is impermissible from the Shariah perspective to stipulate a condition of compensation in the case of delay in the settlement of a debt.(7)(7) of a debt. No penalty clause may be applied in the case of a delay in settling a debt, as any increase in the amount of the debt is Riba; this is in contrast to the application of a penalty clause to other cases of delay, such as delay in fulfilling construction or Istisnaa contracts. As the judgement on this issue by the court is binding, it is therefore not permitted to stipulate such a condition directly in the contract creating a debt or to enforce it subsequently by recourse to the judiciary. in his Musnad (6)(6) This Hadith has been narrated by a number of the companions and it was related by This Hadith has been narrated by a number of the companions and it was related by Ahmad [1: 312]; Ibn Majah through a good chain of transmission Musnad [1: 312]; Ibn Majah through a good chain of transmission Ahmad in his [2: 783], Mustafa Al-Babi Al-Halabi edition, Cairo, 1372 A.H./1952 A.D.; Al-Hakim Sunan , Hyderabad edition, India, 1355 A.H.); Al-Bayhaqi in his Sunan Mustadrak, Hyderabad edition, India, 1355 A.H.); Al-Bayhaqi in his in his Mustadrak in his [6: 70 and 156] and [1: 133], Hyderabad edition, India, 1355 A.H.; and Al-Darqutni in his [4: 228] and [3: 77], Dar Al-Mahasin Lil-Tibaah edition, Cairo, 1372 Sunan [4: 228] and [3: 77], Dar Al-Mahasin Lil-Tibaah edition, Cairo, 1372 in his Sunan A.H./1952 A.D. Majallat Majma Al-Fiqh International Islamic Fiqh Academy Resolution No. (51); and Majallat Majma Al-Fiqh , No. 6 [1: 193]; and No. 6 [2: 9]. Al-Islami, No. 6 [1: 193]; and No. 6 [2: 9]. Al-Islami (7)(7) International Islamic Fiqh Academy Resolution No. (51); and 9595 Shariah Standard No. (3): Procrastinating Debtor Litigation Expenses A defaulting debtor must bear the litigation expenses and other expenses relating to his default in payment as he is the cause of the expenses.(8)(8) relating to his default in payment as he is the cause of the expenses. Disposal of a Mortgaged Asset It is permissible for the creditor to demand the selling of a mortgaged asset and other properties belonging to a debtor which are in his possession for the purpose of liquidation and recovery of the debt. Furthermore, it is permissible for the creditor to obtain a mandate from the debtor to sell the mortgaged assets or other properties of the debtor, because such disposal is permissible for the creditor, and such a practice would speed up the procedures for disposing of the charged asset.(9)(9) procedures for disposing of the charged asset. Maturity of Instalments in the Case of Instalment Credit It is permissible for the creditor to impose the condition that, if the debtor is late in paying one instalment, all the instalments become due. To this effect, there is a decision by the International Islamic Academy of Fiqh, the text of which reads as follows: It is permissible for a seller on deferred credit terms sale to impose the condition that instalments become due before their original due date in case of the delay of the debtor in paying some of the instalments, so long as the debtor consented to this condition (10) Such a condition would be valid, as there when the contract was agreed.(10) Such a condition would be valid, as there when the contract was agreed. is no Shariah text to the contrary, and it serves a lawful interest of the (11) Giving prior notice to the debtor before giving effect to such creditor.(11) Giving prior notice to the debtor before giving effect to such creditor. (P. 346), Al-Mawardi in Al-Insaf , (P. 74), 2ndnd edition, Dar Al-Turath, Cairo. edition, Dar Al-Turath, Cairo. (8)(8) Some of the jurists have stated this such as Ibn Taymiyyah in (9)(9) Al-Rawd Al-Murbi (10) International Islamic Fiqh Academy Resolution No. (51); (10) Al-Ikhtiyarat and in and in Some of the jurists have stated this such as Ibn Taymiyyah in Al-Ikhtiyarat Mukhtasar Al-Fatawa and Sheikh Muhammad Ibn Al-Insaf and Sheikh Muhammad Ibn Mukhtasar Al-Fatawa (P. 346), Al-Mawardi in Ibrahim Al Al-Shaykh (see: Paper by Sheikh Ibn Mani in the Fourth Fiqh Conference (pp. 226-227), organized by Kuwait Finance House 1416 A.H./1995 A.D. Al-Rawd Al-Murbi, (P. 74), 2 International Islamic Fiqh Academy Resolution No. (51); Majallat Majma Al-Fiqh Al- Majallat Majma Al-Fiqh Al- Islami No. 6 [1: 193] and No. 7 [2: 9]. This has been reinforced by the Resolution No. Islami No. 6 [1: 193] and No. 7 [2: 9]. This has been reinforced by the Resolution No. 64 (2/7); see: Majallat Jamiat Al-Malik Abd Al-Aziz 64 (2/7); see: (11) Ibn Abidin says; If one says, I have invalidated the deferred period and I have Ibn Abidin says; If one says, I have invalidated the deferred period and I have (11) abandoned it, the debt becomes due on the spot: [5: 157], Dar Hashiyat Ibn Abidin [5: 157], Dar abandoned it, the debt becomes due on the spot: Hashiyat Ibn Abidin Al-Fikr edition, Beirut, 1399 A.H./1979 A.D. The Shariah Supervisory Council of Al-Fatawa Al- the Kuwait Finance House has supported this in its Fatwa No. (542). Al-Fatawa Al- the Kuwait Finance House has supported this in its Fatwa No. (542). , Kuwait Finance House, [4: 18]. Shariyyah Fi Al-Masail Al-Iqtisadiyyah, Kuwait Finance House, [4: 18]. Shariyyah Fi Al-Masail Al-Iqtisadiyyah , Al-Iqtisad Al-Islami, (P. 89). Majallat Jamiat Al-Malik Abd Al-Aziz, Al-Iqtisad Al-Islami, (P. 89). 9696 Shariah Standard No. (3): Procrastinating Debtor a condition is merely of the nature of a reminder, so as to provide him with reasonable time for payment. The Right to Repossess a Sold Asset If an asset sold by Murabahah or another sales contract is still available to the seller, and the purchaser has defaulted in the payment of the price, and subsequently has become bankrupt, then the seller is entitled to repossess the sold asset instead of initiating legal proceedings to obtain a bankruptcy order. This judgement is based on the report of Abu Hurayrah (may Allah be pleased with him) that the Prophet (prayers and peace of Allah be upon him) said: If one party has sold an asset and the other party (the purchaser) has become bankrupt, and the former party has managed to retain the asset, then he is more qualified to take possession of the asset in preference to the (12) other creditors.(12) other creditors. A Commitment on the Part of the Debtor to Make a Donation in Case of Default The permissibility of stipulating a condition, whereby the debtor in case of default is obliged to donate a sum of money (in addition to the amount of the debt) to be spent by the creditor (the Institution) on charitable causes, is because this has been considered as an instance of the commitment to make a donation, which is well established in the Maliki school of law. This is the opinion of Abu Abdullah Ibn Nafi and Muhammad Ibn Ibrahim Ibn Dinar, (13) two Maliki jurists.(13) two Maliki jurists. Guarantor A guarantor is liable for anything for which the debtor whose debt is guaranteed is liable, because standing as a surety adds one obligation to another with respect to the liability. This is in line with the Quranic verse expressing the statement of Prophet Yusuf (peace be upon him) saying: (14) Also, the Prophet (peace be upon (... and I will be a guarantor to it).(14) (... and I will be a guarantor to it) Also, the Prophet (peace be upon Sahih [10: 221]. Also, see: (12) This Hadith has been related by Al-Bukhari in his (12) [10: 221]. Also, see: Al-Muhadhdhab This Hadith has been related by Al-Bukhari in his Sahih his his Sahih Qalam edition, Damascus 1417 A.H./1996 A.D. See the book entitled: Tahrir Al-Kalam Fi Masail Al-Iltizam by Al-Hattab and the Tahrir Al-Kalam Fi Masail Al-Iltizam by Al-Hattab and the legal opinions of the Fourth Fiqh Conference organized by the Kuwait Finance House. [Yusuf (Joseph): 72]. (14) [Yusuf (Joseph): 72]. (14) [2: 846]; and Muslim in Sahih [2: 846]; and Muslim in by Al-Shirazi [3: 253], Dar Al- Al-Muhadhdhab by Al-Shirazi [3: 253], Dar Al- (13) See the book entitled: (13) 9797 Shariah Standard No. (3): Procrastinating Debtor him) affirmed the suretyship of Abu Qatadah in respect of the debt of a deceased person, when Abu Qatadah said; I take responsibility as surety (15) It is a principle of law that for both (two dinars), O Messenger of Allah.(15) for both (two dinars), O Messenger of Allah. It is a principle of law that the demand for payment from either the debtor or guarantor is permissible, as this is the very essence of suretyship, so long as there is no stipulation that the demand be in sequence; that is, it must start with the debtor and once he refuses to pay, payment will be demanded from the guarantor, because this sequence is a valid stipulation and believers are bound by their stipulations. Contractor or Concessionaire It is permissible to impose penalty clauses in contracts for constructions, Istisnaa and supply contracts, as such clauses are included in what may be validly stipulated as part of the contract. This does not render the impermissible permissible, or vice versa, and it complies with the Hadith of the Prophet Muslims are bound by contractual conditions, except (peace be upon him): Muslims are bound by contractual conditions, except (peace be upon him): those that render impermissible what is permissible or render permissible what (16) Also, this is based on the statement of Shurayh (may Allah is impermissible.(16) is impermissible. Also, this is based on the statement of Shurayh (may Allah confer mercy upon him) saying: Whoever has bound himself by a contractual condition voluntarily without any coercion, is bound by that condition. The International Islamic Fiqh Academy has also issued a decision which states: It is permissible to include in an Istisnaa contract a penalty clause according to what is agreed upon by the two contracting parties provided that there are no (17) In addition, it is a juristic principle in the Hanbali unusual circumstances.(17) unusual circumstances. In addition, it is a juristic principle in the Hanbali school of law. This is also what has been decided by consensus of the Council of the Eminent Scholars of Saudi Arabia, in the following words: The council has decided by consensus that a penalty clause that is stipulated in a contract (18) It is well known that the stipulation of is a valid and enforceable stipulation.(18) It is well known that the stipulation of is a valid and enforceable stipulation. the penalty clause is permissible only for non-financial obligations. [2: 800-803]; Ahmad and others. Sahih [2: 800-803]; Ahmad and others. (15) Related by Al-Bukhari in his (15) Related by Al-Bukhari in his Sahih This Hadith has been previously explained under Note No. (5). (16) (16) This Hadith has been previously explained under Note No. (5). International Islamic Fiqh Academy Resolution No. 56 (3/7); see also the Journal of (17) International Islamic Fiqh Academy Resolution No. 56 (3/7); see also the Journal of (17) the Academy vol. 2, issue No. (7), (p. 223). Research papers by the Eminent Scholars of the Kingdom of Saudi Arabia, vol. 1, the (18) Research papers by the Eminent Scholars of the Kingdom of Saudi Arabia, vol. 1, the (18) penalty clause, Maktabat Ibn Khuzaymah edition, Riyadh, 1412 A.H. 9898 Shariah Standard No. (3): Procrastinating Debtor Non-Material Penalties Applied to the Debtor in Case of Default The grounds for such penalties lie in the jurists decision which is based on their interpretation of the Hadith of the Prophet (peace be upon him): Delay in payment by a solvent debtor would be a legal ground for his being (19) A public complaint about his default in publicly criticised and punished.(19) A public complaint about his default in publicly criticised and punished. payment is not a prohibited slander; on the contrary, there is an obligation to warn other companies about his character, as this falls under the category of advice which it is a duty to give. General Provisions a) The monitoring of the affairs of the default debtor, is a kind of pursuing that has been established by the Shariah jurists. This pursuit is intended to make recovery from the defaulting debtor out of assets that he may have concealed from the knowledge of the creditor. In the circumstances, such pursuit does not constitute interference in the affairs of others. b) The debtor may, entirely at his own discretion without any condition or customary practice, pay an additional amount when settling the debt, and this is part of good settlement following the saying of Allah: (...No ground (of complaint) can there be against the Muhsinun (20) Also, the prophetic Hadith says: (good-doers)...).(20) (good-doers)...). Verily the best Also, the prophetic Hadith says: Verily the best (21) The Prophet of you is he who is the best in the settlement of debt.(21) The Prophet of you is he who is the best in the settlement of debt. (peace be upon him), occasionally used to pay an additional amount when settling a debt. The permissibility of this practice depends on the discretionary nature of this extra payment and the absence of any stipulation or customary practice of making such a payment, since the existence of such a customary practice would be inconsistent with the condition that the extra payment be entirely discretionary and not stipulated. c) It is permissible to accept the extra amount paid by the debtor following the proofs mentioned earlier. This Hadith has been previously explained under Note No. (3). (19) (19) This Hadith has been previously explained under Note No. (3). [Al-Tawbah (Repentance): 91]. (20) (20) [Al-Tawbah (Repentance): 91]. Fayd Al-Qadir Related by Al-Nasai on the authority of Al-Irbad Ibn Sariyah: Fayd Al-Qadir (21) Related by Al-Nasai on the authority of Al-Irbad Ibn Sariyah: (21) [3: 497]. 9999 Shariah Standard No. (3): Procrastinating Debtor d) A stipulation by an Institution that it may recover amounts owing to it by a defaulting debtor by right of set-off from accounts of the debtor that are kept by the Institution is valid, since believers are bound by their stipulations. This right of set-off, even though it does not require the consent of the debtor, should preferably be documented in the contract that establishes the indebtedness, in order to shorten the in the contract that establishes the indebtedness, in order to shorten the procedures in case of dispute. This right is based on the amicable right of recovery that is based on Shariah evidence including the saying of Take the Prophet (peace be upon him) to the wife of Abu Sufyan: Take the Prophet (peace be upon him) to the wife of Abu Sufyan: (22) (from his property) what would suffice you and your child amicably.(22) (from his property) what would suffice you and your child amicably. (22) Related by Al-Bukhari and Muslim: Al-Lulu Wa Al-Marjan (22) Related by Al-Bukhari and Muslim: , No. (1115). Al-Lulu Wa Al-Marjan, No. (1115). 100100 Shariah Standard No. (3): Procrastinating Debtor Appendix (C) Definitions Default in payment Delay in the settlement of an obligation or in paying an amount due for payment, without any legitimate reason. Procrastinating debtor A debtor who is solvent but refuses to pay a debt that is due, without any legitimate reason, after receiving the normal demand for payment. Penalty clause An agreement between two parties to a contract stipulating a pre-deter- mined amount of compensation that will be due to the obligee, should the obligor delayed carrying it out. 101101 Shariah Standard No. (4) Settlement of Debts by Set-Off (Revised Standard) Contents Subject ................................................................................................... Preface ................................................................................................... Preface ..................................................................... Statement of the Standard ..................................................................... Statement of the Standard ..............................................................................
Scope of the Standard ..............................................................................
Scope of the Standard .........................................
Definition of Set-Off and its Various Forms .........................................
Definition of Set-Off and its Various Forms
Bilateral Exchange of Promises to Conclude a Set-Off in the Future
Application of the Rules of Set-Off to Some Modern Transactions .. ..
Application of the Rules of Set-Off to Some Modern Transactions ........................................................................................
Currency Swaps ........................................................................................
Currency Swaps ............................................................
Date of Issuance of the Standard ............................................................
Date of Issuance of the Standard ...................................................................... Adoption of the Standard ...................................................................... Adoption of the Standard Appendices Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (b): The Shariah Basis for the Standard Appendix (b): The Shariah Basis for the Standard ........... ........................ ........... ........................ Appendix (c): Definitions Appendix (c): Definitions .................................................... ........................ .................................................... ........................ PagePage 107107 108108 110110 111111 112112 113113 114114 116116 117117 105105 IN THE NAME OF ALLAH, THE ALL-MERCIFUL, THE MOST MERCIFUL All praise be to Allah, the Lord of all the worlds, and blessings and peace be upon our master, Muhammad, and his household and all his companions Preface The aim of this standard is to outline the rules governing the use of set- off in settling debts, the Shariah requirements and conditions applicable to set-off, what is permissible or not permissible in this procedure and the most significant practices of Islamic financial Institutions (Institution/ Institutions)(1)(1) in this regard. in this regard. Institutions) (1)(1) The word (Institution/Institutions) is used here to refer, in short, to Islamic financial The word (Institution/Institutions) is used here to refer, in short, to Islamic financial institutions including Islamic Banks. 107107 Shariah Standard No. (4): Settlement of Debts by Set-Off Statement of the Standard
Scope of the Standard This standard covers the settlement of debt by way of set-off. The standard shall not apply to discharge of liability by way of transfer, waiving of obli- gation, composition, acquisition of a right payable or bilateral cancellation of a contract, as they are covered by their respective Standards.
Definition of Set-Off and Its Various Forms A set-off is to extinguish a debt receivable by a debt payable. It is divided into two main forms: mandatory set-off and contractual set-off. 2/1 Mandatory set-off A mandatory set-off is a set-off that occurs without the need for bilateral agreement or consent of both indebted parties and, in some cases of mandatory set-off, it is one party that is forced to comply with the request of the other party for set-off. It is divided into compulsory set-off (on both parties)(2)(2) and set-off on demand (of the person with set-off (on both parties) and set-off on demand (of the person with the superior debt whereby the other party is obliged to comply with the demand). 2/1/1 A compulsory set-off is the spontaneous discharge of two debts that is not contingent on the request or consent of both or either party. 2/1/2 The conditions of the permissibility of compulsory set-off are the following: a) Each party should be a creditor and debtor simultaneously. b) Both debts should be equal in kind, type, description and maturity. However, if the two debts are not equal in amount, a set-off will take place of an equivalent amount on both Compulsorily set-off is a set-off that occurs without a need to bilateral agreements or (2)(2) Compulsorily set-off is a set-off that occurs without a need to bilateral agreements or consents of the parties. 108108 Shariah Standard No. (4): Settlement of Debts by Set-Off sides, and the party that is owed the larger debt will remain a creditor for the remaining balance. c) Neither of the two debts should be encumbered by an obliga- tion to a third party, such as the right of a mortgagee to one of the debts. The intention of this is to protect rights associated with the amount of the debt and belonging to third parties. d) The set-off should not be arranged in a manner that results in Shubhat violation of a rule of Shariah, such as Riba (usury) or Shubhat violation of a rule of Shariah, such as Riba (usury) or (a transaction potentially involving Riba). al-Riba (a transaction potentially involving Riba). al-Riba 2/1/3 A set-off on demand is the discharge of two debts at the request of the creditor for the superior debt and his consent to forgo the excess of the amount or privilege he is owed over what he owes. This set-off will take place whether or not the creditor for the smaller debt consents. 2/1/4 The conditions of permissibility of a set-off on demand are the following: a) Each party should be a creditor and debtor simultaneously. b) The creditor for the superior debt, in terms of quality and duration, should consent to relinquish his additional right or privilege. An example of superiority in terms of quality is when the debt is secured by a mortgage, or when a third party has given a guarantee to pay the debt, and the owner of the secured debt consents to relinquish this guarantee. Superiority in terms of duration exists if the duration of one of the debts is shorter, or one debt is now due and the other is not yet due. In these cases, the debt which has the shorter duration or which is now due is superior. c) Both debts should be similar in kind and type, but not necessarily in quality and date of maturity. However, if the two debts are not equal in amount, a set-off will take place of an equivalent amount on both sides, and the party that is owed the larger debt will remain a creditor for the remaining balance. 109109 Shariah Standard No. (4): Settlement of Debts by Set-Off d) The set-off should not be arranged in a manner that results in violation of a rule of Shariah, such as Riba (usury) or a transaction potentially involving Riba. 2/2 Contractual set-off 2/2/1 A contractual set-off is the discharge of two debts by the consent of the two parties to extinguish their obligations towards each other. 2/2/2 The conditions of the permissibility of a contractual set-off are the following: a) Each party should be a creditor and debtor simultaneously. b) The two parties should mutually consent to the set-off. c) The set-off should not be arranged in a manner that results in violation of a rule of Shariah, such as Riba or a transaction potentially involving Riba. 2/2/3 A contractual set-off is permissible even without the need for two debts to be similar in kind, type, description or maturity. This is because the agreement on contractual set-off means that each party has agreed to relinquish any extra privilege associated with his debt. A contractual set-off is also permissible if the two debts are not equal in terms of amount, in which case a set-off will take place of an equivalent amount on both sides, and the party that is owed the larger debt is entitled to request payment of the remaining balance. [see item 2/10 (a) of the Shariah Standards on Trading in Currencies]
Bilateral Exchange of Promises to Conclude a Set-Off in the Future It is permissible for the Institution and its customers or other Institutions to exchange bilateral promises that debts that may be created between them in the future will be settled by way of set-off, in which case all the conditions mentioned in the items 2/1 and 2/2 will be applicable at the time of actual set-off. However, if the currencies of the two debts differ, a bilateral exchange of promise of set-off should be concluded on the basis 110110 Shariah Standard No. (4): Settlement of Debts by Set-Off that a set-off will take place based on the current currency exchange rate at the time of actual set-off; this ruling is to prevent the practices of Riba by roundabout methods or by implied agreement for practicing Riba.
Application of the Rules of Set-Off to Some Modern Transactions The followings are some rules of set-off to modern transactions: 4/1 Stipulating set-off between the customer and the Institution in respect of debts to the Institution arising out of sales on deferred payment. The agreement on contractual set-off of future debts, commonly known as set-off and consolidation, is a practice employed by a large number of financial Institutions. This form of set-off may take place either compulsorily or contractually depending on whether the situation that gives rise to this set-off meets the conditions of compulsory set-off or the conditions of contractual set-off. Moreover, by pre-stipulating this type of set-off in the agreement, a fresh agreement may be avoided at the time of set-off when the two currencies are different or when one of the debts is superior to the other. 4/2 A set-off may take place between a financial Institution accepting a cheque and the drawer of the cheque, through the clearing-house. This form of set-off may also take place either compulsorily or contractually depending on whether the state that gives rise to this set-off meets the conditions of compulsory set-off or the conditions of contractual set-off. 4/3 Set-off that is concluded among financial Institutions through international or national networking systems, such as credit card or debit card organisations. This form of set-off may be either compulsory or contractual depending on whether the state that gives rise to this set-off meets the conditions of compulsory set-off or the conditions of contractual set-off.
Currency Swaps The currency swaps that are concluded on the basis of Riba are not permis- sible. This is because in this process it is the interest-based securities that are set-off against interest-based securities. 111111 Shariah Standard No. (4): Settlement of Debts by Set-Off
Date of Issuance of the Standard This Standard was issued on 29 Safar 1422 A.H., corresponding to 23 May 2001 A.D. 112112 Shariah Standard No. (4): Settlement of Debts by Set-Off Adoption of the Standard The Shariah Standard on Settlement of Debts by Set-off was adopted by the Shariah Board in its meeting No. (6) held on 25-29 Safar 1422 A.H., corresponding to 19-23 May 2001 A.D. 113113 Shariah Standard No. (4): Settlement of Debts by Set-Off Appendix (A) Brief History of the Preparation of the Standard In its meeting No. (2) held in Makkah Al-Mukarramah on 10-14 Ramadan 1420 A.H., corresponding to 18-22 December 1999 A.D., the Shariah Board decided to give priority to the preparation of a Shariah Standard on settlements of debt by way of set-off. On Tuesday 27 Ramadan 1420 A.H., corresponding to 4 January 2000 A.D., one Shariah consultant was commissioned to prepare a juristic study and an exposure draft. In its meeting held in Bahrain on 18-19 Rabi I, 1421 A.H., corresponding to 20-21 June 2000 A.D., the Shariah Studies Committee discussed the juristic study and made certain amendments to it. The committee also discussed the exposure draft of the Standard in its meeting No. (6) held in Bahrain on 20-21 Jumada II, 1421 A.H., corresponding to 18-19 September 2000 A.D., and asked the consultant to make some amendments in light of the comments made by the members. In its meeting No. (7) In its meeting held in Bahrain on 5-6 Shaban 1421 A.H., cor- No. (7) held in Bahrain on 5-6 Shaban 1421 A.H., cor- responding to 1-2 November 2000 A.D., the Shariah Studies Committee discussed the exposure draft and made some relevant amendments. The revised exposure draft of the standard was presented to the Shariah Board in its meeting No. (5) held in Mecca on 8-12 Ramadan 1421 A.H., corresponding to 4-8 December 2000 A.D. The Shariah Board made further amendments to the exposure draft of the standard and decided that it should be distributed to specialists and interested parties in order to obtain their comments in order to discuss them in a public obtain their comments in order to discuss them in a hearing. public hearing A A public hearing was held in Bahrain on 4-5 Dhul-Hajjah 1421 A.H., cor- public hearing was held in Bahrain on 4-5 Dhul-Hajjah 1421 A.H., cor- d by was attended by responding to 27-28 February 2001 A.D. The public hearing responding to 27-28 February 2001 A.D. The public hearing was attende 114114 Shariah Standard No. (4): Settlement of Debts by Set-Off more than 30 participants representing central banks, Institutions, account- ing firms, Shariah scholars, academics and others who are interested in this field. Members of the Shariah Studies Committee responded to the written comments that were sent prior to the as well as to the oral com- public hearing as well as to the oral com- comments that were sent prior to the public hearing public hearing. ments that were expressed in the public hearing ments that were expressed in the The Shariah Studies Committee held its meeting No. (8) The Shariah Studies Committee held its meeting on 16-17 Dhul- No. (8) on 16-17 Dhul- Hajjah 1421 A.H., corresponding to 11-12 March 2001 A.D., to discuss the comments made about the exposure draft. The Committee made the necessary amendments in light of both the written comments that were received and oral comments that took place in the public received and oral comments that took place in the hearing. public hearing The Shariah Board in its meeting No. (6) held in Al-Madinah Al-Mun- awwarah on 25-29 Safar 1422 A.H., corresponding to 19-23 May 2001 A.D., discussed the amendments made by the Shariah studies committee, and made necessary amendments. The Shariah Board unanimously adopted some of the items of the standard and some items were adopted by the ma- jority vote of the members of the Shariah Board, as recorded in the minutes of the meetings of the Shariah Board. The Shariah Standards Review Committee reviewed the standard in its meeting held in Muharram 1433 A.H., corresponding to November 2011 A.D., in the State of Qatar, and proposed after deliberation a set of amend- ments (additions, deletions, and rephrasing) as deemed necessary, and then submitted the proposed amendments to the Shariah Board for approval as it deemed necessary. In its meeting No. (38) held in Al-Madinah Al-Munawwarah, Kingdom of Saudi Arabia on 28 Shaban to 1 Ramadan 1435 A.H., corresponding to 26- 28 June 2014 A.D., the Shariah Board discussed the proposed amendments submitted by the Shariah Standards Review Committee. After deliberation, the Shariah Board approved the necessary amendments, and the standard was adopted in its current amended version. 115115 Shariah Standard No. (4): Settlement of Debts by Set-Off Appendix (B) The Shariah Basis for the Standard The basis for debt settlements by way of set-off is that it has been practised from time immemorial without any report of disapproval. Moreover, set- off is in line with the objectives of the Shariah as it encourages discharging individuals from liability of debt and set-off is one way of discharging debt liabilities without involving futile processes of debt recovery. In addition, there is no Shariah objection to a set-off taking place on demand. The authority for this permissibility is that the person entitled to the superior debt has agreed to forgo the advantage attached to his debt and the Shariah will not object to such a gesture. If set-off is executed contractually, it is then based on the prophetic Hadith stating; Muslims are bound by the conditions and agreements they have made, stating; Muslims are bound by the conditions and agreements they have made, except a condition that has rendered the unlawful lawful or rendered the lawful unlawful.(3)(3) unlawful. (3)(3) The Hadith has been related by Al-Tirmidhi in his The Hadith has been related by Al-Tirmidhi in his Sunan Al-Tirmidhi [3: 634] edited Sunan Al-Tirmidhi [3: 634] edited by Ahmad Muhammad Shakir and others, Beirut: Dar Ihya Al-Turath Al-Arabi. Also, [7: 248]; and Al-Manawi, Sunan Al-Bayhaqi [7: 248]; and Al-Manawi, it has been related by Al-Bayhaqi in his Sunan Al-Bayhaqi it has been related by Al-Bayhaqi in his [6: 272], Egypt: Al-Maktabah Al-Kubra, 1356 A.H.. Fayd Al-Qadir [6: 272], Egypt: Al-Maktabah Al-Kubra, 1356 A.H.. Fayd Al-Qadir 116116 Shariah Standard No. (4): Settlement of Debts by Set-Off Appendix (C) Definitions Debt and Loan A debt is any liability that is not in terms of a specified or defined item, whatever the cause of its establishment, i.e. whether its origin is in cash or in a commodity, or in a particular described benefit such as the benefit of using particular things or services of persons. For instance, the consideration in deferred sales and loans is described as a debt. The relationship between a loan and a debt is that the latter is more general than the former, since every loan is described as a debt but the converse is not true. Not all debts originate from a loan. In this sense, a loan is but one cause of the creation of debt. Due Debt A due debt is a debt that is immediately payable or that is payable on the creditors demand, whether on its original due date or, if it has been rescheduled and deferred, on its rescheduled due date. Deferred Debt A deferred debt is a debt the payment thereof is due at a certain time in the future, and it may also be due in periodic instalments over time. Description A description is a condition that distinguishes particular specimens of the same species from one other. For examples, conditions such as good quality and poor quality, or mortgage of security or personal guarantees, letters of guarantee and the freezing of the amount of cheques for payment which are attached to the debt are considered descriptions. Ibra (discharge) An act by a person to discharge another person from a liability (owed by the latter to the former) 117117 Shariah Standard No. (4): Settlement of Debts by Set-Off Reconciliation (Sulh) An agreement to solve dispute between parties. Iqalah (Mutual Rescission of Contract) Revocation of a contract and cancellation of its effects with mutual consent of both parties. 118118 Shariah Standard No. (5) Guarantees (Revised Standard) Contents Subject ................................................................................................... Preface ................................................................................................... Preface ..................................................................... Statement of the Standard ..................................................................... Statement of the Standard ..............................................................................
Scope of the Standard ..............................................................................
Scope of the Standard ..............................................................
General Rulings on Guarantees ..............................................................
General Rulings on Guarantees ................................................................................
Personal Guarantees ................................................................................
Personal Guarantees .....................................................................................
Mortgage (Rahn) .....................................................................................
Mortgage (Rahn) ...................................
Cases of Achieving the Objectives of Securities ...................................
Cases of Achieving the Objectives of Securities .................................
Some Contemporary Applications of Securities .................................
Some Contemporary Applications of Securities
1. Date of Issuance of the Standard ................................................................... Date of Issuance of the Standard ................................................................... ...................................................................... Adoption of the Standard ...................................................................... Adoption of the Standard Appendices Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (b): The Shariah Basis for the Standard.................................... Appendix (b): The Shariah Basis for the Standard.................................... Appendix (c): Definitions............................................................................. Appendix (c): Definitions............................................................................. PagePage 123123 124124 125125 129129 134134 135135 136136 138138 146146 121121 IN THE NAME OF ALLAH, THE ALL-MERCIFUL, THE MOST MERCIFUL All praise be to Allah, the Lord of all the worlds, and blessings and peace be upon our master, Muhammad, and his household and all his companions Preface The aim of this standard is to outline the Shariah rules governing guarantees, and to clarify the forms of guarantees that are permissible or prohibited. It also outlines some significant modern applications of guarantees as employed by Islamic financial Institutions (Institution/ Institutions).(1)(1) Institutions). The word (Institution/Institutions) is used here to refer, in short, to Islamic financial (1)(1) The word (Institution/Institutions) is used here to refer, in short, to Islamic financial institutions including Islamic Banks. 123123 Shariah Standard No. (5): Guarantees Statement of the Standard
Scope of the Standard This standard covers securities (Guarantees) intended to secure obligations and protect debts against procrastination and default. Such securities may take the form of written documents, attestations, personal guarantees, mortgages, cheques and promissory notes. The standard also explains the permissible and prohibited forms of securities. It also intends to distinguish between liabilities and the assets held on trust. The standard does not cover guarantees against torts.
General Rulings on Guarantees 2/1 Permissibility of guarantees and their relevance to contracts 2/1/1 A contract of guarantee is permissible in contracts of exchange, e.g. a contract of sale, or contract of rights, e.g. right of intel- lectual property. Such a guarantee contract does not affect the permissibility of the original contract in which it is required. It is, moreover, permissible to stipulate a guarantee into the body of an original at one time, because guarantee is appropriate to, or relevant in, contracts. 2/1/2 There is no objection in Shariah to include a number of guaran- tees in one contract, such as incorporating a personal guarantee together with a mortgage of security in the same contract. 2/2 Guarantees in trust (fiduciary) contracts 2/2/1 It is not permissible to stipulate in trust (fiduciary) contracts, e.g. agency contracts or contracts of deposits, that a personal guarantee or mortgage of security be produced, because such a stipulation is against the nature of trust (fiduciary) contracts, unless such a stipulation is intended to cover cases of miscon- 124124 Shariah Standard No. (5): Guarantees duct, negligence or breach of conditions or stipulations. The prohibition against seeking a guarantee in trust contracts is more stringent in Musharakah and Mudarabah contracts, since it is not permitted to require from a manager in the Mudara- bah or the Musharakah contract or an investment agent or one of the partners in these contracts to guarantee the capital, or to promise a guaranteed profit. Moreover, it is not permissible for these contracts to be marketed or operated as a guaranteed investment. 2/2/2 It is not permissible to combine agency and personal guarantees in one contract at the same time (i.e. the same party acting in the capacity of an agent on one hand and acting as a guarantor on the other hand), because such a combination conflicts with the nature of these contracts. In addition, a guarantee given by a party acting as an agent in respect of an investment turns the transaction into an interest-based loan, since the capital of the investment is guaranteed in addition to the proceeds of the investment, (i.e. as though the investment agent had taken a loan and repaid it with an additional sum which is tantamount to Riba). But if a guarantee is not stipulated in the agency contract and the agent voluntarily provides a guarantee to his clients independently of the agency contract, the agent becomes a guarantor in a different capacity from that of agent. In this case, such an agent will remain liable as guarantor even if he is discharged from acting as agent. 2/3 Guaranteeing existing leased properties The lessor bears the risk associated with the leased property and the lessee holds it on a trust basis. Hence, it is not permissible for the lessor to stipulate in the lease contract that the lessee provide a guarantee or mortgage of security, etc., so that he may use it to recover the amount of the lease rental if the leased property is damaged, unless such a stipulation is restricted to cases of misconduct, negligence or breach of contract. Therefore, the lessor is liable for the consequences of any damage to the leased property that is not caused 125125 Shariah Standard No. (5): Guarantees by the misconduct or negligence of the lessee, and is responsible for any related insurance expenses. The lessor also bears the expense of any major maintenance work required to keep the leased property in the condition necessary to provide the contractual benefits under the lease. 2/4 Written documentation and attestation 2/4/1 Documentation in writing is recommended by Shariah, whether such documentation is in the form of ordinary (private) or official documents. However, customary practice is applicable in the drawing up of such documents and in determining the documents that are relevant as proof (or have evidential value). It is prohibited to forge documents or to conceal their contents or to destroy them so as to bring about the loss of other peoples rights. 2/4/2 Attestation in financial transactions is recommended by Shariah. It is also commendable, and in case of necessity it is obligatory, to give testimony. On the other hand, perjury is prohibited and is one of the major sins. 2/4/3 It is not permitted to scribe or witness acts prohibited by Shariah, such as certifying or witnessing borrowing on the basis of interest.
Personal Guarantees 3/1 Permissibility and types of personal guarantee 3/1/1 It is permissible for an Institution to stipulate that a customer should provide one or more guarantors to secure the debts owed by the customer. 3/1/2 Personal guarantees are divided into two types. One type is a guarantee where the guarantor has a right of recourse to the debtor, and this guarantee is offered at the request or with the consent of the debtor. The other type is a non-recourse guar- antee, which is offered voluntarily by a third party without the debtors request or consent (voluntary guarantee). 126126 Shariah Standard No. (5): Guarantees 3/1/3 An Institution is not entitled to guarantee financial com- mitments without a right of recourse to the debtor, i.e. to be a non-recourse guarantor, unless the Institution is already authorised by its shareholders and investors to make dona- tions or to perform acts of benevolence. 3/1/4 It is permissible to fix the duration of a personal guarantee. It is also permissible to set a ceiling on the amount to be guaranteed and it is permissible that the personal guarantee be restricted by, or be contingent upon, a condition. In addition, it is permissible that such a guarantee be made contingent upon a future event, for example, by fixing a future date at which liability will com- mence and, in this case, the guarantor may validly withdraw the guarantee, by notifying the creditor, before the prospective obligation to be guaranteed arises. 3/1/5 It is not permissible to take any remuneration whatsoever for providing a personal guarantee per se, or to pay commission for obtaining such a guarantee. The guarantor is, however, entitled to claim any expenses actually incurred during the period of a personal guarantee, and the Institution is not obliged to inquire as to how the guarantee produced has been obtained by the customer. [see item 7/1/1 and 7/1/2)] 3/2 Guaranteeing unknown (Majhul) and future debts A valid guarantee may be given for debts, the exact amount of which is unknown. Similarly, a valid guarantee may be given for a debt that will arise in the future. However, it is permissible for the guarantor to withdraw such a guarantee before a future debt is actually created, after notifying the person having interest in the guarantee. This is called a market (business) guarantee, or a guarantee of contractual obligation. An example of this type is a third partys guarantee to refund the price to the buyer if it appears that the sold commodity belongs to a person other than the seller and this guarantee is known (dealers/business misrepresentation guarantee). Daman al-Dark (dealers/business misrepresentation guarantee). as as Daman al-Dark 127127 Shariah Standard No. (5): Guarantees 3/3 The effect of a personal guarantee 3/3/1 The creditor is entitled to claim the amount of his debt from either the debtor or the guarantor and he has the choice of claiming his right from either of them. However, the guarantor is entitled to arrange the order of liability, for example, by stipulating (at the conclusion of the contract of guarantee) that the creditor shall first claim payment from the principal debtor and that the creditor is entitled to recourse to the guarantor for payment only if the principal debtor refuses to fulfil his obligation. 3/3/2 If the creditor discharges the debtor from the debt, the guarantor is also discharged automatically from his liability. However, is also discharged automatically from his liability. However, if the creditor discharges the guarantor from liability, the if the creditor discharges the guarantor from liability, the debtor remains in debt. If the guarantor secures a discount that results in paying an amount less than the original debt, the guarantor is entitled to recover only the amount he has actually paid to the creditor; he cannot demand that the debtor pay the debt in full ignoring the discount. This rule is intended to prevent a procedure being used that potentially leads to Riba. However, if the guarantor reaches an agreement with the creditor to settle the debt using as consideration a commodity of a different type from that in which the original debt was designated, the guarantor is entitled to recover the exact amount of the commodity provided as consideration for the debt, or the exact amount of the debt, whichever is less. 3/3/3 It is permissible for a personal guarantee contract to be desig- nated in a separate contract. It can also be concluded togeth- er with, or before, or after, the conclusion of the contract of a credit transaction. 3/3/4 If an Institution manages transactions on the basis of Mudarabah or Musharakah or investment agency, it is not permitted for it to guarantee the fluctuations of currency exchange rates so that the of the investment shares irrespective of the investors will recover their investment shares irrespective investors will recover their behaviour of the currency market. Such a guarantee is prohibited 128128 Shariah Standard No. (5): Guarantees because it is tantamount to the Mudarib or partner or investment agent guaranteeing the capital of other partners or investors, which is prohibited by Shariah. [see items 2/21 and 2/2/2] 3/3/5 If the contract of a credit transaction stipulates that the debtor shall provide a guarantor and the debtor fails to provide one, the Institution is entitled to initiate legal action to force him to provide a guarantor or to terminate the contract.
Mortgage (Rahn) It is to make a financial asset or so tied to a debt so that the asset or its value is used for repayment of the debt in case of default. [see Shariah Standard No. (39) on Mortgage]
Cases of Achieving the Objectives of Securities 5/1 Bringing forward future instalments in case of default on payment It is permissible to include a term in a debt contract to the effect that, if the debtor defaults on the payment of one or more instalments, some or all of the future instalments shall fall due immediately, provided the default was not caused by unforeseeable intervening events or force majeure. However, this term shall not be effective until the debtor has been served with a reminder notice and after a reasonable period of time has elapsed. 5/2 Termination of a sale on deferred payment terms in case of failure to pay The seller is entitled, in a contract of sale on a deferred payment basis, to stipulate that if the buyer fails to pay the price within a certain period of time, the seller is entitled to revoke the contract and repossess the sold asset without recourse to the courts.
Some Contemporary Applications of Securities 6/1 Letters of guarantee 6/1/1 It is not permissible to take remuneration for issuing a letter of guarantee, whether it is with cover or without cover, if the remuneration is intended as consideration for the guarantee remuneration is intended as consideration for the guarantee 129129 Shariah Standard No. (5): Guarantees per se , since the amount guaranteed and the duration of the per se, since the amount guaranteed and the duration of the guarantee are usually taken into consideration in computing remuneration. 6/1/2 Asking an applicant for a letter of guarantee to bear administrative expenses incurred in issuing a letter of guarantee of either type (i.e. preliminary or final) is permissible in Shariah, provided the remuneration for such expenses do not exceed the commission that others would charge for such services. Where full or partial cover is provided, it is permissible, in estimating the expenses for issuing a letter of guarantee, to take into account anything that will reflect the actual service to be rendered in providing a cover for the transaction. 6/1/3 It is not permitted for the Institution to issue a letter of guarantee in favour of an applicant who will use it to acquire an interest- based loan or to conclude a prohibited transaction. 6/2 Documentary credit It is a written undertaking by a bank (known as the issuer) given to the seller (the beneficiary) as per the buyers (applicants or orderers) instruction or is issued by the bank for its own use, undertaking to pay up to a specified amount (in cash or through acceptance or discounting of a bill of exchange), within a certain period of time, provided that the seller present documents for the goods conforming to the instructions. In brief, a documentary credit is an undertaking by a bank to pay subject to conformity of the documents to the contractual instructions. [see Shariah Standard No. (14) on Documentary Credit] 6/3 Use of cheques or promissory notes There is no Shariah objection to obtaining cheques or promissory notes from the debtor (unless not allowed by law) as a means to force the debtor to make timely payment of instalments in cash, whereby if the debtor pays on time such cheques or promissory notes shall be returned to him, and in the event of default on payment they 130130 Shariah Standard No. (5): Guarantees may be produced for recovery. The party providing these cheques or promissory notes as security is entitled to obtain an undertaking from the Institution that they will be used only for timely recovery of its due debts without any addition. 6/4 Insurance for doubtful or bad debts It is permissible to subscribe to an Islamic insurance coverage as security for debt obligations and it is not permissible that debts be insured on a conventional insurance basis. 6/5 Freezing cash deposits (blocking withdrawals) 6/5/1 In order to secure the future payment of debts on a single payment or an instalment basis, it is permissible for the In- stitution to stipulate, that it is entitled to freeze the customers investment account, or to revoke his right to withdraw money from such an account entirely or to block an amount in the account equivalent to the debt, which is the preferred option. Nevertheless, the customer remains entitled to share profits on the whole balance of the investment account after deducting the Institutions share for acting as a Mudarib. 6/5/2 In a credit transaction, it is not permitted for the Institution to stipulate a right to freeze the customers current account. However, a stipulation of this kind is allowed where the customer has freely, willingly and absolutely agreed to his current account to be frozen. 6/6 Third party guarantees (voluntary undertakings to compensate an investment loss) It is permissible for a third party, other than the Mudarib or invest- ment agent or one of the partners, to undertake voluntarily that he will compensate the investment losses of the party to whom the undertaking is given, provided this guarantee is not linked in any manner to the Mudarabah financing contract or investment agen- cy contract. 131131 Shariah Standard No. (5): Guarantees 6/7 Underwriting the subscription of shares issued (subscription guar- antee) 6/7/1 It is permissible for the Institution to undertake that it will underwrite the remaining shares offered for subscription after underwrite the remaining shares offered for subscription after the expiry of the offer period, provided the shares are under- written at the offer value without any consideration for the underwriting per se. 6/7/2 The underwriter is entitled to receive consideration for a service it provides other than the guarantee, such as conducting a feasi- bility study or marketing the shares. 6/8 Guarantees in tenders, security deposits in Murabahah transactions and Arboun (Earnest Money) 6/8/1 It is permissible to obtain guarantees for tenders and this includes both the amounts paid for participating in the bid (primary cash security for participating in the bid) and the amounts paid when the contract is awarded to the successful bidder (final cash security providing evidence of ability to complete the project). Such amounts shall be considered as being held on trust by the offeror of the bid on behalf of the successful bidder, and are not viewed as Arboun (Earnest Money). Hence, such amounts are recoverable if they are intermingled with other amounts of money (i.e. irrespective of any unwanted circumstances). Moreover, it is not permissible to confiscate such amounts of money, except in compensation for an equivalent amount of financial damage actually sustained in the tendering process. Such amounts may be invested in the benefit of the customer with his consent, unless he requests it to be credited to his current account. 6/8/2 It is permissible for the Institution, in the case of a unilateral binding promise, to take a sum of money called Hamish Jiddiyyah binding promise, to take a sum of money called Hamish Jiddiyyah (security deposit) from the purchase orderer (customer) as se- is held on trust, not as curity for his promise. This sum of money is held on trust, not as curity for his promise. This sum of money 132132 Shariah Standard No. (5): Guarantees Arboun, because no contract has been established. The rules set out in item 6/8/1 apply here. Where the customer fails to honour his binding promise, the Institution is not permitted to retain the security deposit as such. Instead, the Institutions rights are lim- the amount of any damage actually incurred as ited to deducting the amount of any damage actually incurred as ited to deducting a result of the breach, namely the difference between the cost of the item to the Institution and its selling price to a third party. 6/8/3 It is permissible to take Arboun 6/8/3 It is permissible to take Arboun from a buyer or lessee when from a buyer or lessee when a sale or lease contract is concluded, on condition that, if the contract is not terminated within the specified period during which the option to terminate the contract remains valid, such an amount will be considered as part of the consideration for the contract and, if the buyer or lessee fails to perform the contract within this period, the seller or lessor is entitled to retain the amount. It is, however, preferable that the Institution should amount. It is, however, preferable that the Institution should refund to the customer any balance remaining after deducting from the the amount of any damage actually sustained Arboun the amount of any damage actually sustained from the Arboun by it. 6/9 Priority right of recovery and the right to follow up 6/9/1 The Institution is entitled to recover first its tangible items that were sold to or manufactured for a customer and have not been paid for and can be identified among the assets of the customer. 6/9/2 The Institution is entitled to protect the integrity of the subject of a guarantee, such as a mortgaged asset, and pursue a legal action against misusing it if it is established that the person holding it is using it in a manner that may lead to losses to be borne by the Institution. 6/9/3 The rights of the parties holding mortgages of security shall be given priority over the rights of the parties who are unsecured. [see Shariah Standard No. (39)] 133133 Shariah Standard No. (5): Guarantees 6/9/4 In the event of bankruptcy or liquidation, the parties in charge of the liquidation have a preferential right or priority over other creditors in recovering their rights; i.e. the cost of any services provided in the process of liquidation. [see Shariah Standard No. (43) on Insolvency]
Date of Issuance of the Standard This Standard was issued on 29 Safar 1422 A.H., corresponding to 23 May 2001 A.D. 134134 Shariah Standard No. (5): Guarantees Adoption of the Standard The Shariah Standard on Guarantees was adopted by the Shariah held on 25-29 Safar 1422 A.H., corre- No. (6) held on 25-29 Safar 1422 A.H., corre- Board in its meeting Board in its meeting No. (6) sponding to 19-23 May 2001 A.D. 135135 Shariah Standard No. (5): Guarantees Appendix (A) Brief History of the Preparation of the Standard In its meeting No. (2) held in Mecca on 10-14 Ramadan 1420 A.H., corresponding to 18-22 December 1999 A.D., the Shariah Board decided to give priority to the preparation of a Shariah Standard on Guarantees. On Tuesday 27 Ramadan 1420 A.H., corresponding to 4 January 2000 A.D., a Shariah consultant was commissioned to prepare a juristic study and an exposure draft. In its meeting held in Bahrain on 18-19 Rabi I, 1421 A.H., corresponding to 20-21 June 2000 A.D., the Shariah Committee discussed the juristic study and made certain amendments to it. The committee also discussed the exposure draft of the Standard in its meeting No. (6) held in Bahrain on 20-21 Jumada II, 1421 A.H., corresponding to 18-19 September 2000 A.D., and asked the consultant to make some amendments in light of the comments made by the members. In its meeting No. (7) held in Bahrain on 5-6 Shaban 1421 A.H., corre- sponding to 1-2 November 2000 A.D., the Shariah Committee discussed the exposure draft and made some relevant amendments. The revised exposure draft of the standard was presented to the Shariah held in Mecca on 8-12 Ramadan 1421 A.H., No. (5) held in Mecca on 8-12 Ramadan 1421 A.H., Board in its meeting No. (5) Board in its meeting corresponding to 4-8 December 2000 A.D. The Shariah Board made further amendments to the exposure draft of the standard and decided that it should be distributed to specialists and interested parties in order to obtain their comments in order to discuss them in a public hearing. A public hearing was held in Bahrain on 4-5 Dhul-Hajjah 1421 A.H., corresponding to 27-28 February 2001 A.D. The public hearing was attended 136136 Shariah Standard No. (5): Guarantees by more than 30 participants representing central banks, Institutions, accounting firms, Shariah scholars, academics and others who are interested in this field. Members of the Shariah studies committee responded to the written comments that were sent prior to the public hearing as well as to the oral comments that were expressed in the public hearing. The Shariah Committee held its meeting No. (8) on 16-17 Dhul- Hajjah 1421 A.H., corresponding to 11-12 March 2001 A.D., to discuss the comments made about the exposure draft. The committee made the necessary amendments in light of both the written comments that were received and oral comments that took place in the public hearing. The Shariah Board in its meeting No. (6) held in Al-Madinah Al- Munawwarah on 25-29 Safar 1422 A.H., corresponding to 19-23 May 2001 A.D., discussed the amendments made by the Shariah Committee, and made necessary amendments. The Shariah Board unanimously adopted some of the items of the standard and some items were adopted by the majority vote of the members of the Shariah Board, as recorded in the minutes of the meetings of the Shariah Board. The Shariah Standards Review Committee reviewed the standard in its meeting held in Muharram 1433 A.H., corresponding to November 2011 A.D., in the State of Qatar, and proposed after deliberation a set of amendments (additions, deletions, and rephrasing) as deemed necessary, and then submitted the proposed amendments to the Shariah Board for approval as it deemed necessary. In its meeting No. (38) held in Al-Madinah Al-Munawwarah, Kingdom of Saudi Arabia on 28 Shaban - 1 Ramadan 1435 A.H., corresponding to 26- 28 June 2014 A.D., the Shariah Board discussed the proposed amendments submitted by the Shariah Standards Review Committee. After deliberation, the Shariah Board approved necessary amendments, and the standard was adopted in its current amended version. 137137 Shariah Standard No. (5): Guarantees Appendix (B) The Shariah Basis for the Standard Permissibility of Guarantees and Its Relevance to Contracts The basis of the permissibility of stipulating guarantees in contracts is that it protects property, which is one of the objectives of Shariah. The other authorities mentioned in the standard in support of each kind of guarantee can be cited as authority for the permissibility of guarantees in contracts. Guarantees in Trust Contracts Assets held on trust must be returned to their owners in the manner in which they were received and in their original physical state promptly (Allah after the owners demand their return. Allah, the Almighty, says: (Allah after the owners demand their return. Allah, the Almighty, says: doth command you to render back your trusts to those to whom they are due).(2)(2) Since such assets are not subject to exchange, they are purposely due). Since such assets are not subject to exchange, they are purposely meant either for custody with permission to use them, such as assets on deposit, or for charitable acts, such as a loan of tangible assets. Therefore, the persons holding such assets are considered by the owners from the beginning as capable of returning them to their owners on demand, making them trustees, and as a principle of Shariah, a trustee is not held liable (for loss of, or damage to, an asset held on trust), except in circumstances of misconduct, negligence or violation of the conditions agreed upon, because in other circumstances it is inconsistent with the fundamental principle of trusts for a trustee to be held liable. Written Documentation and Attestation Written documentation is recommended by Shariah. This is the opinion of the majority of Fuqaha, in contrast to Ibn Hazm who argued that written documentation is an obligation (i.e. if one did not put his financial [Al-Nisa (Women): 58]. (2)(2) [Al-Nisa (Women): 58]. 138138 Shariah Standard No. (5): Guarantees transactions in writing he has committed a sin) relying on the literal (O ye who believe! When you deal with meaning of the Quranic verse: (O ye who believe! When you deal with meaning of the Quranic verse: each other, in transactions involving future obligations in a fixed period time, reduce them to writing)(3)(3) and the Quranic Verse: time, reduce them to writing) (Disdain not to and the Quranic Verse: (Disdain not to reduce to writing your contract for a future period, whether it be small or big.(4)(4) The majority of Fuqaha have also inferred that this verse itself or big. The majority of Fuqaha have also inferred that this verse itself excluded written documentation in the cases of trustworthiness, as the last (And if one of you deposits a thing on trust part of the following verse says: (And if one of you deposits a thing on trust part of the following verse says: with another, let the trustee (faithfully) discharge his trust and left him fear Allah his Lord.) It must be noted that customary practice is the basis in determining the form and evidential value of written documentation, because Shariah did not specify a particular manner of writing to be considered. As for the permissibility of attestation as documentation, the authority for that is the (And get out two witnesses, out of your own following Quranic verse: (And get out two witnesses, out of your own following Quranic verse: men. And if there are not two men, then a man and two women, such as ye choose, for witnesses, so that if one of them errs, the other can remind her).(5)(5) her). The evidential value of attestation according to traditional Fuqaha is stronger than that of written documentation. But in modern times, things have changed so that some laws rely on witnesses only in a very limited number of cases and paramount importance is given to written documentary evidence. Personal Guarantees Permissibility of personal guarantees Personal guarantees derive their permissibility from the Quran, Sunnah, (They consensus and reasoning. In the Quran, Allah, the Almighty, says: (They consensus and reasoning. In the Quran, Allah, the Almighty, says: said: We miss the great beaker of the king; for him who produces it, is (the reward of) a camel load; I will be bound by it).(6)(6) In Sunnah, there is the reward of) a camel load; I will be bound by it). In Sunnah, there is the Hadith narrated by Salamah Ibn Al-Akwa, who said: We were with the (3)(3) [Al Baqarah (The Cow): 282]. [Al Baqarah (The Cow): 282]. (4)(4) [Al Baqarah (The Cow): 282]. [Al Baqarah (The Cow): 282]. (5)(5) [Al Baqarah (The Cow): 282]. [Yusuf (Joseph): 72]. (6)(6) [Yusuf (Joseph): 72]. 139139 Shariah Standard No. (5): Guarantees Prophet (peace be upon him) when a deceased person was brought. They said, O Prophet of Allah, perform prayers on him. He (peace be upon him) Has the deceased left anything? They said, No. He (peace be upon said, They said, No. He (peace be upon said, Has the deceased left anything? They said, Three dinars. He said, Perform prayers him) said, Perform prayers him) said, Is he in debt? Abu Qatadah said, O Messenger of Allah, perform on your companion. Abu Qatadah said, O Messenger of Allah, perform on your companion. prayer on him, and I am responsible for his debt. Then the Prophet (peace be upon him) performed prayers on him.(7)(7) In another text of the Hadith, be upon him) performed prayers on him. In another text of the Hadith, he (Qatadah) said: I guarantee (to pay) his debt.(8)(8) he (Qatadah) said: I guarantee (to pay) his debt. Is he in debt? They said, Three dinars. He said, The Fuqaha are unanimous on the permissibility of personal guarantees. Moreover, the need of people for personal guarantees to facilitate dealings with each other had also made them legitimate, particularly in the case of customers who lack a good credit record. In addition, personal guarantees encourage performance and prevent the contract from being breached and this security also justifies their permissibility. The objection to taking consideration for personal guarantees is that giving a guarantee is one of the charitable acts that should be offered without consideration, and this ruling has generated consensus among the Fuqaha. Moreover, a personal guarantee indicates a readiness to give away the amount of a loan, which means that the guarantor will pay the loan (if the principal debtor fails to pay) and have recourse to the guaranteed person for fulfilment. Hence, it is not permissible to take consideration for a guarantee, because it is not permissible to take consideration for giving away the amount of the loan itself, since such consideration is considered to be Riba. Guaranteeing unknown and future debts The Shariah basis for the permissibility of guaranteeing the unknown The guarantor is liable.(9)(9) because because is the general meaning of the Hadith: The guarantor is liable. is the general meaning of the Hadith: [7: 317]; Sunan Ibn Majah [2: 800], Dar Ibn Kathir and Yamamah. Sahih [2: 800], Dar Ibn Kathir and Yamamah. Sunan Ibn Majah, [2: 804]; and Al-Bayhaqi in Related by Al-Bukhari in his Sahih (7)(7) Related by Al-Bukhari in his (8)(8) Sunan Al-Nasai Sunan Al-Nasai [7: 317]; Al-Kubra [4: 95]. Al-Kubra [4: 95]. The Hadith has been related by Ahmad, Abu Dawud, and Al-Tirmidhi: Al-Darari Al- Al-Darari Al- [2: 804], Dar Al- Sunan Ibn Majah [2: 804], Dar Al- Mudiyyah [1: 399], Dar Al-Jil; Ibn Majah in his Mudiyyah Fikr; and Al-Bayhaqi in Al-Sunan Al-Kubra Fikr; and Al-Bayhaqi in (9)(9) The Hadith has been related by Ahmad, Abu Dawud, and Al-Tirmidhi: [1: 399], Dar Al-Jil; Ibn Majah in his Sunan Ibn Majah [6: 72], Maktabat Dar Al-Baz. Al-Sunan Al-Kubra [6: 72], Maktabat Dar Al-Baz. Al-Sunan , [2: 804]; and Al-Bayhaqi in Al-Sunan 140140 Shariah Standard No. (5): Guarantees this Hadith makes no distinction between guaranteeing the known and the unknown since there is no harm or element of dispute arising due to uncertainty here, because the unknown transaction guaranteed will become certain and known, and the guarantor will know, after the debt is incurred, the actual obligation he undertakes. Another authority for the permissibility (...for him who of guaranteeing what is not known is the Quranic verse: (...for him who of guaranteeing what is not known is the Quranic verse: (10) produces it, is (the reward of) a camel load and I will be bound by it.(10) produces it, is (the reward of) a camel load and I will be bound by it. Here, the guarantor guaranteed a camel load although it was not yet a debt. The evidence for the creditors right to demand payment from either the debtor or the guarantor is that the debt is established as liability of both of them, hence the right to demand payment from either of them. The permissibility for stipulating that the creditor has first to ask for payment from the principal debtor and that he may ask the guarantor for payment only if the debtor fails to pay, is based on an opinion in the Maliki school (12) These opinions argued of lawof law(11) These opinions argued that if the debtor is solvent then demanding payment from the guarantor is pointless, unless the debtor refuses to pay. So, the requirement that payment be first sought from the debtor has a Shariah basis as well as being a case of adherence to a principle of natural justice. and it is also an opinion of the Hanafis.(12) (11) and it is also an opinion of the Hanafis. Bringing Forward Future Instalments in Case of Default in Payment Muslims are bound by the conditions they made,(13) The basis for this condition is the Hadith of the Prophet (peace be upon (13) and because him): and because him): Muslims are bound by the conditions they made, payment on a deferred basis is the right of the debtor, and the debtor may choose to pay before time and relinquish the deferral of the date of payment entirely. If this is the case, the date of payment may also be based on default so as to strengthen the collectibility of the debt and secure payment on time. The basis of the rule enabling the creditor to demand payment of all instalments in the event of default, instead of waiting until each instalment [11: 291]. Al-Bayan Wa Al-Tahsil [11: 291]. I will be bound by it means being a guarantor. means being a guarantor. (10) (10) [Yusuf (Joseph): 72]. (11) Ibn Rushd, (11) (12) (12) Badai Al-Sanai (13) Related by Al-Bayhaqi in (13) [Yusuf (Joseph): 72]. I will be bound by it Ibn Rushd, Al-Bayan Wa Al-Tahsil Badai Al-Sanai [7: 2423]. [7: 2423]. Related by Al-Bayhaqi in Al-Sunan Al-Kubra Daraqutni in his Daraqutni in his Sunan Al-Daraqutni in his Musannaf in his Musannaf [4: 450], Maktabat Al-Rushd; and Al-Tahawi in [4: 90], Dar Al-Kutub Al-Ilmiyyah. Athar [4: 90], Dar Al-Kutub Al-Ilmiyyah. Athar Al-Sunan Al-Kubra [6: 79], Maktabat Dar Al-Baz; Al- [6: 79], Maktabat Dar Al-Baz; Al- Sunan Al-Daraqutni [10: 27], Dar Al-Marifah; Ibn Abu Shaybah [10: 27], Dar Al-Marifah; Ibn Abu Shaybah Sharh Maani Al- [4: 450], Maktabat Al-Rushd; and Al-Tahawi in Sharh Maani Al- 141141 Shariah Standard No. (5): Guarantees is due, is the possibility that during the period of delay in payment the debtor may find a means to conceal his assets and claim insolvency. The permissibility of this condition is confirmed by the Resolution No. (51) issued by the International Islamic Fiqh Academy. Termination of a Sale on Deferred Payment Terms in Case of Failure to Pa The basis for this is that the seller has consented to deferred payment only if it will not lead to a loss of what is due to him. This is the opinion of the majority of Fuqaha, as opposed to the Hanafis who have confined the creditors right to litigation, unless he has stipulated the right to terminate the contract and Muslims are bound by conditions they made. Guarantees and Their Modern Applications Letters of Guarantee The basis of the rule that no remuneration may be taken for a guarantee per se is that it is a surety, and as such it is one of the contracts of charity since it involves a readiness to give away the amount of a loan for no consideration. The majority of Fuqaha agree that it is prohibited to take consideration for guarantee. However, issuing the letter of guarantee is a service that justifies charging fees. The prohibition of issuing a letter of guarantee for unlawful acts is analogous to the prohibition of giving assistance in committing a sin. The Hadith: Allah curses the one who gives Riba and the one who takes it The Hadith: Allah curses the one who gives Riba and the one who takes it (14) also and the one who writes its contract and the two witnesses involved(14) and the one who writes its contract and the two witnesses involved also supports this ruling, because the personal guarantor has a stronger role in establishing and recovering a debt than the writer of the contract and the witness mentioned in the Hadith. Documentary credits The basis for the permissibility of charging fees for a documentary credit is that issuing a documentary credit is a service performed in the interest of the applicant for the documentary credit, for which the Bank has the right to charge fees. (14) Related by Muslim in his (14) Related by Muslim in his Sahih compilers of Hadith, and see: Al-Shawkani Nayl Al-Awtar compilers of Hadith, and see: Al-Shawkani [3: 1219], Dar Ihya Al-Turath Al-Arabi; and the five Sahih [3: 1219], Dar Ihya Al-Turath Al-Arabi; and the five [5: 296], Dar Al-Jil. Nayl Al-Awtar [5: 296], Dar Al-Jil. 142142 Shariah Standard No. (5): Guarantees Use of cheques or promissory notes The Shariah basis for obtaining cheques or promissory notes from the debtor as a guarantee is the general sources on the permissibility of guar- antees in general. Insurance for debts Islamic insurance is based on the principle of donation, and Gharar is tolerable in such conditions. In Islamic insurance, the instalments that are paid are provided within a framework of donations organised for the mutual benefit of the contributors to the insurance fund. The permissibility of Islamic insurance is confirmed by the resolutions issued by the Islamic (15) and the International Islamic Fiqh Academy of the World Muslim League (15) and the International Islamic Fiqh Academy of the World Muslim League (16) Although this Fiqh Academy of the Organisation of Islamic Conference.(16) Fiqh Academy of the Organisation of Islamic Conference. Although this form of insurance falls within the meaning of a guarantee, the guarantee here is not provided in return for conditional consideration as such, hence the permissibility of subscribing to an Islamic insurance coverage as security for doubtful or bad debts. Freezing cash deposits The basis for the permissibility of stipulating a right to freeze acustomers investment account is the permissibility of pledging funds, in addition to the fact that the purpose behind such freezing is to be able to agree on a set-off if it appears that the pledgor of the balance is in debt to the bank. It is a form of mortgage to secure a possible future debt. The basis for the prohibition of stipulating a right to freeze a customers current account is that such a right would be tantamount to a combination of a sale on deferred payment terms and a loan transaction; i.e., it amounts to a deferred sale with a condition to provide a loan, which is prohibited by Shariah. Third party guarantees The basis for third party guarantees is that they are a promise to volunteer party other to remedy a loss of capital under an investment contract with a party other to remedy a loss of capital under an investment contract with a The First Session, Resolution No. (5). (15) The First Session, Resolution No. (5). (15) Resolution No. 9 (9/2). (16) Resolution No. 9 (9/2). (16) 143143 Shariah Standard No. (5): Guarantees than the volunteer. This is a permissible act as a volunteer, as is evidenced in (No ground (of complaint) can there be against such as the Holy Quran: (No ground (of complaint) can there be against such as the Holy Qura`n: (17) A resolution passed by the International Islamic Fiqh Academy do right,).(17) do right,). A resolution passed by the International Islamic Fiqh Academy states as follows: There is no Shariah objection to mention in the prospectus of the issue or in the documents of Muqaradah (Mudarabah) bonds the promise of a third party, who is independent personally and in terms of financial liability from the two parties to the contract, to volunteer an amount of money for no consideration to be allocated to make good a loss on a particular project. However, this is circumscribed with a condition that such a promise should be an obligation independent from the Mudarabah contract. In other words, the third partys performance of his obligation should not be a condition for the enforcement of the contract and the conditions and liabilities of the parties to the contract. As such, holders of the bonds or the manager of the Mudarabah are not entitled to claim that they may fail to honour their obligations relating to their contracts because the volunteer failed to fulfil his promise because the performance of their (18) obligations takes into consideration the promise to volunteer.(18) obligations takes into consideration the promise to volunteer. Underwriting the subscription of shares issued If such underwriting is offered without consideration, it is considered as a personal guarantee for no consideration, and this is permissible in Shariah. However, if it is for consideration, the basis for its prohibition is what we have However, if it is for consideration, the basis for its prohibition is what we have a guarantee. [see item 4/1] mentioned in respect to taking a commission for a guarantee. [see item 4/1] mentioned in respect to taking a commission for Guarantees in tenders, security deposits in Murabahah transactions and Arboun (Earnest Money) The basis for the permissibility of guarantees in tenders and earnest money is the afore-mentioned authority for guarantees in general. Both guarantees in tenders and security deposits are permissible because they facilitate obtaining compensation for actual damages in case of breach of contract. The basis for obtaining the earnest money to secure performance [Al-Tawbah (Repentance): 91]. (17) [Al-Tawbah (Repentance): 91]. (17) Resolution No. 30 (5/4) (18) Resolution No. 30 (5/4) (18) 144144 Shariah Standard No. (5): Guarantees is the practice of Umar Ibn Al-Khattab (may Allah be pleased with him) in the presence of some companions of the Prophet (peace be upon him), which has been permitted by Imam Ahmad. A resolution has been issued in connection with the permissibility of Arboun (Earnest Money) by the (19) International Islamic Fiqh Academy.(19) International Islamic Fiqh Academy. Priority right of recovery and the right to follow up The basis for the permissibility of the priority of certain rights, such as those of liquidators, is that these rights are considerations that are determined by the judiciary on the basis of public interest. The basis for giving priority to a person whose assets per se have contributed to the increase of the bankrupts assets, and have been located and identified, is the Hadith of the Prophet (peace be upon him): If one sells a commodity, and the owner thereof Prophet (peace be upon him): If one sells a commodity, and the owner thereof becomes bankrupt, and then he finds it without being altered, he has more (20) A resolution in connection with the right over it than the other creditors.(20) right over it than the other creditors. A resolution in connection with the permissibility of preference was issued by the Second Fiqh Seminar hosted by Kuwait Finance House, based on a number of Fiqh rulings determining certain preferences that include priority in the recovery of debts. The right of following up the subject of a mortgage is based on the fact that the aim of the mortgage is to facilitate recovery of the amount of the debt and leaving the debtor without a right of follow-up will defeat this objective. Resolution No. 72 (3/8) in respect of Arboun (Earnest Money). (19) (19) Resolution No. 72 (3/8) in respect of Arboun (Earnest Money). Related by Al-Bukhari and Muslim with different texts as follows: If one finds his If one finds his (20) Related by Al-Bukhari and Muslim with different texts as follows: (20) property without being altered in the possession of a bankrupt, he has more right over it (H: 1559). Sahih Muslim (H: 1559). Sahih Al-Bukhari (H: 2402); and than the other creditors: : Sahih Al-Bukhari than the other creditors (H: 2402); and Sahih Muslim 145145 Shariah Standard No. (5): Guarantees Appendix (C) Definitions Payables: Debts that are absolutely payable and liabilities held on trust basis, either because of being contractually created, or because unjust enrichment has given rise to a liability for restitution. Liabilities: Liabilities held on trust basis, i.e., obligations that are not subject to compensation for any loss suffered except in circumstances of misconduct, negligence or violation of the conditions agreed upon. 146146 Shariah Standard No. (6) Conversion of a Conventional Bank to an Islamic Bank Contents Subject PagePage ................................................................................................... Preface ................................................................................................... Preface ..................................................................... Statement of the Standard ..................................................................... Statement of the Standard ..............................................................................
Scope of the Standard ..............................................................................
Scope of the Standard .............................................................
Time Frame for the Conversion .............................................................
Time Frame for the Conversion .....................................................
Necessary Measures for Conversion .....................................................
Necessary Measures for Conversion .................................................................................
Dealings with Banks .................................................................................
Dealings with Banks
Providing Banking Services in Permissible Ways ................................
Providing Banking Services in Permissible Ways ................................
Effect of Conversion on the Interest Based Receivables and Their ................................................................................. Shariah Alternatives ................................................................................. Shariah Alternatives
Effect of Conversion on Investments .....................................................
Effect of Conversion on Investments .....................................................
Treatment of the Banks Non-Permissible Existing Receivables before the Decision to Convert ............................................................... ............................................................... before the Decision to Convert
Treatment of Non-Permissible Liabilities before the Decision to Convert, Whether the Conversion Is Internal or External.................. ....................................................
Disposal of Impermissible Earnings ....................................................
Disposal of Impermissible Earnings .....
Zakah Obligation on the Bank before the Decision to Convert .....
Zakah Obligation on the Bank before the Decision to Convert ...........................................................
Date of Issuance of the Standard...........................................................
Date of Issuance of the Standard ...................................................................... Adoption of the Standard ...................................................................... Adoption of the Standard Appendices Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (b): TheThe Shariah Basis for the Standard..................................... Appendix (b): Shariah Basis for the Standard..................................... 151151 152152 153153 154154 155155 156156 157157 158158 159159 160160 161161 162162 164164 149149 IN THE NAME OF ALLAH, THE ALL-MERCIFUL, THE MOST MERCIFUL All praise be to Allah, the Lord of all the worlds, and blessings and peace be upon our master, Muhammad, and his household and all his companions Preface The aim of this standard is to explain procedures, mechanisms and treatments that are required for converting a conventional bank to an Islamic bank (bank/banks)(1)(1) that observes the rules and principles of that observes the rules and principles of an Islamic bank (bank/banks) Shariah in its operations and financial relationships, and, at the same time, embraces the objectives and functions of Islamic banking services. The standard also includes an outline of significant Islamic banking activities that constitute alternatives to conventional banking practices that are in place prior to conversion. The word (Institution/Institutions) is used here to refer, in short, to Islamic financial (1)(1) The word (Institution/Institutions) is used here to refer, in short, to Islamic financial institutions including Islamic Banks. 151151 Shariah Standard No. (6): Conversion of a Conventional Bank to an Islamic Bank Statement of the Standard
Scope of the Standard This standard covers fundamental mechanisms for converting a conven- tional bank to a bank that complies with Shariah rules and principles right after the decision to undertake immediate comprehensive conversion within a particular designated period that is announced, whether such a decision comes from within the bank or from outside the bank to be converted by outside parties interested in converting it. The standard covers the time frame required for the conversion, the effect of conversion on the methods used to solicit and receive deposits, and the method to be used to invest such deposits. The standard provides guidance on how to treat the receiv- ables and liabilities realized by the bank prior to the conversion, whether or not such receivables and liabilities are received or paid. The standard includes a treatment of the prohibited assets that are in the possession of the bank before conversion and the appropriate ways of disposing of them. The standard does not cover activities of the converting bank that are naturally permissible or the profit made by permissible means, as these are not the subject matter of the conversion. This is because there is no Shariah objection to the bank continuing such activities or employing them for its own benefit. The standard also does not cover activities of Islamic windows or departments or units in conventional banks.
Time Frame for the Conversion 2/1 It is necessary that all Shariah requirements be executed in the process of converting a conventional bank to a potential Islamic bank. It is also necessary that the Shariah rules and principles be observed in respect of all new transactions after conversion. In principle, the transactions that are concluded before the decision to convert must be ceased or disposed of immediately. It is not permissible to delay clearing out non-permissible transactions 152152 Shariah Standard No. (6): Conversion of a Conventional Bank to an Islamic Bank unless such delay becomes a necessity or a pressing need. Thus, unless such delay becomes a necessity or a pressing need. Thus, the circumstances surrounding the conversion must be taken into consideration in order to avoid the risk of failure or a breakdown of the banks operations, taking into account that the provisions of this standard will be applied to accommodate the situation. 2/2 If the bank did not decide on an immediate and comprehensive conversion as per item 2/1 and decided to adopt a gradual or partial conversion, then it is not regarded as a converted bank and may not be granted a licence as an Islamic bank unless the conversion process is completed. The shareholders are required to accelerate the process of conversion in order to free themselves from the sin of impermissible activities. This standard may be used as a guideline for identifying the steps of conversion. 2/3 The impermissible profits realised and transactions concluded during the period of conversion can be treated as per the explanation in items 8-11.
Necessary Measures for Conversion 3/1 For the success of the process of conversion, it is necessary that the bank set up all necessary procedures, create the required tools, explore alternatives to non-permissible financial practices, and train and promote the personnel required for proper implementation of the procedures of conversion. 3/2 The appropriate administrative arrangements must be in place, in- cluding changing the banks operating license if required by the super- visory authorities, and amending the banks by-laws (memorandum and articles of association) through the required procedures so that they include objectives and operational measures that are appropriate to Islamic banking. The by-laws must be cleansed from anything that contradicts the nature of Islamic banking. 3/3 Restructuring the organizational structure of the bank and its em- ployment procedures, conditions and employee statutes to fit the situation of conversion. 153153 Shariah Standard No. (6): Conversion of a Conventional Bank to an Islamic Bank 3/4 Formation of a Shariah supervisory board and an internal Shariah compliance department in accordance with the Governance Standards issued by Accounting and Auditing Organization for Islamic Financial Institutions. 3/5 Reformatting or designing standard contracts or specimens or exem- plars of documents that comply with Shariah rules and principles. 3/6 Opening accounts with local or international Islamic banks and revamping of the accounts that are maintained with local or corre- sponding conventional banks [see, item 4 (b)]. Any dealings with conventional banks must be limited to the magnitude of the need to do so. 3/7 Preparing a special programme for preparing personnel and training them to deal with the application of Islamic banking practices. 3/8 Taking necessary measures for the implementation of accounting, auditing, governance, and ethics standards issued by Accounting and Auditing Organization for Islamic Financial Institutions.
Dealings with Banks 4/1 Exerting all possible efforts to adapt the ways of dealing with central banks regarding deposits, liquidity needs or otherwise in a way that does not conflict with the rules of Shariah, especially rules that govern Riba transactions. The possible alternatives to the reserve amount required by law include, among others, depositing receivables amount required by law include, among others, depositing receivables instead represented by commercial paper to be paid later by customers instead represented by commercial paper to be paid later by customers of accepting the freezing of the cash account. The bank can also finance government projects using Islamic instruments. Among the possible alternatives for the purpose of set-off is for the bank to maintain current accounts that accrue no interest or disposing of the interest earned, if that is impossible, and adapting the ways of dealing with the central bank for acquiring liquidity, for example, by the opening of investment accounts for the central bank. 4/2 Revamping the transactions with conventional banks on the basis of Riba free transactions and the application of instruments acceptable by Shariah. 154154 Shariah Standard No. (6): Conversion of a Conventional Bank to an Islamic Bank 4/3 Intensifying transactions with Islamic financial Institutions through bilateral exchange of current or investment accounts and considerable cooperation in the areas of remittances, documentary credits and syndicated financing.
Providing Banking Services in Permissible Ways In providing banking services, it is not permissible for the bank to receive interest as compensation for services rendered. It is a requirement that an Islamic alternative be worked out, such as treatment of uncovered documentary credits through Murabahah, Musharakah or Mudarabah in accordance with the rules of Shariah. It is not permissible to take a commission for providing a mere facility. However, the commission may be linked to expenses incurred for the execution of the credit facility accordingly.
Effect of Conversion on the Interest Based Receivables and Their Shariah Alternatives 6/1 All traces of conventional transactions whereby the bank originated monetary assets and is liable to pay interest for them must be liquidated. This is the rule whether such transactions involve individuals, banks or central banks. This liquidation includes, among others, the conditions relating to the deposits, preference shares, investment bonds and interest-based certificates that were issued by the bank before the decision for conversion. [see item 9] 6/2 The bank must confine itself to permissible operations for acquiring the necessary funds to operate or to meet its liabilities. Examples of such operations are: 6/2/1 The shareholders may increase their share capital in order to increase the banks capital and provide a basis for attracting investment accounts and current accounts. 6/2/2 Issuance of Islamic certificates such as Mudarabah, Musharakah or Ijarah certificates within the parameters of Shariah. 6/2/3 Concluding Salam contracts whereby the bank acts in the capacity of a supplier, or Istisnaa contracts whereby the bank 155155 Shariah Standard No. (6): Conversion of a Conventional Bank to an Islamic Bank acts in the capacity of a manufacturer or builder with the condition that the contract price of the Istisnaa is paid to the bank in advance, although the deferment of payment of the price in Istisnaa is allowed by Shariah. 6/2/4 Concluding a sale-and leaseback deal by selling some of the assets of the bank for liquidity and leasing them back by means of an Ijarah contract. This transaction must take into account the Shariah Standards on Ijarah and Ijarah Muntahia Bittamleek whereby the contract of sale must be independent from the contract of lease, i.e. the two contracts must remain separate from each other. 6/2/5 Concluding Tawarruq deals in line with Shariah principles by buying a commodity on a deferred payment basis and selling it to a third party, other than the previous seller, for immediate payment. 6/3 If the capital of the bank has increased due to non-permissible transactions or the accumulation of reserves based on non-permissible transactions, then its treatment must be in accordance with the treatment of non-permissible receivables or other non-permissible assets in the possession of the bank as discussed below. [see items 8 and 10]
Effect of Conversion on Investments 7/1 All interest-based investment instruments must cease to be used and must be replaced by permissible investment instruments such as Mudarabah, all Shariah-nominate partnerships, diminishing Musharakah, sharecropping partnerships (agricultural, planting or irrigation partnership) or financing by way of deferred sales, Murabahah, Salam, Istisnaa, operating Ijarah, Ijarah Muntahia Bittamleek or other permissible financing and investment instru- ments.ments. 7/2 All possible efforts must be exerted to terminate all interest-based loans that the bank has made before the decision to convert, whether such loans are medium-term or long-term facilities, followed by converting 156156 Shariah Standard No. (6): Conversion of a Conventional Bank to an Islamic Bank the principal amounts to financing instruments in accordance with the rules and principles of Shariah. If the bank is unable to terminate some of these loans, then the bank must dispose of the interest earned in the manner explained in item 10/2.
Treatment of the Banks Non-Permissible Existing Receivables before the Decision to Convert 8/1 Non-permissible assets of the bank originated or acquired before the decision to convert Starting from the financial period in which the bank decides to convert, the following must be done: 8/1/1 If a conventional bank is acquired with the intention to convert it to an Islamic bank, the new owners are not obliged to dispose of interest and impermissible earnings that have been earned before such acquisition. 8/1/2 If a conventional bank is converted by its existing shareholders into an Islamic bank, then the process of disposing of interest and impermissible earnings should be considered as commencing at the beginning of the financial period in which the conversion starts to take effect. However, for any impermissible earnings that have been distributed prior to conversion, it is necessary, on ethical grounds, for the shareholders and depositors to whom these earnings have been distributed to dispose of them personally. The bank is not bound to do so. 8/1/3 Revenues not yet received that are of doubtful permissibility are not subject to compulsory disposal, whether they were earned before or during the financial period in which the bank decides to convert. The same rule applies to revenues of doubtful decides to convert. The same rule applies to revenues of doubtful permissibility that have been already received because of a belief that they are permissible on the basis of (I) an interpretation of a person who is qualified to perform on issues that are Ijtihad on issues that are a person who is qualified to perform Ijtihad subject to personal juristic interpretation, (II) juristic position of an authoritative school of Shariah or (III) the opinion of some eminent and knowledgeable scholars. 157157 Shariah Standard No. (6): Conversion of a Conventional Bank to an Islamic Bank 8/1/4 If the bank has rights to prohibited non-monetary assets, it may receive them with the intent to destroy them. If the bank is entitled to receive consideration for supplying non-permissible assets or services, the bank may receive the consideration with the intent to donate it to charity. The same rule applies to any income that has been acquired from non-permissible assets during the period in which the bank decides to convert. In both cases, the customer should not be allowed to avoid paying the amount receivable or the consideration, otherwise such a customer would end up being entitled to two counter-values of the same transaction: the good or service supplied and the price payable for it. 8/1/5 If the bank is converted and it has, among its tangible assets, impermissible commodities, the bank is obliged to destroy them. If the bank has sold some of these commodities and is yet to receive the price thereof, the price must be received and be donated to charity. 8/1/6 If the property assets of the bank are locations designated for non-permissible activities, they should be changed to locations designated for permissible operations and services.
Treatment of Non-Permissible Liabilities before the Decision to Con- vert, Whether the Conversion Is Internal or External 9/1 Internal conversion 9/1/1 If the liabilities are in the form of payment of interest, the bank should employ all lawful means to avoid paying such interest. This rule does not apply to the principal amounts of debts or loans. The bank should not pay interest except on the basis of dire need. 9/1/2 If the liabilities are in the form of obligations to provide non- permissible services, then the bank is obliged to make every effort to terminate such liabilities, by refunding the consideration, even if it has to pay compensation for non-fulfilment of such obligations. 158158 Shariah Standard No. (6): Conversion of a Conventional Bank to an Islamic Bank 9/2 External conversion through acquisition of the bank by parties interested in converting it. If the purchaser is capable of negotiating a deal that could exclude all non-permissible receivables (e.g. interest and non-permissible assets) from the acquisition deal in a way that will make the seller solely liable for non-permissible liabilities, then the Shariah requires that the purchaser do so. However, if the acquisition cannot be concluded unless all assets of the bank including the non-permissible assets and receivables are acquired, then the purchaser is required by Shariah to act as quickly as possible to dispose of non-permissible liabilities even if the purchaser has to suggest to the creditors of the bank an earlier repayment for a discount. 9/3 Treatments for impermissible mortgages The shareholders must accelerate the redemption of all impermissible mortgages attached to the assets of the bank. In the case of external conversion, the buyer must stipulate that the seller replaces impermis- sible mortgages with permissible ones.
Disposal of Impermissible Earnings 10/1 All impermissible earnings acquired by the bank before conver- sion that need to be disposed of as per the rules in this standard must without delay be paid to charity, unless it is difficult to do so, for example, where complete disposal promptly will lead to the collapse of the bank or bankruptcy. In this case, the implementa- tion of conversion can reasonably take place gradually. 10/2 Any interest and other non-permissible earnings should be chan- nelled to charity and general public utilities. It is not permissible for the bank to use this money, directly or indirectly, for its own benefit. Examples of charitable channels include, among others, training people other than the staff of the bank, funding research, providing relief equipment, financial and technical assistance for Islamic countries or Islamic scientific, academic Institutions, Islamic knowledge, and schools, anything to do with spreading Islamic knowledge, and schools, anything to do with spreading 159159 Shariah Standard No. (6): Conversion of a Conventional Bank to an Islamic Bank similar channels. The charity money must go to these channels in accordance with the resolutions of the Shariah Supervisory Board of the bank.
Zakah Obligation on the Bank before the Decision to Convert When the conversion is initiated by outsiders who acquired the conventional bank for the purpose of converting it, then they are not obliged to make Zakah payment for the past financial periods because the Zakah for previous periods is the liability of the previous owners. The Zakah liability will start to exist for the new owners from the date of the decision to convert. For the purpose of discharging the responsibility to pay Zakah, the owners may apply the Shariah Standard No. (35) on Zakah. However, if the decision to convert was made by the shareholders and the Zakah was not paid for the previous financial periods, the shareholders are obliged to pay Zakah for these periods. They must take into account that they are obliged to pay Zakah even if the revenues and the money earned are impermissible because the shareholders are obliged in the first place to dispose of all accrued interest and impermissible earnings. So, the payment of Zakah is part of the obligation to dispose of impermissible earnings and interest.
Date of Issuance of the Standard This Standard was issued on 4 Rabi I, 1424 A.H., corresponding to 16 May 2002 A.D. 160160 Shariah Standard No. (6): Conversion of a Conventional Bank to an Islamic Bank Adoption of the Standard The Shariah Standard on Conversion of a Conventional to an Islamic bank was adopted by the Shariah Board in its meeting No. (8) held in Al- Madinah Al-Munawwarah on 28 Safar - 4 Rabi I, 1423 A.H., corresponding to 11-16 May 2002 A.D. 161161 Shariah Standard No. (6): Conversion of a Conventional Bank to an Islamic Bank Appendix (A) Brief History of the Preparation of the Standard In its meeting No. (5) held in Makkah Al-Mukarramah on 8-12 Ramadan 1421 A.H., corresponding to 4-8 December 2000 A.D., the Shariah Board decided to give priority to the preparation of a Shariah Standard on Conversion of a Conventional bank to an Islamic Bank. On Monday 29 Ramadan 1421 A.H., corresponding to 25 December 2000 A.D., a Shariah consultant was commissioned to prepare a juristic study and an exposure draft. In its meeting held in Bahrain on 15-16 Safar 1422 A.H., corresponding to 9-10 May 2001 A.D., the Shariah Studies Committee discussed the juristic study and made certain amendments to it. The committee also discussed the exposure draft of the Standard in its meeting No. (10) held in Bahrain on 14 Rabi I, 1422 A.H., corresponding to 6 June 2001 A.D., and asked the consultant to make some amendments in light of the comments made by the members. In its meeting No. (11) In its meeting held in Jordan on 17 Jumada II, 1422 A.H., No. (11) held in Jordan on 17 Jumada II, 1422 A.H., corresponding to 5 September 2001 A.D., the Shariah Studies Committee discussed the exposure draft and made some relevant amendments. The revised exposure draft of the standard was presented to the Shariah Board in its meeting No. (7) held in Makkah Al-Mukarramah on 9-13 Ramadan 1422 A.H., corresponding to 24-28 November 2001 A.D. The Shariah Board made further amendments to the exposure draft of the standard and decided that it should be distributed to specialists and interested parties in order to obtain their comments and discuss them in a public hearing. 162162 Shariah Standard No. (6): Conversion of a Conventional Bank to an Islamic Bank A public hearing was held in Bahrain on 29 20 Dhul-Hajjah 1422 A.H., corresponding to 2-3 February 2002 A.D.. The public hearing was attended by more than 30 participants representing central Institutions, Institutions, accounting firms, Shariah scholars, academics and others who are interested in this field. The members responded to the written comments that were sent prior to the public hearing as well as to the oral comments that were expressed in the public hearing. The Shariah Standards Committee in its meeting held on 21-22 Dhul- Hajjah1422 A.H., corresponding to 6-7 March 2002 A.D., in the Kingdom of Bahrain discussed the comments made about the exposure draft. The Committee made the necessary amendments, which it deemed necessary in light of both the discussions that took place in the public hearing, and the written comments that were received. The Shariah Board in its meeting No. (8) held on 28 Safar 4 Rabi I, 1423 A.H., corresponding to 11-16 May 2002 A.D, in Al-Madinah Al- Munawwarah discussed the amendments made by the Shariah Standards Committee, and made the necessary amendments, which it deemed necessary. Some paragraphs of the standard were adopted by the unanimous vote of the members of the Shariah Board, while the other paragraphs were adopted by the majority vote of the members, as recorded in the minutes of the Shariah Board. 163163 Shariah Standard No. (6): Conversion of a Conventional Bank to an Islamic Bank Appendix (B) The Shariah Basis for the Standard Gradual Clearance of Non-Permissible Previous Transactions The basis for the permissibility of gradual clearance of non-permissible previous transactions due to necessity or need and in accordance with the rules of Shariah is because it is not feasible for the converting bank to clear all non-permissible transactions immediately. Therefore, the bank must dispose of the effects of impermissible transactions because this is feasible. Necessary Procedures and Mechanisms for Conversion Since the realisation of the conversion is dependent on the procedures and mechanisms mentioned in this standard, these procedures and mechanisms thus become permissible or in certain circumstances their use becomes obligatory when the conversion will not be realised without applying these procedures and mechanisms. This is because conversion is obligatory, and if an obligation can be realised only by means of a particular way or tool, then the use of such a tool also becomes an obligation. Providing Banking Services The basis for the permissibility of providing banking services that are not related to giving loans on an interest-bearing basis is that such an operation is a practical application of Ijarah and an agency contract with remuneration. If providing these services involves Riba then the operation becomes impermissible as it is a Riba-based transaction that is prohibited by Shariah. Attracting Investments The conversion necessitates doing away with the conventional methods of attracting investment funds such as interest-bearing deposits, which should be replaced by the application of Mudarabah and Musharakah contracts or acting as an investment agent. The basis for the impermissibility of using conventional methods of attracting investments is the Saying of Allah, 164164 Shariah Standard No. (6): Conversion of a Conventional Bank to an Islamic Bank (But Allah has permitted trade and forbidden usury).(2)(2) Exalted: (But Allah has permitted trade and forbidden usury). the the Exalted: The basis for terminating all previous impermissible transactions is the Saying of Allah, the Exalted: (Give up what remains of your demand for (Give up what remains of your demand for Saying of Allah, the Exalted: usury).(3)(3) Also, a number of Shariah boards have issued resolutions for the usury). Also, a number of Shariah boards have issued resolutions for the treatment of pre-conversion liabilities that involve payment of interest by using Shariah acceptable instruments and the conversion of interest-based bonds to Islamic certificates and shares.(4)(4) The Fiqh Academy under the bonds to Islamic certificates and shares. The Fiqh Academy under the auspices of the Muslim World League has issued a resolution confirming the permissibility of Tawarruq (which is one of the instruments that can be used to acquire liquidity).(5)(5) to acquire liquidity). Investment of Funds The basis for the rule that the bank must cease investing through making The basis for the rule that the bank must cease investing through making loans and receiving interest is that this is Riba and paying or receiving Riba is prohibited. The basis for the alternatives to interest-based transactions provided in The basis for the alternatives to interest-based transactions provided in this standard is the authorities that are mentioned for each investment instrument in details in the Fiqh books(6)(6) and the Shariah Standards. and the Shariah Standards. instrument in details in the Fiqh books Treatment of Impermissible Rights of the Bank before the Decision to Convert The basis for not obliging the bank to dispose of impermissible in- The basis for not obliging the bank to dispose of impermissible in- tangible assets from the previous financial period, i.e. before the year of conversion, is because the management of the bank cannot change rights originating in the previous financial period, as the responsibili- ty ty and authority for doing so ends at the end of the previous financial and authority for doing so ends at the end of the previous financial period. As for the shareholders (the owners), they are obliged person- [Al-Baqarah (The Cow): 275]. (2)(2) [Al-Baqarah (The Cow): 275]. [Al-Baqarah (The Cow): 278]. (3)(3) [Al-Baqarah (The Cow): 278]. Qararat Al-Hayah Al-Shariyyah Li Sharikat Al Rajhi: Fatwa No. (106 and 200); : Fatwa No. (106 and 200); (4)(4) Qararat Al-Hayah Al-Shariyyah Li Sharikat Al Rajhi Fatawa Nadwat Al Baraka Fatwa Hayat Al-Fatwa Wa Al-Raqabah Al- [11: 6]; Fatwa Hayat Al-Fatwa Wa Al-Raqabah Al- Fatawa Nadwat Al Baraka [11: 6]; No. (415). Shariyyah li Bayt Al-Tamwil Al-Kuwayti No. (415). Shariyyah li Bayt Al-Tamwil Al-Kuwayti Qararat Majma Al-Fiqh Al-Islami Al-Tabi Li Rabitat Al-Alam Al-Islami, the session , the session held in 1419 A.H. (6)(6) See: Chapters on Mudarabah, partnerships, agency contract, sales, Ijarah, etc. in different See: Chapters on Mudarabah, partnerships, agency contract, sales, Ijarah, etc. in different Fiqh books and also the Shariah rules for investment and financing instrument issued by Accounting and Auditing Organisation for Islamic Financial Institutions. (5)(5) Qararat Majma Al-Fiqh Al-Islami Al-Tabi Li Rabitat Al-Alam Al-Islami 165165 Shariah Standard No. (6): Conversion of a Conventional Bank to an Islamic Bank ally to dispose of any dividends from non-permissible earnings that were distributed to them, because the responsibility of shareholders remains even after termination of the responsibility of the manage- ment at the end of the financial period, i.e. the end of financial period does exonerate shareholders from responsibility. The basis for allowing the bank to keep impermissible earnings and in- The basis for allowing the bank to keep impermissible earnings and in- come of doubtful permissibility earned on the basis of an interpretation of a person who is qualified to perform on issues that are subject Ijtihad on issues that are subject of a person who is qualified to perform Ijtihad to personal juristic interpretation and the juristic position of an authorita-ta- to personal juristic interpretation and the juristic position of an authori tive School of Shariah, etc., is that the Shariah validates actions that occur on the basis of an interpretation that one believes to be valid until such an interpretation is proved incorrect. The scholars are unanimous that in times of social unrest due to the actions of insurgents who believe in their cause by interpretation or to the effect that they have a right Ijtihad to the effect that they have a right their cause by interpretation or Ijtihad to do so, the insurgents are entitled to items of property they acquire during this time, even if they realise later that they were wrong and end their act of insurgence.(7)(7) their act of insurgence. The basis for destroying the banks non-permissible tangible assets The basis for destroying the banks non-permissible tangible assets in the possession of others before the year of conversion is that these assets are worthless by Shariah Standards since they are impermissible. This is because disposing of a prohibited thing is an obligation as in the case when the verse that prohibited liquor was revealed people discharged the wine that was in their possession. Treatment of Non-Permissible Liabilities of the Bank before the Decision to Convert The basis for the rule that the bank should refrain from paying inter- The basis for the rule that the bank should refrain from paying inter- est after the conversion is because such interest is not, by the Shariah Standard, a valid debt that should be honoured. Again, repentance through conversion necessitates refraining from prohibited acts in- cluding payment of interest. The principle of necessity is the basis for allowing payment of interest if the bank could not refrain from doing (7)(7) See Ibn Qudamah, See Ibn Qudamah, Al-Mughni edited by Abdullah Al-Turki and Abdul-Fattah Al-Hulw. Al-Mughni [12: 250-251], Hajr publication, 2 [12: 250-251], Hajr publication, 2ndnd edition 1413 A.H., edition 1413 A.H., 166166 Shariah Standard No. (6): Conversion of a Conventional Bank to an Islamic Bank so because of lack of legal protection and the possibility that the bank may be subject to punishment that may prevent the avoidance of pay- ing interest. The payment of interest due to necessity is supported by (Whoever disbelieved in Allah after his saying of Allah, the Exalted: (Whoever disbelieved in Allah after his saying of Allah, the Exalted: belief, except him who is forced thereto and whose heart is at rest with Faith...)(8)(8) and the saying of the Prophet (peace be upon him): Faith...) Verily, and the saying of the Prophet (peace be upon him): Verily, Allah, the Exalted, Has forgiven my ummah those act done by mistake, forgetfulness and compulsion.(9)(9) forgetfulness and compulsion The basis for making a distinction between the principal loan and in- The basis for making a distinction between the principal loan and in- terest is because the loan contracts per se are valid. It is the interest associated with the loan that is forbidden. This is the view of the Hanafi jurists who say that the loan contract itself is valid and the condition to (10) Again, the basis for this ruling is the legal maxim pay interest is void.(10) pay interest is void. Again, the basis for this ruling is the legal maxim that says acts of Muslims must be deemed valid as far as possible even if (11) their acts are based on a non-preferable juristic view.(11) their acts are based on a non-preferable juristic view. The basis for the requirement that the outside buyer interested in The basis for the requirement that the outside buyer interested in converting the conventional bank should exert all possible effort to exclude impermissible rights is that the payment of interest is the responsibility of the seller. Such interest would have no bearing on the buyer of the bank as the sellers right to receive such interest can be taken into account in computing the price to be paid for the bank. If the buyer is unable to convince the seller in this respect, the principle of necessity becomes applicable with regard to payment of interest. The basis for extinguishing Riba-based loans as soon as possible even if such an act will impose on the buyer the need to suggest to the creditor/s early payment of these loans for a discount is the principle of Da Wa Tajjal (discount for acceleration of payment) that was endorsed Da Wa Tajjal (discount for acceleration of payment) that was endorsed by the resolution of International Islamic Fiqh Academy provided the (12) discount was not agreed upon earlier.(12) discount was not agreed upon earlier. [Al-Nahl (The Bees): 106]. (8)(8) [Al-Nahl (The Bees): 106]. The Hadith is related by Ibn Majah, Sunan Ibn Majah (9)(9) The Hadith is related by Ibn Majah, See Al-Sarakhsi, Al-Mabsut (10) (10) See Al-Sarakhsi, See Ibn Al-Humam, Fath Al-Qadir (11) See Ibn Al-Humam, (11) [7: 86]; Al-Kasani, [7: 86]; Al-Kasani, Badai Al-Sanai Kutub Al-Ilmiyyah). International Islamic Fiqh Academy Resolution No. 64 (2/7). (12) International Islamic Fiqh Academy Resolution No. 64 (2/7). (12) [12: 25-26], Dar Al-Marifah. Al-Mabsut [12: 25-26], Dar Al-Marifah. [1: 695]. Sunan Ibn Majah [1: 695]. [9: 114], Dar Al-Fikr; Al-Sarakhsi, Al-Mabsut Fath Al-Qadir [9: 114], Dar Al-Fikr; Al-Sarakhsi, Al-Mabsut , [3: 79], [4: 5], [7: 149 and 177], (Dar Al- Badai Al-Sanai, [3: 79], [4: 5], [7: 149 and 177], (Dar Al- 167167 Shariah Standard No. (6): Conversion of a Conventional Bank to an Islamic Bank The basis for requiring that the purchaser accelerate the redemption of The basis for requiring that the purchaser accelerate the redemption of all impermissible mortgages attached to the assets of the bank is because Riba is prohibited; hence, securing payment of Riba by personal guar- antees or mortgages is also prohibited. It must be noted that the grave- ness of securing Riba by personal guarantee is greater than graveness of securing Riba by writing and attestation, which were mentioned in the saying of the Prophet (peace be upon him): Allah curses the one who saying of the Prophet (peace be upon him): Allah curses the one who take (earn) Riba, the one who gives it, the one who scribe it and the two (13) witnesses.(13) witnesses. Treatment of Impermissible Tangible Assets Acquired by the Bank Before the Decision to Convert The basis for destroying the existing tangible assets of the bank after The basis for destroying the existing tangible assets of the bank after conversion has already been explained. The basis for donating to char- ity receivables earned from trading in such assets has also been ex- plained earlier. The basis for transforming the locations that were used for impermissible services to locations for permissible services is that the prohibition does not concern the location itself, rather the prohibi- tion relates to the use of the location. Disposal of Impermissible Rights The basis for the requirement that impermissible earnings be donated The basis for the requirement that impermissible earnings be donated to charity is that these revenues are not permissible for the person who earns them. This is evidenced by the order of the Prophet (peace be (14) upon him) that the usurped goat be given to war prisoners.(14) upon him) that the usurped goat be given to war prisoners. The basis for indicating charity as a way of disposing of impermissi- The basis for indicating charity as a way of disposing of impermissi- ble earnings is that by transferring the ownership of these earnings, the characterisation of prohibition in respect to these earnings is changed and they become permissible for the beneficiary. Again, a thing which is prohibited for one person is not necessarily prohibited for another person, i.e. when it is prohibited for one, it may be permissible for other. (13) The Hadith has been related by Muslim in his (13) The Hadith has been related by Muslim in his Sahih Muhammad Fu`ad Abdul-Baqi, Dar Ihya Al-Turath Al-Arabi. The Hadith has been related by Al-Daraqutni, Sunan Al-Daraqutni [9: 18]. Nayl Al-Awtar [9: 18]. Nayl Al-Awtar (14) The Hadith has been related by Al-Daraqutni, (14) [4: 285]; and Sunan Al-Daraqutni [4: 285]; and [3: 1219], verified by Sahih [3: 1219], verified by 168168 Shariah Standard No. (6): Conversion of a Conventional Bank to an Islamic Bank (15) of this ruling.(15) The International Islamic Fiqh Academy has issued a resolution in sup- port of this ruling. port The basis for allowing delay in disposal of non-permissible earnings if The basis for allowing delay in disposal of non-permissible earnings if such disposal will lead a total breakdown of the activities of the bank or its bankruptcy is that the Fuqaha were of the view that a repentant may use impermissible earnings to cover his unavoidable needs. However, the Institution is not entitled to benefit whatsoever, i.e. directly or indirectly, from the earnings that must be disposed of. This is because such benefit adds value to the asset of the Institution. The channels for disposing of impermissible earnings include, as well as The channels for disposing of impermissible earnings include, as well as those mentioned in this standard, all other channels of disposal that the Shariah Supervisory Board of each Institution will regard as appropriate channels for disposal of impermissible earnings. International Islamic Fiqh Academy Resolution No. 13 (1/3). (15) International Islamic Fiqh Academy Resolution No. 13 (1/3). (15) 169169 Shariah Standard No. (7) Hawalah Contents Subject PagePage ................................................................................................... Preface ................................................................................................... Preface ..................................................................... Statement of the Standard ..................................................................... Statement of the Standard ..............................................................................
Scope of the Standard ..............................................................................
Scope of the Standard ..............................................................................
Definition of Hawalah ..............................................................................
Definition of Hawalah .......................................................................
Permissibility of Hawalah .......................................................................
Permissibility of Hawalah ..................................................................
Form of a Hawalah Contract ..................................................................
Form of a Hawalah Contract .....................................
Types of Hawalah and the Applicable Rulings .....................................
Types of Hawalah and the Applicable Rulings
Conditions of Hawalah ............................................................................
Conditions of Hawalah ............................................................................
Effect of Hawalah on the Relationship between the Transferor and the Transferee ............................................................................................ ............................................................................................ the Transferee
Effect of Hawalah on the Relationship between the Transferor and the Payer .................................................................................................... .................................................................................................... the Payer
Effect of Hawalah on the Relationship between the Transferee and the Payer..................................................................................................... ...............
Effect of Death and Bankruptcy on a Hawalah Transaction ...............
Effect of Death and Bankruptcy on a Hawalah Transaction ........................................................
Termination of a Hawalah Liability ........................................................
Termination of a Hawalah Liability ................................................
Modern Applications of Hawalah Rules ................................................
Modern Applications of Hawalah Rules .............................................................
Date of Issuance of the Standard .............................................................
Date of Issuance of the Standard ...................................................................... Adoption of the Standard ...................................................................... Adoption of the Standard Appendices Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (b): TheThe Shariah Basis for the Standard..................................... Appendix (b): Shariah Basis for the Standard..................................... Appendix (c): Definitions.............................................................................. Appendix (c): Definitions.............................................................................. 175175 176176 177177 178178 179179 180180 183183 184184 185185 187187 193193 173173 IN THE NAME OF ALLAH, THE ALL-MERCIFUL, THE MOST MERCIFUL All praise be to Allah, the Lord of all the worlds, and blessings and peace be upon our master, Muhammad, and his household and all his companions Preface The aim of this standard is to explain the rulings, types, requirements and limitations of transfers (transfer of debts and transfer of rights), what is permissible or prohibited in this regard, and the applications of transfers in Islamic financial Institutions (Institution/Institutions).(1)(1) in Islamic financial Institutions (Institution/Institutions). The word (Institution/Institutions) is used here to refer, in short, to Islamic financial (1)(1) The word (Institution/Institutions) is used here to refer, in short, to Islamic financial institutions including Islamic Banks. 175175 Shariah Standard No. (7): Hawalah Statement of the Standard
Scope of the Standard This standard covers Hawalah transactions that involve a change of debtor, i.e. transfer of debt. The scope of this standard does not cover banking remittances except the remittances that take the form of Hawalah (transfer of debt).
Definition of Hawalah Hawalah of debt is the transfer of debt from the transferor (Muheel Hawalah of debt is the transfer of debt from the transferor ( ) to the Muheel) to the payer ( ). The transfer of right, on the other hand, is a replacement Muhal Alaihi). The transfer of right, on the other hand, is a replacement payer (Muhal Alaihi of a creditor with another creditor. The transfer of debt differ from transfer of right in that in transfer of debt a debtor is replaced by another debtor, whereas in a transfer of right a creditor is replaced by another creditor.
Permissibility of Hawalah 3/1 Hawalah is a legitimate and an independent contract made out of courtesy and is not a contract of sale. It is permitted in order to facilitate payments and recovery. 3/2 The acceptance of Hawalah is recommended for the transferee if the potential payer is known to be solvent and a person who honours payments. This is because Hawalah benefits the creditor and gives relief to the debtor. If the financial status and creditworthiness of the potential payer are unknown, then Hawalah becomes MubahMubah the potential payer are unknown, then Hawalah becomes (permissible).
Form of a Hawalah Contract 4/1 A contract of Hawalah can be concluded by an offer from the transferor and acceptance from the transferee (MuhalMuhal) and the payer in a manner and acceptance from the transferee ( ) and the payer in a manner to conclude a Hawalah that clearly indicates the intention of the parties to conclude a Hawalah that clearly indicates the intention of the parties contract and the transfer of the liability or obligation in respect of 176176 Shariah Standard No. (7): Hawalah a debt from one party to another party. It is not necessary that the word transfer be used. 4/2 Hawalah is a binding contract. Therefore, it is not subject to unilateral termination. 4/3 It is a requirement that a transfer of debt take effect immediately, not to be suspended for a period of time and not to be concluded on a temporary basis or contingent on future events. However, it is permissible to defer payment of the transferred debt until a future specified date.
Types of Hawalah and the Applicable Rulings 5/1 Hawalah is divided into restricted and unrestricted Hawalah. 5/1/1 Restricted Hawalah is permissible. It is a transaction where the payer is restricted to settling the amount of the transferred debt from the amount of a financial or tangible asset that belongs to the transferor and is in the possession of the payer. 5/1/2 Unrestricted Hawalah is permissible. It is a kind of transfer of debt in which the transferor is not a creditor to the payer and the payer undertakes to pay the amount of the debt owed by the transferor from his own funds and to have recourse afterwards to the transferor for settlement, provided that the transfer for payment was made on the order of the transferor. 5/1/3 It is permitted to conclude a Hawalah on a spot payment basis. This is a Hawalah in which the debt transferred to the payer becomes payable on the spot, whether the debt has already fallen due and the obligation is then transferred to the payer for immediate settlement, or the transferred debt is yet to fall due and the transferee has required, as a condition for accepting the transfer, that it be paid immediately by virtue of transfer. 5/1/4 It is permissible to conclude a Hawalah contract on a deferred payment basis. This is a Hawalah in which the debt transferred payment of to the payer is to be paid in the future, whether the payment of to the payer is to be paid in the future, whether the the debt is not yet due and was transferred as such to the payer, 177177 Shariah Standard No. (7): Hawalah or the payment of such debt is due but the payer required that it should be transferred for future payment at an agreed date. In the latter case, the payer cannot be asked for payment before the agreed date.
Conditions of Hawalah 6/1 The permissibility of Hawalah requires the consent of all parties, namely the transferor, the transferee and the payer. 6/2 The permissibility of a Hawalah requires that the transferor be a debt- or to the transferee. A transaction in which a non-debtor transfers an- other is an agency contract for collection of the debt and not a transfer of debt. 6/3 It is not a condition in a Hawalah that the payer be a debtor to the transferor. If the payer is not a debtor to the transferor, the Hawalah will be an unrestricted Hawalah. [see item 5/1/2] 6/4 It is a condition that all Hawalah parties be legally competent to act independently. 6/5 It is a condition in Hawalah that both the transferred debt and the 6/5 It is a condition in Hawalah that both the transferred debt and the debt to be used for settlement be known and transferable. 6/6 It is a condition for concluding restricted Hawalah that the transferred debt or the transferred portion of the debt be equal to the debt owed to the transferee in terms of kind, type, quality and amount. However, the transferor may transfer a lesser amount of a debt owed to the transferee to be settled from a larger amount owed by the transferor on condition that the transferee be entitled only to the equivalent amount of his debt.
Effect of Hawalah on the Relationship between the Transferor and the Transferee 7/1 A valid Hawalah discharges the transferor from both the debt liability and any claims in respect of it. In other words, the transferee will have no right of recourse against the transferor for payment. However, if 178178 Shariah Standard No. (7): Hawalah the acceptance of the transfer was based on the condition that the payer must be solvent, then the transferee will have a right of recourse if the payer is not solvent. 7/2 The transferee is entitled to have a right of recourse against the transferor in situations of (I) death of the payer in bankruptcy, (II) liquidation of an Institution that is the payer in the case of bankruptcy before payment of the debt, (III) the payer is declared bankrupt in his lifetime, or he denies concluding the Hawalah contract and has taken a judicial oath to this effect and there is no evidence to prove otherwise and (IV) the Institution that is the payer is declared bankrupt by a court order.
Effect of Hawalah on the Relationship between the Transferor and the Payer After the conclusion of a restricted Hawalah, the transferor is no longer entitled to reclaim from the payer an amount transferred to the payer in respect of the debt to be settled, because the right to receive this amount has now passed to the transferee.
Effect of Hawalah on the Relationship between the Transferee and the Payer 9/1 The transferee is entitled to claim the amount of the debt assigned to him through Hawalah from the payer in accordance with conditions of Hawalah contract. The payer, on the other hand, is obliged to pay him and has no right to refuse payment. 9/2 The payer takes the place of the transferor in respect to all rights, legal protections and obligations. The transferee in restricted Hawalah takes the place of the transferor in respect to all rights, legal protections and obligations against the payer.
Effect of Death and Bankruptcy on a Hawalah Transaction 10/1 A Hawalah shall not be annulled by the death of the transferor or liquidation of a transferor Institution. The transferee is the sole owner of the amount of the debt payable by the payer and, after 179179 Shariah Standard No. (7): Hawalah a Hawalah transaction, such a debt cannot be included in the assets of the transferor that are available to be distributed, after death or liquidation, among creditors on a pro rata basis. 10/2 A Hawalah transaction shall not be annulled due to the death of the payer or the liquidation of the Institution acting as payer. In these cases, the transferee will have the right of recourse against the estate of the payer for recovery, a personal guarantor, if any, or pre-distribution assets of the liquidation. However, if the payer dies in the state of bankruptcy, then the transferee shall be entitled to have recourse to the transferor. [see item 7/2] 10/3 A Hawalah transaction shall not be annulled due to the death of the transferee and the heirs shall replace the transferee. The Hawalah will also not be void in case of liquidation of a transferee Institution in which case the liquidator takes the place of the Institution for settlement.
Termination of a Hawalah Liability A Hawalah liability will come to an end by settlement of the debt or by a mutual agreement to terminate it or by the debt being written-off by the transferee.
Modern Applications of Hawalah Rules 12/1 Withdrawals from a current account An issuance of a cheque against a current account is a form of Hawalah if the beneficiary is a creditor of the issuer or the account holder for the amount of the cheque, in which case the issuer, the bank and the beneficiary are the transferor, the payer and the transferee respectively. If the beneficiary is not a creditor to the issuer of the cheque, then this is not a Hawalah transaction because there can be no Hawalah transaction without an existing debt. In the absence of a debt, the transaction becomes an agency contract for recovery of the amount of the debt on behalf of the transferor, which is permissible by Shariah. 180180 Shariah Standard No. (7): Hawalah 12/2 Overdrawing from an account or overdraft If the beneficiary of the amount of a cheque is a creditor to the issuer, then issuing a cheque against the account of the issuer without a balance is unrestricted transfer of debt if the bank accepts the overdraft. If the bank rejects the overdraft, then this is not considered a transfer of debt, in which case the potential beneficiary may have recourse to the issuer. 12/3 Travellers cheques The holder of a travellers cheque, the value of which has been paid by him to the issuing Institution, is a creditor to such an Institution. If the holder of the travellers cheque endorses the cheque in favour of his creditor, it becomes a transfer of debt in favour of a third party against the issuing Institution that is a debtor to the holder of the travellers cheque. This is a restricted transfer of debt and the amount of the debt is the value of the cheque for which the Institution received payment. 12/4 Bills of exchange 12/4/1 A bill of exchange is a form of Hawalah if the beneficiary is a creditor to the drawer. The drawer is, in this case, the transferor who gives orders for the paying bank to pay a certain sum of money at a specified date to the defined beneficiary. The party executing payment of such amount of money is the payer whereas the beneficiary, i.e. the holder of the bill, is the transferee. If the beneficiary is not a creditor of the drawer, then the issuance of the bill of exchange becomes an agency contract to recover or collect the amount of the bill of exchange on behalf of the drawer. 12/4/2 In the absence of a debt obligation between the drawer and the paying bank, the issuance of a bill of exchange becomes an unrestricted Hawalah. 181181 Shariah Standard No. (7): Hawalah 12/5 Endorsement of a negotiable instrument 12/5/1 An endorsement of a negotiable instrument in a manner that transfers title to its value to the beneficiary is a form of Hawalah if the beneficiary is a creditor to the endorser. If the beneficiary is not a creditor to the endorser, the en- dorsement becomes one of agency contract for collection of the amount of the debt. 12/5/2 An endorsement of a bill of exchange on behalf of a client who requires the Institution to transfer, after collection, the amount of the instrument into his account is not a Hawalah. This is a contract of agency that is permissible with or without consideration. 12/5/3 Subject to item 12/5/1, it is permissible for the first beneficiary from a bill of exchange to endorse it in favour of any other party. The second beneficiary may also endorse such a bill of exchange in favour of a third party and so on, in which of exchange in favour of a third party and so on, in which case the revolving of endorsements is a form of successive Hawalah which is not objectionable in Shariah. 12/5/4 It is not permissible to discount bills of exchange by trans- ferring the ownership of their value, before their due date, to an Institution or others for a discounted immediate payment. This is because the transaction in this manner is a form of Riba. 12/6 Transfer of money (remittances) The request of a customer for the Institution to transfer a certain amount of money in the same currency from his current account to a particular beneficiary is a transfer of debt if the applicant is a debtor to such a beneficiary. The fee that the Institution gains from this transaction is consideration for the delivery of the money and it is not an additional amount gained by the Institution over the amount transferred. However, if a remittance is to take place in a currency different from that presented by the applicant 182182 Shariah Standard No. (7): Hawalah for the transfer, then the transaction consists of a combination of currency exchange and a transfer of money that is permissible. [see item 2/11 of the Shariah Standard on Trading in Currencies]
Date of Issuance of the Standard This standard was issued on Rabi I, 1423 A.H., corresponding to 16 May 2002 A.D. 183183 Shariah Standard No. (7): Hawalah Adoption of the Standard The Shariah Standard on Hawalah was adopted by the Shariah Board in its meeting No. (8) held in Al-Madinah Al-Munawwarah on 28 Safar - 4 Rabi I, 1423 A.H., corresponding to 11-16 May 2002 A.D. 184184 Shariah Standard No. (7): Hawalah Appendix (A) Brief History of the Preparation of the Standard In its meeting No. (5) In its meeting held in Makkah Al-Mukarramah on 8-12 Ramadan No. (5) held in Makkah Al-Mukarramah on 8-12 Ramadan 1421 A.H., corresponding to 4-8 December 2000 A.D., the Shariah Board decided to give priority to the preparation of a Shariah Standard on Hawalah. On 29 Ramadan 1421 A.H., corresponding to 25 December 2000 A.D., a Shariah consultant was commissioned to prepare a juristic study and an exposure draft. In its meeting held in Bahrain on 15-16 Safar 1422 A.H., corresponding to 9-10 May 2001 A.D., the Shariah Studies Committee discussed the juristic study and made certain amendments to it. The committee also discussed the exposure draft of the Standard in its meeting No. (10) held in Bahrain on 14 Rabi I, 1422 A.H., corresponding to 6 June 2001 A.D., and asked the consultant to make some amendments in light of the comments made by the members. In its meeting No. (11) held in Jordan on 17 Jumada II, 1422 A.H., cor- responding to 5 September 2001 A.D., the Shariah Studies Committee dis- cussed the exposure draft and made some relevant amendments. The revised exposure draft of the standard was presented to the Shariah Board in its meeting No. (7) held in Makkah Al-Mukarramah on 9-13 Ramadan 1422 A.H., corresponding to 24-28 November 2001 A.D. The Shariah Board made further amendments to the exposure draft of the standard and decided that it should be distributed to specialists and interested parties in order to obtain their comments in order to discuss them in a public hearing. A public hearing was held in Bahrain on 2920 Dhul-Hajjah 1422 A.H., corresponding to 2-3 February 2002. The public hearing was attended by 185185 Shariah Standard No. (7): Hawalah more than 30 participants representing central Institutions, Institutions, accounting firms, Shariah scholars, academics and others who are interested in this field. The members responded to the written comments that were sent prior to the public hearing as well as to the oral comments that were expressed in the public hearing. The Shariah Standards Committee in its meeting held on 21-22 Dhul- Hajjah 1422 A.H., corresponding to 6-7 March 2002 A.D., in the Kingdom of Bahrain discussed the comments made about the exposure draft. The Committee made the necessary amendments, which it deemed necessary in light of both the discussions that took place in the public hearing, and the written comments that were received. The Shariah Board in its meeting No. (8) held on 28 Safar 4 Rabi I, 1423 A.H., corresponding to 11-16 May 2002 A.D., in Al-Madinah Al- Munawwarah discussed the amendments made by the Shariah Standards Committee, and made the necessary amendments, which it deemed necessary. Some paragraphs of the standard were adopted by the unanimous vote of the members of the Shariah Board, while the other paragraphs were adopted by the majority vote of the members, as recorded in the minutes of the Shariah Board. The Shariah Standards Review Committee reviewed the standard in its meeting held in Rabi II, 1433 A.H., corresponding to March 2012 A.D., in the State of Qatar, and proposed after deliberation a set of amendments (additions, deletions, and rephrasing) as deemed necessary, and then submitted the proposed amendments to the Shariah Board for approval as it deemed necessary. In its meeting No. (39) held in the Kingdom of Bahrain on 13-15 Mu- harram 1435 A.H., corresponding to 6-8 November 2014 A.D., the Shariah Board discussed the proposed amendments submitted by the Shariah Standards Review Committee. After deliberation, the Shariah Board ap- proved necessary amendments, and the standard was adopted in its cur- rent amended version. 186186 Shariah Standard No. (7): Hawalah Appendix (B) The Shariah Basis for the Standard Permissibility of Hawalah The contract of Hawalah derives its permissibility from the Quran, the Sunnah, Ijma (consensus of Fuqaha) and reasoning. Abu Hurayrah (may Allah be pleased with him) narrated that the Prophet (peace be upon him) Default on payment by a solvent debtor is unjust, and if anyone of you said: Default on payment by a solvent debtor is unjust, and if anyone of you said: is transferred to a solvent person, he must accept the transfer.(2)(2) In another is transferred to a solvent person, he must accept the transfer. In another text of the Hadith, related by Ahmad and Al-Bayhaqi, the Prophet (peace If one is referred to a solvent person for the recovery be upon him) said: If one is referred to a solvent person for the recovery be upon him) said: of his right, such a person must accept the transfer. The Prophets order of his right, such a person must accept the transfer. The Prophets order that the creditor must accept the transfer means transfer of debt is legal, otherwise he would not give that order. The permissibility of Hawalah has enjoyed unanimity in Muslim soci- eties and communities from time immemorial and there is no report that anyone has disapproved of it.(3)(3) anyone has disapproved of it. The acceptance of a Hawalah contract is recommended for the transferee if the potential payer is known to be solvent and keeps his promises in respect to payments because it benefits the creditor and gives relief to the debtor from liability by the transfer. (permissible) for the The basis that a Hawalah transaction is also MubahMubah (permissible) for the The basis that a Hawalah transaction is also transferee if the financial status and creditworthiness of the potential payer are unknown is that the order in the above-mentioned Hadith does not make it a condition that the payer be solvent for the permissibility of Hawalah. If (2)(2) Sahih Al-Bukhari (3)(3) Ibn Qudamah, [3: 123]; and Sahih Muslim Al-Mughni [4: 336]; Al-Buhuti, Sharh Muntaha Al-Iradat [2: 134]; Ibn Nujaym, Sahih Al-Bukhari [3: 123]; and Ibn Qudamah, Al-Mughni Buhuti, Sharh Muntaha Al-Iradat Buhuti, and Al-Zaylai, Tabyin Al-Haqaiq and Al-Zaylai, [2: 134]; Ibn Nujaym, Al-Bahr Al-raiq [4: 171]. Tabyin Al-Haqaiq [4: 171]. [4: 336]; Al-Buhuti, Kashshaf Al-Qina Kashshaf Al-Qina [3: 382]; Al- [3: 382]; Al- [6: 269]; Al-Bahr Al-raiq [6: 269]; [3: 119]. Sahih Muslim [3: 119]. 187187 Shariah Standard No. (7): Hawalah the payer is not solvent then the acceptance of the Hawalah by the transferee remains permissible. A Hawalah Contract is Binding If all its conditions are met, a Hawalah contract becomes binding without any difference of opinion among the scholars. Form of a Hawalah Contract The contract of Hawalah cannot be concluded on a deferred basis or subject to the happening of a particular event, as it has the character of a contract of (immediate) exchange. This is because by virtue of the Hawalah contract both the transferee (the payee) and the payer have immediately entered into a new contractual relationship. Also, a Hawalah cannot be concluded on a temporary basis nor can it be contingent on future events, because this conflicts with the nature of Hawalah which is the immediate transfer of the debt to the payer.(4)(4) the immediate transfer of the debt to the payer. Types and Rulings of a Hawalah Contract The scholars have unanimously endorsed the permissibility of restricted The scholars have unanimously endorsed the permissibility of restricted Hawalah, whether it is restricted to a debt owed to the transferor by the payer or it is restricted to the value of a tangible good belonging to the transferor in the possession of the payer. The unrestricted Hawalah is permitted by the Hanafis only. They based this permissibility on the Prophets order that a Hawalah deal must be accepted, without indicating that the payer must be a debtor to the transferor or not. This shows the permissibility permissibility of both the unrestricted and restricted Hawalah. The basis for the permissibility of a deferred Hawalah contract is that The basis for the permissibility of a deferred Hawalah contract is that the payer is liable to make payment to the payee (transferee) by virtue of Hawalah. This permissibility is analogous to the permissibility of a de- ferred guarantee contract. As a matter of principle, a right that is due by virtue of Hawalah is similar to a right that is due by virtue of a guarantee of both the unrestricted and restricted Hawalah.(5)(5) Radd Al-Muhtar [5: 349]; Durar Al-Hukkam Fi Sharh Majallat Al- [5: 349]; Durar Al-Hukkam Fi Sharh Majallat Al- Ibn Abidin, Radd Al-Muhtar (4)(4) Ibn Abidin, Ahkam Ahkam [2: 52]; and Al-Kasani, Badai Al-Sanai (5)(5) Al-Kasani, Zaylai, Tabyin Al-Haqaiq Zaylai, [2: 52]; and Al-Mawsuah Al-Fiqhiyyah Al-Kuwaytiyyah [18: 191-192]. Al-Mawsuah Al-Fiqhiyyah Al-Kuwaytiyyah [18: 191-192]. Badai Al-Sanai [6: 16]; Al-Ibadi, [6: 16]; Al-Ibadi, Al-Jawharah Al-Nayyirah [4: 174]; and Majallat Al-Ahkam Al-Adliyyah [1: 316]; Al- Al-Jawharah Al-Nayyirah [1: 316]; Al- , article (686). Majallat Al-Ahkam Al-Adliyyah, article (686). Tabyin Al-Haqaiq [4: 174]; and 188188 Shariah Standard No. (7): Hawalah The basis for the permissibility of Again, Hawalat al-Haqq contract. Since the latter can be concluded on a deferred basis, so a Hawa- lah transaction.(6)(6) lah transaction. The basis for the permissibility of Hawalat al-Haqq (transfer of a right) Hawalat al-Haqq (transfer of a right) as advocated by the Hanafis is that its essence is similar to suretyship which is permitted by all four schools of Islamic law, regardless of the name of the contract in this regard.(7)(7) Again, name of the contract in this regard. does not Hawalat al-Haqq does not significantly differ from restricted transfer of debt. If one looks at the change of creditor, then the transaction is one of transfer of rights, and if one looks at the change of debtor, it is a restricted transfer of debt. The differences between transfer of debt and transfer of right are evident in some forms, such as when the creditor makes a gift of the amount of his debt claim against the payer to a person who is not a debtor to the transferor. Here, there are not two debts, hence there is a transfer of right and not a restricted Hawalah because of the lack of two debtors, as the transferor here is not a creditor of the beneficiary from the gift. Conditions of Hawalah The basis for the necessity of the consent of all the three parties in The basis for the necessity of the consent of all the three parties in a Hawalah contract is as follows: a) The transferor is required to consent because he might not want a third party to pay the debt on his behalf. Therefore, his consent is necessary for the permissibility for the of the Hawalah contract. permissibility of the Hawalah contract. b) The transferee must also consent to the Hawalah contract because the Hawalah contract necessitates a transfer of his right to payment from the transferor as debtor to another person (the payer), and people differ in various aspects when it comes to payment of debts. c) The payer must also consent in the unrestricted Hawalah because the effect of the Hawalah contract is to make the payer liable for payment and, as a principle; there is no liability without there first being an acceptance of such liability.(8)(8) being an acceptance of such liability. Al-Mabsut [20: 71-72]; Ibn Nujaym, [2: 52]; and Al-Balkhi, Al-Fatawa Al-Hindiyyah Al-Sarakhsi, Al-Mabsut (6)(6) Al-Sarakhsi, Al-Hukkam Al-Hukkam [2: 52]; and Al-Balkhi, Wahabah Al-Zuhayli, Al-Fiqh Al-Islami Wa Adillatuhu Ibn Abidin, Radd Al-Muhtar (7)(7) Wahabah Al-Zuhayli, (8)(8) Ibn Abidin, Radd Al-Muhtar [5: 341]; and Mullah Khasru, [5: 171]. Al-Fiqh Al-Islami Wa Adillatuhu [5: 171]. [20: 71-72]; Ibn Nujaym, Al-Bahr Al-Raiq [3: 298]. Al-Fatawa Al-Hindiyyah [3: 298]. [5: 341]; and Mullah Khasru, Durar Al-Hukkam [2: 308]. Durar Al-Hukkam [2: 308]. Al-Bahr Al-Raiq [6: 270]; Durar [6: 270]; Durar 189189 Shariah Standard No. (7): Hawalah The basis for the requirement that the transferred debt or the trans- The basis for the requirement that the transferred debt or the trans- ferred part of a debt be equal to the payable debt in kind, type, quality or amount is to avoid Riba. However, this condition does not mean that the liability of the transferor must be similar in quantity to the liability of the payer towards the transferor in order to make a Hawalah con- tract valid. In other words, a Hawalah contract is permissible even if the amount of one of the two liabilities is either greater or lesser than the other liability provided that the transferee will be paid only an amount equivalent to his debt. For example, one can transfer the right to his creditor to collect 10 dinars, the equivalent amount of his debt, out of the 20 dinars he is owed. The transferor may also direct the transferee to collect five dinars being his right against the payer out of the ten the transferor owes the transferee. Therefore, the similarity in amount that is required here is that the transferee must not take more than the actual amount of his debt. The intention of this is to avoid Riba.(9)(9) amount of his debt. The intention of this is to avoid Riba. Effect of Hawalah on the Relationship Between the Transferor and the Transferee The reason for saying that the transferor is discharged from liability The reason for saying that the transferor is discharged from liability after the conclusion of a Hawalah transaction is because this is the legal effect of Hawalah. Hawalah means that the other party (the transferee) is deemed to have received his right to payment by the payer outright, which connotes its obligatory nature. Therefore, the transaction can- not be reversed for the simple reason that if something is transferred then it cannot be argued that it remains in the same place. This means the transferee is not entitled to ask the transferor for payment and the payer, on the other hand, becomes liable for payment. payer, on the other hand, becomes liable for payment.(10) The right of the transferee to have recourse, in the event of non-per- The right of the transferee to have recourse, in the event of non-per- formance by the payer, to the transferor as advocated by the Hanafis is based on a Hadith. It is reported that Uthman Ibn Affan was asked about a situation in which a transfer of debt is concluded and the transferee (10) (9)(9) Al-Ruhaybani, Matalib Uli Al-Nuha [3: 325]; Al-Buhuti, Al-Ruhaybani, Matalib Uli Al-Nuha Hashiyat Al-Dusuqi Ala Al-Sharh Al-Kabir Hashiyat Al-Dusuqi Ala Al-Sharh Al-Kabir [3: 327]; and Al-Sawi, [3: 426]. Ala Al-Sharh Al-Saghir [3: 426]. Ala Al-Sharh Al-Saghir [4: 338]. Al-Mughni [4: 338]. Ibn Qudamah, Al-Mughni [3: 325]; Al-Buhuti, Kashshaf Al-Qina Kashshaf Al-Qina [3: 308]; [3: 308]; Hashiyat Al-Sawi [3: 327]; and Al-Sawi, Hashiyat Al-Sawi (10) Ibn Qudamah, (10) 190190 Shariah Standard No. (7): Hawalah The Hadith that says, Muslims are bound by the conditions they made found the payer had died in a state of bankruptcy. The answer was that the transferee is entitled to return to the transferor for payment, as the right of a Muslim cannot go unfulfilled. This report reveals that the (11) This report reveals that the right of a Muslim cannot go unfulfilled.(11) transferor has a right of recourse to the original debtor if the payment is not attained due to bankruptcy or death of the payer. The Hadith that says, Muslims are bound by the conditions they made(12) (12) is the basis for the view of the majority of jurists that the transferee has a right of recourse to the transferor if he had stipulated that he accepts the transfer on the basis that the payer is solvent and is capable of paying the amount of the debt. Moreover, this stipulation serves the purpose of the contract; hence, termination of the contract takes place if such (13) a condition is not met.(13) a condition is not met. The Effect of Hawalah on the Relationship Between the Transferor and the Payer The basis for the rule that the transferor loses his claim over the amount of the debt against the payer after the Hawalah transaction is that the right to this claim has shifted to the transferee by virtue of the contract of Hawalah. The Effect of Hawalah on the Relationship Between the Transferee and the Payer The basis for the rule that the transferee no longer has a financial claim against the transferor is that the contract of Hawalah transfers the liability (14) to pay to the payer.(14) to pay to the payer. The right of the payer to be entitled to all rights associated with the securities that were available to the debtor (the transferor) is based on the fact that these securities are associated with the debt of the transfer or, which are the subject matter of the Hawalah contract. These rights are [4: 339]. Al-Mughni [4: 339]. (11) (11) Ibn Qudamah, (12) This Hadith has been related by Al-Bayhaqi in (12) Ibn Qudamah, Al-Mughni This Hadith has been related by Al-Bayhaqi in Al-Sunan Al-Kubra 249], Maktabat Dar Al-Baz; and Al-Daraqutni in his Sunan Al-Daraqutni 249], Maktabat Dar Al-Baz; and Al-Daraqutni in his Dar Al-Marifah. Ibn Qudamah, Al-Mughni (13) Ibn Qudamah, (13) Al-Buhuti, Al-Buhuti, Sharh Muntaha Al-Iradat Al-Balkhi, Al-Fatawa Al-Hindiyyah (14) Al-Balkhi, (14) Al-Ahkam [2: 36]; and Al-Kasani, Al-Ahkam Sharh Muntaha Al-Iradat [2: 136]. [2: 136]. Al-Fatawa Al-Hindiyyah [3: 297], [2: 36]; and Al-Kasani, Badai Al-Sanai [4: 339]; Al-Buhuti, Kashshaf Al-Qina Al-Mughni [4: 339]; Al-Buhuti, [6: 18]. Badai Al-Sanai [6: 18]. Al-Sunan Al-Kubra [6: 79] and [7: [6: 79] and [7: [10: 27], Sunan Al-Daraqutni [10: 27], Durar Al-Hukkam Fi Sharh Majallat [3: 297], Durar Al-Hukkam Fi Sharh Majallat [3: 387]; and Kashshaf Al-Qina [3: 387]; and 191191 Shariah Standard No. (7): Hawalah therefore transferable with the transfer of the debt liability. Hence, the (15) payer is entitled to all these rights as well.(15) payer is entitled to all these rights as well. Effect of Death and Bankruptcy on a Hawalah Contract The basis that the death of the transferor will not affect the Hawalah contract is that the transferor, after the Hawalah contract, is not entitled to (16) In addition, the reason why the death of the payer the transferred debt.(16) the transferred debt. In addition, the reason why the death of the payer will not affect the Hawalah contract is that the heirs or the guarantor of (17) the payer, if any, will be liable for payment.(17) the payer, if any, will be liable for payment. The practices of overdrafts, negotiable instruments and endorsing cheques and bills of exchange are valid because they are practical applications of the concept of Hawalah. Transfer of Money (Remittances) The International Islamic Fiqh Academy has issued a resolution in respect to the permissible solutions for the combination of transfer of money (banking (18) remittances) and currency exchange.(18) remittances) and currency exchange. Qanun Al-Muamalat Al- [18: 225]; Qanun Al-Muamalat Al- (15) Al-Mawsuah Al-Fiqhiyyah Al-Kuwaytiyyah (15) Al-Mawsuah Al-Fiqhiyyah Al-Kuwaytiyyah [18: 225]; Sudani, article (510); and Jordanian Civil code, Article (1005). Sudani , article (510); and Jordanian Civil code, Article (1005). Al-Inayah Sharh Al-Hidayah [7: 249]; Al-Zaylai, Al-Babarti, Al-Inayah Sharh Al-Hidayah (16) Al-Babarti, (16) [4: 174]; Ibn Abidin, Tanqih Al-Fatawa Al-Hamidiyyah [4: 174]; Ibn Abidin, Mudawwanah [4: 126-127]; Ibn Nujaym, Al-Bahr Al-Raiq Mudawwanah [4: 126-127]; Ibn Nujaym, Badai Al-Sanai [6: 17]. Badai Al-Sanai [6: 17]. (17) Durar Al-Hukkam Fi Sharh Majallat Al-Ahkam (17) Durar Al-Hukkam Fi Sharh Majallat Al-Ahkam [2: 36]; and International Islamic Fiqh Academy Resolution No. 8 (1/9). (18) International Islamic Fiqh Academy Resolution No. 8 (1/9). (18) Tanqih Al-Fatawa Al-Hamidiyyah [1: 293]; Malik, Tabyin Al-Haqaiq [7: 249]; Al-Zaylai, Tabyin Al-Haqaiq [1: 293]; Malik, Al-Al- , [6: 274]; and Al-Kasani, Al-Bahr Al-Ra`iq, [6: 274]; and Al-Kasani, [2: 36]; and Al-Mabsut [20: 72]. Al-Mabsut [20: 72]. 192192 Shariah Standard No. (7): Hawalah Appendix (C) Definitions Hawalah Hawalah is the transfer of a debt liability from the transferor to the payer (i.e. it is a process of changing debtors and creditors) Muheel (the transferor) The transferor is the principal debtor and who usually refers his creditor to a third party for the collection of the debt. In some forms of Hawalah, he may be a creditor. MuhalMuhal Muhal or the transferee is the creditor or the party who accepts the offer to collect his due from the transferors debtor. He is also known as Muhal Lahu or Muhtal Lahu. Muhal Alaihi Muhal Alaihi is the party accepting the debt liability that will be collected from him by the transferee. He is also called Muhtal Alaihi. Hawalat al-Haqq The transfer of a right from one creditor to another 193193 Shariah Standard No. (8) Murabahah (1)(1)* Murabahah (Revised Standard) (1)(1)* This standard was previously issued by the title Shariah Rules for Investment and

This standard was previously issued by the title Shariah Rules for Investment and Financing Instruments No. (1) Murabahah to the Purchase Orderer. It is reissued as a Shariah standard based on the resolution of the Shariah Board to reformat all Shariah Rules in the form of Shariah Standards. Contents Subject PagePage ................................................................................................... Preface ................................................................................................... Preface ..................................................................... Statement of the Standard ..................................................................... Statement of the Standard

Scope of the Standard ..............................................................................
Scope of the Standard .............................................................................. .... .................... Procedures Prior to the Contract of Murabahah ....
1. Procedures Prior to the Contract of Murabahah .................... Acquisition of Title to, and Possession of, the Asset by the
1. Acquisition of Title to, and Possession of, the Asset by the Institution or Its Agent ........................................................................ Institution or Its Agent ........................................................................
1. Conclusion of a Murabahah Contract
1. Guarantees and Treatment of Murabahah Receivables
1. Date of Issuance of the Standard Conclusion of a Murabahah Contract ................................................... ................................................... Guarantees and Treatment of Murabahah Receivables ............... ............... Date of Issuance of the Standard ....................................................... ....................................................... ...................................................................... Adoption of the Standard ...................................................................... Adoption of the Standard Appendices Appendix (a): Notice from Institutions Customer of Its Performance of Appendix (a): Notice from Institutions Customer of Its Performance of Purchasing Asset or Good As Agent for Institution, and of Its Offer to Purchase Item from Institution According .................................................... to Contract of Murabahah .................................................... to Contract of Murabahah Appendix (b): Notice of Acceptance by Institution of Customers Offer Appendix (b): Notice of Acceptance by Institution of Customers Offer to Purchase Asset or Good to Be Acquired, and of selling ........................................... item by Institution to Customer ........................................... item by Institution to Customer Appendix (c): Brief History of the Preparation of the Standard Appendix (c): ............... Brief History of the Preparation of the Standard ............... Appendix (d): The Shariah Basis for the Standard Appendix (d): ...................................... The Shariah Basis for the Standard ...................................... Appendix (e): Definitions Appendix (e): ............................................................................... Definitions ............................................................................... 199199 200200 206206 210210 212212 214214 215215 216216 217217 218218 221221 230230 197197 IN THE NAME OF ALLAH, THE ALL-MERCIFUL, THE MOST MERCIFUL All praise be to Allah, the Lord of all the worlds, and blessings and peace be upon our master, Muhammad, and his household and all his companions Preface The purpose of this standard is to explain the Shariah basis and rules for a Murabahah transaction, the stages of this transaction beginning from the promise to transferring ownership of the goods to the customer, and the Shariah requirements that need to be observed by Islamic financial Institutions.(2)(2) Institutions. The word (Institution/Institutions) is used here to refer, in short, to Islamic financial (2)(2) The word (Institution/Institutions) is used here to refer, in short, to Islamic financial institutions including Islamic Banks. 199199 Shariah Standard No. (8): Murabahah Statement of the Standard
Scope of the Standard This standard covers the Murabahah transaction and its various stages, the issues relating to guarantees before concluding a Murabahah deal such as promise, (security deposit) and issues relating to Hamish Jiddiyyah (security deposit) and issues relating to as promise, Hamish Jiddiyyah guarantees for recovery of the debt created by the Murabahah transaction. This standard does not cover deferred payment sales that take place on a basis other than that of Murabahah. It also does not cover other trust and bargaining sales.
Procedures Prior to the Contract of Murabahah 2/1 The customers expression of his wish to acquire an item through the Institution 2/1/1 The Institution may purchase the item only in response to its customers wish and application, as long as this practice is compatible with the Shariah precepts for the contract of sale. 2/1/2 With due consideration to item 2/2/3, it is permissible for the customer to request the Institution to purchase the item from a particular source of supply. However, the Institution is entitled to decline to carry out the transaction if the customer refuses offers from other sources of supply that are more suitable for the Institution. 2/1/3 The customers wish to acquire the item does not constitute a promise or commitment except when it has been expressed in due form. It is permissible to prepare a single set of docu- mentation to be signed by the customer and to include both the customers stated wish that the Institution should buy the item from the supplier and a promise to buy the item from the Institution. It is permissible for the customer to prepare suchsuch Institution. It is permissible for the customer to prepare 200200 Shariah Standard No. (8): Murabahah a document, or it may be a standard application form prepared by the Institution to be signed by the customer. 2/1/4 The customer may obtain statement of prices from the supplier whether they are addressed to the customer by name [specific offer], or with no reference to any named customer [general offer]. In the latter case, the statement is considered as an in- vitation to negotiate, and not as an offer of sale. It is preferable that the invoice should be addressed to the Institution so as to include an offer of sale from the supplier effective up to the end of a specified period. The contract of sale is deemed concluded once acceptance comes from the Institution. 2/2 The position of the Institution in respect to the application of the customer for Murabahah 2/2/1 When there is acceptance by the customer of an offer from the supplier that is either addressed to him personally, or that has no addressee, then the sale is concluded with the customer and so it is not permissible for the Institution to carry out Murabahah on the same item. 2/2/2 It is essential to exclude any prior contractual relationship between the customer who is the purchase orderer and the original supplier of the item ordered, if any, regarding the supply of the item. It is a requirement of Murabahah that the transaction between the two parties must genuinely, not fictitiously, exclude any prior contractual relationship. It is not permissible to assign a contract that has been executed between the customer and the supplier of the ordered item to the Institution. 2/2/3 The Institution must ensure that the party from whom the item is bought is a third party other than customer or his agent. For example, it is not permitted for a customer to sell an ordered item to the Institution and then repurchase it through supplying a Murabahah transaction. Nor may the party that is supplying a Murabahah transaction. Nor may the party that is the item be wholly, or by way of majority [more than 50%], 201201 Shariah Standard No. (8): Murabahah owned by the customer. If a sale transaction takes place and later on it is discovered that it was carried out through such practices, this would render the transaction void as it is tan- tamount to Inah. 2/2/4 If the supplier (owner) of the item has a blood relationship or marital relationship with the customer, then the Institution shall verify, before entering into Murabahah, that the sale is Inah. not fictitious and not a stratagem for the sale of Inah. not fictitious and not a stratagem for the sale of 2/2/5 It is not permissible for the Institution and the customer to agree to form a Musharakah in a project or a specified deal together with a promise from one of them to buy the others share in Musharakah by means of Murabahah on either spot or deferred payment terms. However, it is permissible for one partner to promise to purchase the others share in Musharakah at market price or at a price to be agreed upon at the time of sale provided a new contract is drawn up. This sale may be on spot or on deferred payment terms. 2/2/6 It is not permitted to carry out a Murabahah on deferred payment terms where the asset involved is gold, silver or currencies. 2/2/7 It is also impermissible to issue negotiable Sukuk where the underlying asset consists of Murabahah receivables or other receivables only. 2/2/8 Likewise, it is not permitted to renew a Murabahah contract on the same commodity that was the subject matter of a previous Murabahah contract with the same customer, i.e. to refinance the transaction. 2/3 The promise from the customer 2/3/1 It is not permissible that the document of promise to purchase (signed by the customer) should include a bilateral promise which is binding on both parties (the Institution and the customer). 202202 Shariah Standard No. (8): Murabahah 2/3/2 The customers promise to purchase, and the related contrac- tual framework, are not integral to a Murabahah transaction, but are intended to provide assurance that the customer will complete the transaction after the item has been acquired by the Institution. If the Institution has other opportunities to sell the item, then it may not need such a promise or contractual framework. 2/3/3 A bilateral promise between the customer and the Institution is permissible only if there is an option to cancel the promise which may be exercised either by both promisors or by either one of them. 2/3/4 It is permissible for the Institution and the customer, after the latter has given a promise but before the execution of the Murabahah, to agree to revise the terms of the promise whether with respect to the deferment of payment, the mark- up or other terms. The terms of the promise cannot be revised except by mutual consent by both parties. 2/3/5 It is permissible for the Institution to purchase the item from a supplier on a sale or return basis, i.e., with the option to return it within a specified period. If the customer then does not purchase the item, the Institution is able to return it to the supplier within the specified period on the basis of the conditional option that is established in Shariah. The option between the Institution and the supplier does not expire by the mere presentation of the item to the customer, but it expires by virtue of the actual sale to the customer. It is advisable to stipulate in a stipulated option to revoke (khiyar al- It is advisable to stipulate in a stipulated option to revoke ( khiyar al- Shart ) that the mere offer by the purchaser for the sale of the item to Shart) that the mere offer by the purchaser for the sale of the item to a third party does not invalidate the option. 2/4 Commissions and expenses 2/4/1 It is not permissible for the Institution to receive a commitment fee from the customer. 203203 Shariah Standard No. (8): Murabahah 2/4/2 It is not permissible for the Institution to receive a fee for providing a credit facility. 2/4/3 The expenses of preparing the documents of the contract between the Institutions and the customer are to be borne evenly by the two parties (the Institution and the customer), provided they do not agree that the expenses are to be borne wholly by one party, and provided those expenses are proportional to the actual amount of work involved, so that they do not implicitly include a commitment fee or a facility fee. 2/4/4 If the Murabahah is carried out by means of syndicated financ- ing, the Institution which acts as the arranger of the syndicate is entitled to an arrangement fee to be paid by the participants in the syndicate. 2/4/5 It is permissible for the Institution to receive a fee for a feasibility study that it undertakes in case such study is requested by the customer and for the benefit thereof and the customer agrees to pay the fee thereof. The customer is entitled to a copy of the study if he so requires. 2/5 Guarantees related to the commencement of the transaction 2/5/1 It is permissible for the Institution to obtain from the customer (the purchase orderer) a guarantee (performance deed) regard- ing the good performance by the supplier of his contractual obligations towards the Institution in his personal capacity and not in his capacity as purchase orderer or in his capacity as an agent of the Institution. Hence, if the Murabahah contract is not executed, his guarantee would still be valid. This guaran- tee is required only in cases where the customer has suggested a particular source of supply for the item that is the subject matter of the Murabahah contract. As a consequence of this guarantee, the customer shall make good any damage suffered by the Institution due to failure of the supplier to provide good performance of his contractual obligations. These obligations concern meeting the specification 204204 Shariah Standard No. (8): Murabahah of the item to be supplied and the exercise of diligence in executing the contract, non-observance of which may result in the loss of the Institutions time and efforts or property, or in a legal dispute and damage claims. 2/5/2 It is not permitted to impose on a customer who is the purchase orderer a guarantee regarding hazards that may affect the item such as damage and destruction during a period of shipment or storage. 2/5/3 It is permissible for the Institution, in the case of a binding promise by the customer, to take a sum of money as Hamish promise by the customer, to take a sum of money as Hamish (security deposit). This is to be paid by the customer at Jiddiyyah (security deposit). This is to be paid by the customer at Jiddiyyah the request of the Institution, both as an indication of the financial capacity of the customer and to ensure the compensation of any damage to the Institution arising from a breach by the customer of his binding promise. Having taken this , the Hamish Jiddiyyah, the of his binding promise. Having taken this Hamish Jiddiyyah Institution need not to demand compensation for damage as Hamish . The Hamish this may be charged against the Hamish Jiddiyyah this may be charged against the Jiddiyyah is not considered as Arboun (Earnest Money). The Jiddiyyah is not considered as Arboun (Earnest Money). The amount of money deposited by the customer as security for his commitment can be either held, if the customer permits the Institution to invest it, as an investment trust on the basis of Mudarabah between the customer and the Institution, or held in a current account at the discretion of the customer. Hamish Jiddiyyah. The 2/5/4 In the case of the customers breach of his binding promise, as Hamish Jiddiyyah as the Institution is not permitted to retain Hamish Jiddiyyah the Institution is not permitted to retain such. Instead, the Institutions rights are limited to deducting the such. Instead, the Institutions rights are limited to deducting the amount of the actual damage incurred as a result of the breach, namely the difference between the cost of the item borne the Institution and the price at which the item is sold to a third party. The actual damage to the Institution may not include the loss of its mark-up in the Murabahah transaction, that is, its opportunity loss. 205205 Shariah Standard No. (8): Murabahah 2/5/5 When the customer has fulfilled his promise and executed the Hamish contract of Murabahah, the Institution must refund Hamish contract of Murabahah, the Institution must refund Jiddiyyah to the customer. The Institution is not entitled to Jiddiyyah to the customer. The Institution is not entitled to receive any amount out of except in the case Hamish Jiddiyyah except in the case receive any amount out of Hamish Jiddiyyah of breach of promise as laid down in item 2/5/3. It is permissible for the Institution to agree with the customer that the amount of of Hamish Jiddiyyah will be deducted from the price payable Hamish Jiddiyyah will be deducted from the price payable by the customer pursuant to the contract of Murabahah. 2/5/6 It is permissible for the Institution to take Arboun (Earnest Mon- ey) upon conclusion of the Murabahah sale with the customer. This may not be done during the contractual stage at which the customer has given his promise to purchase. In the event that the customer revokes the contract in an Arboun-based transaction, it is preferable that the Institution, after deducting the actual damage it incurs, refunds the remaining amount of Arboun to the customer. The damage in this context means the difference between the cost of the item borne the Institution and the price at which the item is sold to a third party.
Acquisition of Title to, and Possession of, the Asset by the Institution or Its Agent 3/1 The acquisition of the asset or good by the Institution prior to its sale by means of Murabahah 3/1/1 The Institution shall not sell any item in a Murabahah transac- tion before it acquires such item. Hence, it is not valid for the In- stitution to conclude a Murabahah sale with the customer before the Institution concludes a urchase contract with the supplier of the item the subject matter of the Murabahah and before it acquires actual or constructive possession of such items, which can be achieved when the supplier gives the Institution control can be achieved when the supplier gives the Institution control over the item or the documents that represent possession there- bahah is consid- of [see items 3/2/1-3/2/4]. Likewise, the Murabahah is consid- of [see items 3/2/1-3/2/4]. Likewise, the Mura ered void in case the contract with the supplier is void, because 206206 Shariah Standard No. (8): Murabahah in this case the Institution would fail to acquire complete title to the item. 3/1/2 It is permitted that the contract between the Institution and the supplier be completed by means of a meeting of the two parties to discuss the details, at which point the contract may be executed. Likewise, it is permitted that the contract be completed through exchanging of the notices of offer and acceptance, either in writing or by any form of modern communication customarily practiced according to known principles. 3/1/3 The original principle is that the Institution itself purchases the item directly from the supplier. However, it is permissible for the Institution to carry out the purchase by authorizing an agent, other than the purchase orderer, to execute the purchase; and the customer (the purchase orderer) should not be appointed to act as an agent except in case of a dire need. be appointed to act as an agent except in case of a dire need. Furthermore, the agent must not sell the item to himself. Rather, the Institution must first acquire title of the item and then sell it to the agent. In such a case, the provisions of item 3/1/5 should be observed. 3/1/4 In cases when the customer is authorized to purchase the item as the Institutions agent, it is obligatory to adopt procedures which would ensure that certain conditions are observed. These conditions include: a) the Institution itself must pay the supplier, and not pay the price of the item into the account of the customer as agent, whenever possible. b) the Institution should obtain from the supplier the documents that confirm that a sale has taken place. 3/1/5 It is obligatory to separate the two liabilities of risk attaching to the purchased item, namely the liability of the Institution and the liability of the customer as agent of the Institution. This is achieved by having an interval in time between the 207207 Shariah Standard No. (8): Murabahah performance of the agency contract and the execution of the contract of Murabahah, as indicated in the customers notice of performance of the agency contract to acquire the item and offer to purchase the item by means of Murabahah [see Appendix (a)], followed by the institutions notice of its acceptance of the customers offer to purchase and the execution of the Murabahah sale contract [see Appendix (b)]. 3/1/6 The original principle is that all documents and contracts concerned with the execution of the sale of the item must be in the name of the Institution and not in that of the customer, unless the latter acts as the Institutions agent in acquiring the item. 3/1/7 It is permissible, at the time when the Institution appoints someone as its agent for the acquisition of the item, that the two parties agree to authorize the agent to carry out the acquisi- tion of the item as agent, without disclosing the existence of the agency agreement. In this case, the agent will act as principal in dealing with other parties, and will undertake the purchase directly in his name but on behalf of the Institution as principal. However, it is preferable that the agents role be disclosed. 3/2 The Institutions taking possession of the asset or good, prior to its sale by Murabahah 3/2/1 It is obligatory that the Institutions actual or constructive possession of the item be ascertained before its sale to the customer on the basis of Murabahah. 3/2/2 The condition that possession of the item must be taken by the Institution (before its onward sale to the customer) has a specific purpose: that the Institution must assume the risk of the item it intends to sell. This means that the item must move from the responsibility of the supplier to the responsibility of the Institution. Similarly, it is obligatory that the point when the risk of the item is passed on by the Institution to the customer 208208 Shariah Standard No. (8): Murabahah be clearly identified, with reference to the stages in which the item is transferred from one party to another. 3/2/3 The forms of taking delivery or possession of items differ according to their nature and different trade customs. Taking possession may be actual in the case of the physical delivery or transportation to the acquirer or its agent, but may also take place constructively by placing of the item at the acquirers disposal so as to enable him to deal with it at his will, even though no physical delivery has taken place. Taking possession of an item of real property may also take place by means of the property being vacated and its being placed at the acquirers disposal; if the latter is not able to have disposal of the purchased item, then the vacation of the property is not considered as conveying possession. In the case of moveable assets, possession will take place in accordance with the nature of the asset. 3/2/4 The receipt of a bill of lading by the Institution or its agent, when purchasing goods on the international market, is considered as constructive possession. The same would apply to the Institutions receipt of certificates of storage issued by warehouses following appropriate and reliable formalities. 3/2/5 The original principle is that the Institution itself must receive the item from the premises of the supplier or from a location that is specified in the delivery conditions. The responsibility for the risk attached to the item is transferred to the Institution upon its taking possession of the item. However, it is permissible for the Institution to authorize another party to take delivery of the item on its behalf. 3/2/6 As the Institution is the owner of the subject matter of its insurance lies with the Institution before selling Murabahah its insurance lies with the Institution before selling Murabahah it to the customer. Any amount recovered from insurance at this stage will belong to the Institution exclusively and the customer has no claim to it even if the recovered amount include exceeds the purchase price. The Institution is entitled to include exceeds the purchase price. The Institution is entitled to 209209 Shariah Standard No. (8): Murabahah the expenses of insurance in the Murabahah cost price to be subsequently added to the price of Murabahah. Insurance must be on the basis of Takaful whenever possible. 3/2/7 Agency in carrying out the procedures of obtaining insurance cover for the item at the stage of the Institutions acquisition of ownership of the asset is permitted. However, it is obligatory that the Institution should bear the cost of insurance.
Conclusion of a Murabahah Contract 4/1 It is not permitted for the Institution to consider that the contract of Murabahah is automatically concluded by its mere taking possession of the asset. Likewise, the Institution may not force a customer who is the purchase orderer to take delivery of the asset and pay the Murabahah selling price, if the customer refuses to conclude the Murabahah transaction. 4/2 The Institution is entitled to receive compensation for any actual damage it has incurred as a result of the customers breach of a binding promise. The compensation consists of the customer reimbursing the Institution for any loss due to a difference between the price received by the Institution in selling the asset to a third party and the original cost price paid by the Institution to the supplier. 4/3 When the Institution has purchased an asset for a deferred price, with the intention that it will be sold on a Murabahah basis, then the Institution is obliged to disclose to the customer that the asset is pur- chased by the Institution on deferred payment basis. The Institution has the obligation to disclose to the customer, when concluding the contract of sale, the details of any expenses that it would include in determining the cost. The Institution is also entitled to include any expenses relating to the item if this is acceptable to the customer. However, if the Institution failed to disclose any expenses, it is not entitled to include them unless they are customarily considered as normal expenses, such as transportation expenses, storage expenses, fees for letters of credit and insurance premiums. 210210 Shariah Standard No. (8): Murabahah 4/4 The Institution is not entitled to include in the base cost of the item, for the purpose of calculating the Murabahah price, any amounts other than the direct expenses that are paid to a third party. It is not permissible, for example, for the Institution to add to the cost of the item payments made to its own staff for their work, and the like. 4/5 If the Institution has, even after the drawing up of the Murabahah contract, received a discount for the same item that was sold on Murabahah basis from the supplier of the item, then the customer should benefit from that discount by a reduction of the total Murabahah selling price in proportion to the discount. 4/6 It is an obligation that both the price of the item and the Institutions profit on the Murabahah transaction be fixed and known to both parties on the signature of the contract of sale. It is not permitted under any circumstances to subject the determination of the price or the profit to unknown variations or variations that are determinable in the future, such as by concluding the sale and making the profit dependent on the rate of LIBOR that will prevail in the future. There is no objection to referring to any other known indicators during the promise stage as a comfort indicator to determine the rate of profit, provided that the determination of the Institutions profit at the time of concluding the Murabahah is based on a certain percentage of the cost and is not tied up with LIBOR or a time factor. 4/7 The Institutions profit mark-up in Murabahah must be known, and the mere mention of the total selling price is not sufficient. It is permissible that the profit be determined based on a lump sum amount or a certain that the profit be determined based on a lump sum amount or a certain percentage of the cost price only or of the cost price plus the expenses. This determination is completed by the agreement and mutual consent of the two parties. 4/8 It is permissible to agree on the payment of the price of the item under Murabahah either by short or long term instalments, and the selling price of the asset becomes a debt that the customer is obligated to pay at the time agreed upon. It is not permitted subsequently to of extra time demand any extra payment either in consideration of extra time demand any extra payment either in consideration 211211 Shariah Standard No. (8): Murabahah given for payment or for delay in payment that may be for a reason or no reason. 4/9 It is permissible for the Institution to stipulate in the contract of Murabahah a condition that the Institution is free from responsibility for all or some of the defects of the asset, but not from destruction caused before the possession of the customer or diminution of quantity sold; this is known as (sale on as is basis). Bay al-Baraah (sale on as is basis). quantity sold; this is known as Bay al-Baraah In the case of stipulating such a condition, it is preferable that the Institution should assign to the customer the right of recourse to the supplier to obtain compensation for any defects that are established, which would otherwise be recoverable by the Institution from the supplier. 4/10 The Institution shall be responsible for pre-existing hidden defects which appear after the conclusion of the contract, unless it stipulates otherwise according to item 10/4. However, it shall not be responsible for any new defects (recent defects) that arise after the conclusion of the contract and taking delivery by the customer. 4/11 The Institution is entitled to include, as a condition of the contract, that in case of the customers refusal, after the execution of the Murabahah contract, to take delivery of the asset at the prescribed time, the Institution could revoke the contract or sell the asset to a third party on behalf of the customer and for his account. The Institution could then recover from the selling price the amount due to it from the customer under the contract, and would have recourse to the customer for the balance if that price were not sufficient to cover the amount due to the customer.
Guarantees and Treatment of Murabahah Receivables 5/1 It is permissible for the Institution to stipulate to the customer that instalments may become due before their originally agreed due dates in case of the customers refusal or delay in paying any instalment without any valid reason after the lapse of the time specified in the notice to be sent by the Institution to the customer within a reasonable period of time following the due date. 212212 Shariah Standard No. (8): Murabahah 5/2 The Institution should ask the customer to provide permissible security in the contract of Murabahah. Among other things, the Institution may receive a third party guarantee or the mortgagee of Institution may receive a third party guarantee or the mortgagee of the investment account of the customer or the mortgagee of any item the investment account of the customer or the mortgagee of any item of real or moveable property, or the mortgagee of the subject matter of the Murabahah contract as a fiduciary mortgagee (or a registered charge), either without taking possession of the mortgageed asset, or by taking possession of the mortgageed asset and then releasing the mortgagee progressively according to the percentage of the total payment received. 5/3 It is permissible for the Institution to require the customer to provide cheques or promissory notes before the execution of the contract of Murabahah, as a guarantee of the indebtedness that will be created after the execution of the contract. This is possible on the written condition that the Institution is not entitled to use these cheques or documents except on their due dates. The requirement to provide cheques as security is not permissible in countries where they could be presented for payment before their due date. 5/4 It is not permissible to stipulate that the ownership of the item will not be transferred to the customer until the full payment of the selling price. However, it is permissible to postpone the registration of the asset in the customers name as a guarantee of the full payment of the selling price. The Institution may receive authority from the customer to sell the asset in case the customer delays payment of the selling price, in which case the Institution should issue a counter- deed to the customer to establish the latters right to ownership. If the Institution sells the asset as a result of the customers failure to make a payment of the selling price on its due date, it must confine itself to recovering the amount due to it and must return the balance to the customer. 5/5 In the case of the Institution receiving a mortgagee from the customer, the Institution is entitled to stipulate that the customer should make an assignment to the Institution to enable it to sell the mortgageed 213213 Shariah Standard No. (8): Murabahah asset for the purpose of recovering the amount due from the customer without recourse to the judiciary. 5/6 It is permissible that the contract of Murabahah consists of an under- taking from the customer to pay an amount of money or a percentage of the debt, on the basis of undertaking to donate it in the event of a delay on his part in paying instalments on their due date. The Shariah Supervisory Board of the Institution must have full knowledge that any such amount is indeed spent on charitable causes, and not for the ben- efit of the Institution itself. 5/7 It is not permissible to extend the date of payment of the debt in exchange for an additional payment in case of rescheduling, irrespectively of whether the debtor is solvent or insolvent. 5/8 When there is default in payment by the customer with regard to instalments of the selling price that are due, the amount due is just the amount of the unpaid selling price. It is not permissible for the Institution to impose any additional payment on the customer for the Institutions benefit. This provision is, however, subject to item 5/6 . 5/9 It is permissible for the Institution to give up part of the selling price if the customer pays early, provided this was not part of the contractual agreement. 5/10 If the customer wishes to pay in a currency different from Murabahah currency, it is permissible, with the agreement of the Institution at the time of payment on condition that the payable debt is paid in full or the amount agreed to be paid in different currency is paid in full and no part of the currency exchange amount remains due. This currency exchange may not be stipulated in the contract of Murabahah.
Date of Issuance of the Standard This Standard was issued on 4 Rabi I, 1423 A.H., corresponding to 16 May 2002 A.D. 214214 Shariah Standard No. (8): Murabahah Adoption of the Standard The Shariah standard for Murabahah was adopted by the Shariah Board standard for Murabahah was adopted by the Shariah Board The Shariah in its meeting No. (4) held on 25-27 Safar 1421 A.H., corresponding to 29-31 May 2000 A.D. In its meeting No. (8) held in Mecca on 28 Safar - 4 Rabi I, 1423 A.H., corresponding to 11-16 May 2002 A.D., the Shariah Board readopted a resolution to reformat the Shariah rules for Murabahah in the form of a Shariah standard. 215215 Shariah Standard No. (8): Murabahah Appendix (A) Notice from Institutions Customer of Its Performance of Purchasing Asset or Good As Agent for Institution, and of Its Offer to Purchase Item from Institution According to Contract of Murabahah Notice from the institutions customer of its performance of the purchase of the asset or good as agent for the institution: From: (The Institutions customer as agent) ............... From: (The Institutions customer as agent) ............... To:To: (The Institution).......... In the performance of my contract of agency with you, I hereby inform you that I have purchased the item described below on your behalf and for your benefit. This item is in my possession on your behalf. In accordance with my promise to you, I hereby agree to purchase this item from you for a total price of ..., namely the cost price of ... plus the mark-up of .... The payment of this price will be in accordance with the following schedule of instalments:

..
.
.. Please send the acceptance in accordance with this offer. 216216 Shariah Standard No. (8): Murabahah Appendix (B) Notice of Acceptance by Institution of Customers Offer to Purchase Asset or Good to Be Acquired, and of selling item by Institution to Customer Notice of the acceptance by the Institution of the customers offer to purchase the asset or good to be acquired: From: (The Institution).......... From: (The Institution).......... To:To: (The customer as the Institutions agent).......... (The customer as the Institutions agent).......... In response to your notice dated .., containing your offer to purchase the item described below which is owned by us, we hereby confirm to you our sale of the item to you at a total price of .. comprising the cost price of .. plus the mark-up of .., in accordance with the conditions explained in the general agreement to a contract of Murabahah. Please send the acceptance in accordance with this offer. 217217 Shariah Standard No. (8): Murabahah Appendix (C) Brief History of the Preparation of the Standard In its meeting No. (1) held on 11 Dhul-Hajjah 1419 A.H., corresponding to 27 February 1999 A.D., the Shariah Board decided to give priority to the preparation of a Standard setting out the Shariah rules for Murabahah. On Tuesday 13 Dhul-Hajjah 1419 A.H., corresponding to 30 March 1999 A.D., the Fatwa and Arbitration Committee recommended to the Shariah Board the commissioning of a Shariah consultant to prepare a juristic study and an exposure draft of the Shariah Rules for Murabahah. In its meeting held on 13-14 Rajab 1420 A.H., corresponding to 22- 23 October 1999 A.D., the Fatwa and Arbitration Committee discussed the exposure draft of the Shariah Rules for Murabahah, and asked the consultant to make the amendments in light of the comments made by the members. The revised exposure draft of the Shariah Rules was presented to the Shariah Board in its meeting No. (2) held in Mecca on 10-15 Ramadan 1420 A.H., corresponding to 18-22 December 1999 A.D. The Shariah Board made further amendments to the exposure draft of the Shariah Rules and decided that it should be distributed to specialists and interested parties in order to obtain their comments in order to discuss them in a public hearing. A public hearing was held in Bahrain on 2930 Dhul-Hajjah 1421 A.H., corresponding to 4-5 April 2000 A.D. The public hearing was attended by more than 30 participants representing central banks, institutions, accounting firms, Shariah scholars, academics and others who are interested in this field. The members responded to the written comments that were 218218 Shariah Standard No. (8): Murabahah sent prior to the public hearing as well as to the oral comments that were expressed in the public hearing. The Shariah Studies Committee and the Fatwa and Arbitration Committee held a joint meeting on 21-23 Muharram 1421 A.H., corresponding to 26-28 April 2000 A.D., to discuss the comments made about the exposure draft of the Shariah Rules. The joint meeting made the necessary amendments, which it deemed necessary in light of the discussions that took place in the public hearing. The Shariah Board in its meeting No. (4) held on 2527 Safar 1421 A.H., corresponding to 2931 May 2000 A.D., in Al-Madinah Al-Munawwarah discussed the amendments made by the Shariah Studies Committee and the Fatwa and Arbitration Committee, and made the necessary amendments, which it deemed necessary. The standard was adopted with the name of Shariah Rules for the Murabahah. Some paragraphs were adopted by the unanimous vote of the members of the Shariah Board, while the other paragraphs were adopted by the majority vote of the members, as recorded in the minutes of the Shariah Board. The Shariah Board decided in its meeting No. (7) held in Makkah Al- Mukarramah on 9-13 Ramadan 1422 A.H., corresponding 24-28 November 2001 A.D., to pass a resolution to reformat all Shariah rules in a form of standards and a committee was formed for this purpose. In its meeting No. (8) held in Al-Madinah Al-Munawwarah on 28 Safar
4 Rabi I, 1423 A.H., corresponding to 11-16 May 2002 A.D., the Shariah Board adopted the reformatting of the Shariah Rules for Investment and Financing No. (1) on Murabahah with the name of Shariah Standard No. (8) on Murabahah. The Shariah Standards Review Committee reviewed the standard in its meeting held in Rabi II, 1433 A.H., corresponding to March 2012 A.D., in the State of Qatar, and proposed after deliberation a set of amendments (additions, deletions, and rephrasing) as deemed necessary, and then submitted the proposed amendments to the Shariah Board for approval as it deemed necessary. 219219 Shariah Standard No. (8): Murabahah In its meeting No. (39) held in the Kingdom of Bahrain on 13-15 Muharram 1435 A.H., corresponding to 6-8 November 2014 A.D., the Shariah Board discussed the proposed amendments submitted by the Shariah Board discussed the proposed amendments submitted by the Shariah Standards Review Committee. After deliberation, the Shariah Board approved the necessary amendments, and the standard was adopted in its current amended version. 220220 Shariah Standard No. (8): Murabahah Appendix (D) The Shariah Basis for the Standard Preface on the Permissibility of Murabahah Definition of Murabahah Murabahah is selling a commodity as per the purchasing price with a defined and agreed profit mark-up. This mark-up may be a percentage of the selling price or a lump sum. This transaction may be concluded either without a prior promise to buy, in which case it is called an ordinary Mura- bahah, or with a prior promise to buy submitted by a person interested in acquiring goods through the Institution, in which case it is called a banking Murabahah i.e. Murabahah to the purchase orderer. This transaction is one of the trust-based contracts that depends on transparency as to the actual purchasing price or cost price in addition to common expenses. Permissibility of Murabahah The authorities for the permissibility of Murabahah are authorities on the permissibility of sale. Among them is the saying of Allah, the exalted: (...Allah has permitted trade...).(3)(3) Some scholars has also cited to (...Allah has permitted trade...) Some scholars has also cited to support the permissibility of Murabahah the saying of Allah, the Exalted: (It is no crime for you to seek the bounty of your Lord,)(4)(4) arguing (It is no crime for you to seek the bounty of your Lord,) arguing that the bounty mentioned here means profit. The Murabahah is also analogous to a form of sale called (which means to sell as per Tawliyyah (which means to sell as per analogous to a form of sale called Tawliyyah the purchasing price without making profit). This is because the Prophet (peace be upon him) purchased a she-camel from Abu Bakr to use it as a transportation to immigrate to Medina. Abu Bakr wanted to give it to the Prophet (peace be upon him) free of charge, but the Prophet refused [Al-Baqarah (The Cow): 275]. (3)(3) [Al-Baqarah (The Cow): 275]. [Al-Baqarah (The Cow): 198]. (4)(4) [Al-Baqarah (The Cow): 198]. 221221 Shariah Standard No. (8): Murabahah I will preferably take it at the acquisition price. The majority of The majority of saying: saying: I will preferably take it at the acquisition price scholars agreed, in principle, on the permissibility of Murabahah. Promise from the Purchase Orderer The basis for the permissibility of responding to the application of the The basis for the permissibility of responding to the application of the customer that the Institution buys the commodity from a particular supplier is because such a demand will not affect the acquisition of the commodity by the Institution, especially in view of the fact that this de- mand is not binding. The Institution is entitled to acquire the commodity from another supplier provided the commodity complies with the de- sired specification. The customer may be forced to fulfil his obligation on the basis of general sources of the Quran and Sunnah that require fulfilment of obligation and undertaking. The International Fiqh Acade- my has issued a resolution endorsing a unilateral binding promise.(5)(5) The my has issued a resolution endorsing a unilateral binding promise. The same was adopted in a fatwa for Kuwait Finance House,(6)(6) Qatar Islamic Qatar Islamic same was adopted in a fatwa for Kuwait Finance House, Bank,(7)(7) and others. Bank, and others. The basis for allowing price quotations be submitted in the name of The basis for allowing price quotations be submitted in the name of customer is because such an act has no contractual effect if there is no acceptance by the customer. The basis why it is preferred that the quotation be submitted in the name of the Institution, is to avoid confusion and this is what was endorsed by the Fatwas of Qatar Islamic Bank,(8)(8) and Kuwait is what was endorsed by the Fatwas of Qatar Islamic Bank, and Kuwait Finance House.(9)(9) Finance House. The basis for not allowing a Murabahah deal when the customer accepts The basis for not allowing a Murabahah deal when the customer accepts the deal directly from the supplier is because, by this, a sale contract has taken place between the customer and the supplier in which case the commodity enters into ownership of the customer. This ruling will not be affected whether or not the customer has paid the price. This is be- and conclusion of permissibility and conclusion of cause payment is not a condition for the permissibility cause payment is not a condition for the a contract as payment of the price is but a consequence of a contract and is not principal requirement or a condition for regarding a contract valid. International Fiqh Academy Resolution No. 40-41 (2/5 and 3/5). (5)(5) International Fiqh Academy Resolution No. 40-41 (2/5 and 3/5). (6)(6) Fatwa No. (49). Fatwa No. (49). (7)(7) Fatwa No. (8). Fatwa No. (8). Fatwa No. (35). (8)(8) Fatwa No. (35). Fatwa No. (87). (9)(9) Fatwa No. (87). 222222 Shariah Standard No. (8): Murabahah The basis for the requirement that there must not be any contractual com- The basis for the requirement that there must not be any contractual com- mitment between the customer and the supplier is to safeguard against the contract being a mere interest-based financing. Therefore, the lack of any commitment between the customer and the supplier is a basic con- of executing a Murabahah by the Institution. permissibility of executing a Murabahah by the Institution. dition for the permissibility dition for the The basis for the requirement that the customer must not have any (busi- The basis for the requirement that the customer must not have any (busi- ness) connection with the supplier is to avoid involving in a Inah (sell and buy back) transaction that is prohibited by Shariah. The basis for the permissibility that the supplier may be a relative of the The basis for the permissibility that the supplier may be a relative of the customer or a husband or wife to the customer is because both parties have independent legal liability unless it has come to be that they are involved Inah transaction, in which case the transaction is prohibited. This is in a Inah transaction, in which case the transaction is prohibited. This is in a to defeat a potential intentional arrangement to evade formalities of the to defeat a potential intentional arrangement to evade formalities of the transaction. The Fatwa of Kuwait Finance House transaction. The Fatwa of Kuwait Finance House supports this. The basis for not allowing a partner to promise to buy the shares of another The basis for not allowing a partner to promise to buy the shares of another partner on a Murabahah basis is because this will lead to the buyer guaran- teeing the share of other partner, which is Riba. The basis for not allowing dealings in gold, silver and currencies on de- The basis for not allowing dealings in gold, silver and currencies on de- ferred Murabahah basis is the saying of the Prophet, peace be upon him, in respect to exchange of gold with silver that such exchange take place (11) i.e., without delay in delivery, and the rules of cur- hand to hand;(11) hand to hand; i.e., without delay in delivery, and the rules of cur- rencies are subsumed under the ruling for gold and silver. This ruling is (12) endorsed by the resolution of the International Fiqh Academy.(12) endorsed by the resolution of the International Fiqh Academy. The basis for the prohibition of Murabahah tradable securities or The basis for the prohibition of Murabahah tradable securities or refinancing of a Murabahah transaction is because these fall under the heading of sale of debt that is prohibited by Shariah. The basis for not allowing a bilateral binding promise is because it amounts to to a contract prior to acquisition of the item to be sold. The International Fiqh (13) Academy has issued a resolution in this respect.(13) Academy has issued a resolution in this respect. The basis for the permissibility of the agreement to amend the terms of the The basis for the permissibility of the agreement to amend the terms of the promise is because a promise is not a contract and as such the amendment ment promise is because a promise is not a contract and as such the amend The basis for not allowing a bilateral binding promise is because it amounts (10) supports this.(10) Fatwa No. (55). (10) (10) Fatwa No. (55). The Hadith has been related by Muslim in his Sahih (11) Sahih. . (11) The Hadith has been related by Muslim in his International Fiqh Academy Resolution No. 63 (1/7). (12) International Fiqh Academy Resolution No. 63 (1/7). (12) International Fiqh Academy Resolution No. 41(3/5). (13) International Fiqh Academy Resolution No. 41(3/5). (13) 223223 Shariah Standard No. (8): Murabahah of the profit margin and the duration will not amount to rescheduling of debt which is prohibited by Shariah. The basis for using options when buying on Murabahah is the case of Hib- The basis for using options when buying on Murabahah is the case of Hib- ban Ibn Munqidh when the Prophet (peace be upon him), said to him: ban Ibn Munqidh when the Prophet (peace be upon him), said to him: If If you buy, a condition that there is no cheating and that you have a three day period for any of the goods bought. If you are satisfied, then keep it and if you (14) The ruling on the application of are not satisfied, return it to the buyer.(14) are not satisfied, return it to the buyer. The ruling on the application of option in Murabahah is endorsed by a resolution issued during the second Fiqh Forum organised by Kuwait Finance House. The basis for the impermissibility of a commitment fee is because such a fee The basis for the impermissibility of a commitment fee is because such a fee is in exchange for the right to contract, which is a mere intention and wish that is not a subject of exchange. The basis for the impermissibility of a facility commission is because it is The basis for the impermissibility of a facility commission is because it is not allowed to receive commission in the event of giving out a loan facility for a mere itself. It is therefore a logical conclusion to disallow commission for a mere itself. It is therefore a logical conclusion to disallow commission readiness to finance the customer on a deferred payment basis. readiness to finance the customer on a deferred payment basis. The basis for allowing that the expenses of preparing the document of The basis for allowing that the expenses of preparing the document of contracts between the Institution and the customer be borne by the two parties is because both parties will equally benefit from this, and more- over there is no any impermissible act involved. The basis for the permis- sibility that these expenses may be borne by one of the parties is because this is a form of condition that is permissible. The basis for the permissibility of the customer guaranteeing the good The basis for the permissibility of the customer guaranteeing the good performance of the supplier is because this guarantee secures rights and does not adversely affect any rules of the Murabahah transaction. The basis for not allowing that the customer guarantee the risk of trans- The basis for not allowing that the customer guarantee the risk of trans- portation of the goods is because the safety of the goods is the responsi- bility of the owner and the customer is not the owner. Hence, the owner must bear the risk since the right to profit is associated with bearing risk. The basis for the permissibility of Hamish Jiddiyyah (security deposit) is Hamish Jiddiyyah (security deposit) is because it is a form of guarantee for any financial damage that may occur. The basis for the permissibility of obtaining the earnest money to secure The basis for the permissibility of obtaining the earnest money to secure pleased performance is the practice of Umar Ibn Al-Khattab (may Allah be pleased performance is the practice of Umar Ibn Al-Khattab (may Allah be The basis for the permissibility of (14) The Hadith has been related by Ibn Majah, (14) The Hadith has been related by Ibn Majah, Sunan Ibn Majah [2: 789]. Sunan Ibn Majah [2: 789]. 224224 Shariah Standard No. (8): Murabahah with him) in the presence of some companions of the Prophet, peace be (15) which has been permitted by Imam Ahmad. A resolution upon him,(15) which has been permitted by Imam Ahmad. A resolution upon him, has been issued in connection with the permissibility of Arboun (Earnest (16) Money) by the International Islamic Fiqh Academy.(16) Money) by the International Islamic Fiqh Academy. Acquisition of Title to, and Possession of, the Asset by the Institution or its Agent The basis for the prohibition of selling a commodity before taking The basis for the prohibition of selling a commodity before taking Do not sell is the saying of the Prophet (peace be upon him): Do not sell possession is the saying of the Prophet (peace be upon him): possession (17) and the Hadith in which the Prophet (peace be upon what you own not(17) what you own not and the Hadith in which the Prophet (peace be upon (18) The basis him) prohibits a person from selling what he does not own.(18) him) prohibits a person from selling what he does not own. The basis for preferring that the Institution appoint an agent other than the purchase orderer in case of the need to do so is to avoid a fictitious transaction that shows on paper that the acquisition is made on behalf of the Institution. This is necessary in order that the Institution appear as the real purchaser and in order to demarcate the liabilities of the parties, the liability of the Institution and the liability of the purchase orderer after the sale contract. The basis for the requirement that the Institution must pay the supplier The basis for the requirement that the Institution must pay the supplier directly is to avoid the risk of the contract degenerating into mere interest- directly is to avoid the risk of the contract degenerating into mere interest- based financing. The basis for the requirement that the liabilities of the parties -in case the The basis for the requirement that the liabilities of the parties -in case the Institution acquires the goods through agency- is to demarcate the two liabilities. The basis for the requirement that documents must be directed to The basis for the requirement that documents must be directed to the Institution is because the purchase is taking place on behalf of the institution. The basis for the requirement that the agent must explain to the supplier The basis for the requirement that the agent must explain to the supplier his agency status is to control the transaction and to determine the party to be referred to for the execution of the contract. The source of the Hadith has been stated earlier. (15) (15) The source of the Hadith has been stated earlier. Resolution No. 72 (3/8) in respect of Arboun (Earnest Money). (16) (16) Resolution No. 72 (3/8) in respect of Arboun (Earnest Money). The Hadith has been related by Al-Tirmidhi Sunan al-Tirmidhi (17) (17) The Hadith has been related by Al-Tirmidhi The Hadith has been related by Al-Tabrani in Al-Mujam Al-Awsat (18) The Hadith has been related by Al-Tabrani in (18) Haramayn, Cairo, 1415 A.H. Sunan al-Tirmidhi [3: 534]. [3: 534]. [5: 66], Dar Al- Al-Mujam Al-Awsat [5: 66], Dar Al- 225225 Shariah Standard No. (8): Murabahah The basis for the requirement of possession before a sale contract is to The basis for the requirement of possession before a sale contract is to ensure that the Institution becomes liable for the risk of destruction of the commodity before it is entitled to sell it. The basis for separating an agency contract from a Murabahah transac- The basis for separating an agency contract from a Murabahah transac- tion is to be sure that there is no any intentional arrangement to connect the two contracts. The basis for the rule that constructive possession is sufficient to meet the The basis for the rule that constructive possession is sufficient to meet the requirement of possession and that possession is according to the nature of the items is because the Shariah did not state a particular form for pos- session. Rather this is left to the customary practices. Again, the purpose of possession is to enable one to have control over something. Therefore, any procedure that serves this objective would be regarded as possession. The basis for the requirement that the contract of agency be separate The basis for the requirement that the contract of agency be separate from the contract of sale on a Murabahah basis is because of the risk that the contracts may be connected to each other. The basis for the rule that the Institution bear the expenses of insurance The basis for the rule that the Institution bear the expenses of insurance is because these expenses follow ownership of the goods. Conclusion of a Murabahah Contract The basis for the rule that the Institution is entitled to compensation in The basis for the rule that the Institution is entitled to compensation in case of breach of a binding promise by the customer to buy the goods is because of the damage that may be inflicted on the Institution due to the act of the customer. This is because the customer has caused the Institu- tion to enter into a deal that it would not have concluded in the absence of the promise. The International Islamic Fiqh Academy has issued a res- (19) olution in this respect.(19) olution in this respect. The basis for the rule that the Institutions rights are limited, in case of The basis for the rule that the Institutions rights are limited, in case of breach of promise, to the difference between the cost of the item to the Institution and its selling price to a third party is because the lawful right in a guarantee is limited to the amount that compensates for the damage suffered and because the Institutions right to recover loss of its mark-up is irrational since there is no mark-up unless there is actually a Muraba- hah transaction and in this case there is no such transaction. International Islamic Fiqh Academys resolution No. 40-41 (2/5 and 3/5). (19) International Islamic Fiqh Academys resolution No. 40-41 (2/5 and 3/5). (19) 226226 Shariah Standard No. (8): Murabahah The basis for the requirement of transparency as to the cost price is The basis for the requirement of transparency as to the cost price is because Murabahah is a trust related contract that requires disclosure of the amount and the currency of the cost price because a price in a deferred payment sale is higher. The basis for allowing normal expenses to be included in computing the The basis for allowing normal expenses to be included in computing the selling price of the commodity is because these expenses are paid to a third party. The basis for entitlement of the buyer to benefit from the discount acquired The basis for entitlement of the buyer to benefit from the discount acquired by the Institution is because Murabahah is a mark-up sale. Therefore, if the previous purchasing price decreases then the cost price is the amount that remains after the discount and this price is the cost price for the purpose of the Murabahah. The basis for the requirement that the price and the profit in Murabahah The basis for the requirement that the price and the profit in Murabahah must be determined is to avoid uncertainty and lack of knowledge. The basis for the requirement that the profit must be separately disclosed The basis for the requirement that the profit must be separately disclosed from the cost price and that it is not allowed to be calculated as a single amount for the customer is because Murabahah is a sale with a profit margin. Therefore, it is necessary this profit be disclosed separately to ensure that the customer will agree to it. The basis for the permissibility of instalment payment is because Mu- The basis for the permissibility of instalment payment is because Mu- rabahah is one of the sale contracts that are subject to spot payment, deferred payment or instalment payment. The basis for the impermissi- bility of requesting an additional sum of money for delay in payment is because this is the prohibited Riba. The basis for the permissibility of stipulating a defect exclusion item is The basis for the permissibility of stipulating a defect exclusion item is because a buyer is entitled to require guaranteeing hidden defects which are related to the sold commodity by the seller. However, the buyer may relinquish this right by agreeing to a defect exclusion item, as stated by (20) a number of scholars.(20) a number of scholars. The basis for the permissibility of stipulating that the contract would The basis for the permissibility of stipulating that the contract would be terminated for default in payment is because the original princi- See Al-Kasani, Badai Al-Sanai (20) See Al-Kasani, (20) Al-Shirazi, Al-Muhadhdhab Al-Shirazi, Buhuti, Kashshaf Al-Qina Buhuti, Al-Muhadhdhab [1: 284]; Ibn Qudamah, [3: 228]. Kashshaf Al-Qina [3: 228]. Badai Al-Sanai [5: 276]; Al-Mawwaq, [1: 284]; Ibn Qudamah, Al-Mughni [5: 276]; Al-Mawwaq, Al-Taj Wa Al-Iklil Al-Taj Wa Al-Iklil [4: 439]; [4: 439]; [4: 129]; and Al- Al-Mughni [4: 129]; and Al- 227227 Shariah Standard No. (8): Murabahah ple ple in respect to stipulations is validity and permissibility. In addition, in respect to stipulations is validity and permissibility. In addition, this item does not render permissible an impermissible act or prohibit a permissible act. Hence, this item falls under the Hadith that says: Mus- a permissible act. Hence, this item falls under the Hadith that says: Mus- lims are bound by the conditions they made, except a condition that renders (21) permissible an impermissible act or prohibits a permissible act.(21) permissible an impermissible act or prohibits a permissible act. Guarantees in Murabahah and Treatment of Murabahah Receivables The basis for the condition that all instalments will become due if there is The basis for the condition that all instalments will become due if there is delay in payment is the Hadith of the Prophet, peace be upon him: Mus- lims are bound by the conditions they made, and because payment on a deferred basis is the right of the buyer, and the buyer may choose to pay before time and relinquish the deferral of the date of payment entirely or make payment of all instalments contingent on default on payment of one instalment. The basis for demanding collateral to secure payment is because such The basis for demanding collateral to secure payment is because such a requirement does not affect the contract; rather, it consolidates perfor- mance and such guarantees are relevant to contracts involving credit. The basis for not allowing a stipulation that delays transfer of ownership The basis for not allowing a stipulation that delays transfer of ownership is because such a stipulation is against the effect of a sale contract, which is immediate transfer of ownership. The basis for allowing the Institution to hold up registering the commodity in the name of the customer until payment is realised is that such an action does not affect the transfer of ownership to the buyer. The basis for the permissibility of stipulating a condition, whereby the The basis for the permissibility of stipulating a condition, whereby the debtor in case of default is obliged to donate a sum of money in addition to the amount of the debt to be spent by the Institution on charitable causes, is because this has been considered as an instance of the commitment to make a donation, which is well established in the Maliki school of law. This (21) This Hadith has been reported by number of the companions. It has been related by This Hadith has been reported by number of the companions. It has been related by (21) [1: 312]. Ibn Majah through a good chain of transmission in Musnad [1: 312]. Ibn Majah through a good chain of transmission in Ahmad in his Musnad Ahmad in his Sunan [2: 783], Mustafa Al-Babi Al-Halabi edition, Cairo, 1372 A.H./1952 A.D.; his his Sunan [2: 783], Mustafa Al-Babi Al-Halabi edition, Cairo, 1372 A.H./1952 A.D.; Al-Hakim in his , Hyderabad edition, India, 1355 A.H.; Al-Bayhaqi in Mustadrak, Hyderabad edition, India, 1355 A.H.; Al-Bayhaqi in Al-Hakim in his Mustadrak Sunan [6: 70 and 156] and [1: 133], Hyderabad edition, India, 1355 A.H.; and his his Sunan [6: 70 and 156] and [1: 133], Hyderabad edition, India, 1355 A.H.; and [4: 228] and [3: 77], Dar Al-Mahasin Lil-Tibaah edition, Sunan [4: 228] and [3: 77], Dar Al-Mahasin Lil-Tibaah edition, Al-Daraqutni in his Sunan Al-Daraqutni in his Cairo, 1372 A.H./1952 A.D. 228228 Shariah Standard No. (8): Murabahah is the opinion of Abu Abdullah Ibn Nafi and Muhammad Ibn Ibrahim Ibn (22) Dinar, among the Maliki jurists.(22) Dinar, among the Maliki jurists. The basis for the prohibition of additional payment over the principal The basis for the prohibition of additional payment over the principal debt in consideration for extension of time is because such action is a pre-Islamic form of Riba. The basis for the permissibility of discount or rebate for earlier payment The basis for the permissibility of discount or rebate for earlier payment is because discount for early payment is a form of settlement between the creditor and the debtor to pay less than the amount of the debt. This is among the settlement that are endorsed by Shariah as stated in the case of Ubay Ibn Kab (may Allah be pleased with him) and his debtor where the Prophet (peace be upon him) suggested to him in words: write off the Prophet (peace be upon him) suggested to him in words: write off (23) The International Islamic Fiqh Academy has a portion of your debt.(23) The International Islamic Fiqh Academy has a portion of your debt. (24) issued a resolution in support of this rule.(24) issued a resolution in support of this rule. The basis of the permissibility of payment of debt in another currency is The basis of the permissibility of payment of debt in another currency is that this would entail the settlement of the debt by discharging it. This does not involve any prohibited transaction pertaining to debts either with regard to sale or purchase. As for some of the forms mentioned in the standard, there are texts As for some of the forms mentioned in the standard, there are texts to to support them, inter alia, the Hadith reported on the authority of Ibn Umar (may Allah be pleased with him) who said: I have met the Prophet (peace be upon him) at the house of Hafsah (may Allah be pleased with her), and I said to him: O Prophet of Allah, I would like to ask you: I sell a camel in Al-Baqi for a price quoted in dinar but I take dirham, and I sell for a price quoted in dirham but I take dinars, I take this from this and I give this There is no objection from this. The Prophet (peace be upon him) replied: There is no objection from this. The Prophet (peace be upon him) replied: to your taking the other currency based on the price of the day, provided you do not leave each other with something remaining owed as a debt between (25) Some of the forms in the standard are a kind of set-off and this is you.(25) you. Some of the forms in the standard are a kind of set-off and this is permissible. (22) See the book entitled: (22) See the book entitled: Tahrir Al-Kalam Fi Masail Al-Iltizam by Al-Hattab. This Tahrir Al-Kalam Fi Masail Al-Iltizam by Al-Hattab. This rule has been endorsed by the resolutions and recommendations of the Fourth Fiqh Forum organized by the Kuwait Finance House. The Hadith has been related by Al-Bukhari: Sahih Al-Bukhari (23) (23) The Hadith has been related by Al-Bukhari: The International Islamic Fiqh Academy Resolution No. 64 (7/2). (24) (24) The International Islamic Fiqh Academy Resolution No. 64 (7/2). (25) Related by Abu Dawud, Al-Tirmidhi, Al-Nassai, Ibn Majah and Al-Hakim, who Related by Abu Dawud, Al-Tirmidhi, Al-Nassa`i, Ibn Majah and Al-Hakim, who (25) deemed it a sound Hadith. Al-Dhahabi agreed with Al-Hakim. It was also narrated without a chain of narrators, quoting only Ibn Umar: Al-Talkhis Al-Habir without a chain of narrators, quoting only Ibn Umar: [1: 179] and [2: 965]. Sahih Al-Bukhari [1: 179] and [2: 965]. [3: 26]. Al-Talkhis Al-Habir [3: 26]. 229229 Shariah Standard No. (8): Murabahah Appendix (E) Definitions Murabahah It is the sale of a commodity by an institution to its customer (the purchase orderer) as per the purchasing price/cost with a defined and agreed profit mark-up (as set out in the promise/ ), in which case it is called a banking mark-up (as set out in the promise/WadWad), in which case it is called a banking Murabahah. The banking Murabahah involves deferred payment terms, but such deferred payment is not one of the essential conditions of such transaction, as there is also a Murabahah arranged with no deferral of payment. In this case, the seller only receives a mark-up that only includes the profit for a spot sale and not the extra charge it would, otherwise, receive for deferral of payment. Commitment Fee A commitment fee is the percentage or amount which the Institution takes from the customer to start processing the transaction even though a sale contract may not be concluded). Arboun The term Arboun means an amount of money that the customer as Arboun means an amount of money that the customer as The term purchase orderer pays to the Institution after concluding the Murabahah sale, with the provision that if the sale is completed during a prescribed period, the amount will be counted as part of the price. If the customer fails to execute the Murabahah sale, then the Institution may retain the whole amount. Syndicated Financing A syndicated financing is a partnership relationship for financing They a particular project which two or more parties has interest to finance. They a particular project which two or more parties has interest to finance. will distribute the profit or revenue as per agreement. In other words, syndicated financing is the acceptance of a number of companies (financial the Institutions) to enter into a joint investment transaction through one of the Institutions) to enter into a joint investment transaction through one of permissible investment instruments with an understanding that one of the 230230 Shariah Standard No. (8): Murabahah parties assumes leadership of the deal. During the period of the transaction, the transaction would enjoy an independent liability separated from their companies. Credit Facility A credit facility is an upper limit for a customers Murabahah transac- tions. This credit facility may be restricted to a specified type of item, or to a specified period of time. 231231 Shariah Standard No. (9) Ijarah and Ijarah Muntahia Bittamleek*(1)(1) Muntahia Bittamleek* (Revised Standard) (1)(1)* This standard was previously issued by the title Shariah Rules for Investment and

This standard was previously issued by the title Shariah Rules for Investment and Financing Instruments No. (2) Ijarah and Ijarah Muntahia Bittamleek. It was reissued as a Shariah standard based on the resolution of the Shariah Board to reformat all Shariah Rules in the form of Shariah Standards. Contents Subject ................................................................................................... Preface ................................................................................................... Preface ..................................................................... Statement of the Standard ..................................................................... Statement of the Standard ..............................................................................

Scope of the Standard ..............................................................................
Scope of the Standard ....................................................................
Promise to Lease (an Asset) ....................................................................
Promise to Lease (an Asset) Acquisition of the Asset to Be Leased, or Its Usufruct, by the Institution
1. Acquisition of the Asset to Be Leased, or Its Usufruct, by the Institution .....................
Concluding an Ijarah Contract and the Forms of Ijarah .....................
Concluding an Ijarah Contract and the Forms of Ijarah
1. Subject Matter of Ijarah ........................................................................... Subject Matter of Ijarah ........................................................................... .................................
Guarantees and Treatment of Ijarah Receivables .................................
Guarantees and Treatment of Ijarah Receivables
1. Changes to the Ijarah Contract ............................................................... Changes to the Ijarah Contract ...............................................................
Transfer of the Ownership in the Leased Property in Ijarah Muntahia .................................................................................................. Bittamleek .................................................................................................. Bittamleek Date of Issuance of the Standard....................................................
1. Date of Issuance of the Standard.................................................... ...................................................................... Adoption of the Standard ...................................................................... Adoption of the Standard Appendices Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (b): TheThe Shariah Basis for the Standard.................................... Appendix (b): Shariah Basis for the Standard.................................... Appendix (c): Definitions............................................................................. Appendix (c): Definitions............................................................................. PagePage 237237 238238 239239 241241 243243 246246 247247 249249 251251 252252 253253 256256 266266 235235 IN THE NAME OF ALLAH, THE ALL-MERCIFUL, THE MOST MERCIFUL All praise be to Allah, the Lord of all the worlds, and blessings and peace be upon our master, Muhammad, and his household and all his companions Preface This standard outlines the basis of the Shariah rulings on Ijarah and Ijarah Muntahia Bittamleek, beginning with the rules relating to the promise to lease, if any, and concluding with the rules of repossession of the leased property in an operating Ijarah by the lessor or transferring its ownership in case of Ijarah Muntahia Bittamleek, within or by the end of the lease term. The Standard also aims to outline the Shariah requirements that must be observed by Islamic financial Institutions (Institution/Institutions)(2)(2) with observed by Islamic financial Institutions (Institution/Institutions) with respect to Ijarah transactions. The word (Institution/Institutions) is used here to refer, in short, to Islamic financial (2)(2) The word (Institution/Institutions) is used here to refer, in short, to Islamic financial institutions including Islamic Banks. 237237 Shariah Standard No. (9): Ijarah and Ijarah Muntahia Bittamleek Statement of the Standard
Scope of the Standard This standard covers operating leases of properties or Ijarah Muntahia Bittamleek, whether the Institution is the lessor or the lessee. This standard does not cover Sukuk al-Ijarah This standard does not cover , as they are covered by Sukuk al-Ijarah, as they are covered by Shariah Standard on Investment Sukuk, nor the employment of persons (labour contract), as it is covered by a separate standard.
Promise to Lease (an Asset) 2/1 In principle, an Ijarah contract is executed for an asset owned by the lessor or an usufruct owned by the sub-lessor. However, it is for a customer to request an Institution to acquire the asset or to acquire the usufruct of an existing asset which the customer wishes to take on lease. 2/2 In principle, Ijarah may be effected directly on the asset without any any 2/2 In principle, Ijarah may be effected directly on the asset without requirement of a preceding master agreement. However, it is permissible to have a master agreement drawn up coveringa number of Ijarah transactions between the Institution and the customer, setting out the general terms and conditions of agreement between the two parties. In this case, there may either be a separate lease contract for each transaction, in a specific written document signed by the two notices of offer parties, or alternatively the two parties may exchange notices of offer parties, or alternatively the two parties may exchange and acceptance by referring to the terms and conditions contained in and acceptance by referring to the terms and conditions contained in the master agreement. 2/3 It is permissible for the Institution to require the customer who has promised to lease to pay a sum of money to the Institution to ensure the customers seriousness in accepting a lease on the asset and the subsequent obligations, provided no amount is to be deducted from 238238 Shariah Standard No. (9): Ijarah and Ijarah Muntahia Bittamleek this sum except in proportion to the actual damage suffered by the Institution in case the customer does not fulfil his promise. Thus, if the customer, in case of Ijarah associated with a promise to transfer the customer, in case of Ijarah associated with a promise to transfer ownership, breaches his promise, the promisor shall be charged either the difference between the cost of the asset intended to be leased and the total lease rentals for the asset which is leased on the basis of Ijarah Muntahia Bittamleek to a third party, or, in case of operating Ijarah, the promisor breaching his promise shall be charged the difference between the cost of acquisition and the total selling price if sold to a third party by the Institution (promisee). Otherwise; i.e., in case it is not sold, the promisee shall not be entitled to receive any compensation. 2/4 The amount of money deposited by the customer as security for his commitment can be either held on trust in the custody of the Institution in which case the latter cannot invest it, or it may be held on an investment trust basis in which case the customer permits the Institution to invest it on the basis of Mudarabah between the customer and the Institution. It is permissible to agree with the customer, upon the execution of the contract of lease, that this amount shall be treated as an advance payment of the instalments of the lease rental.
Acquisition of the Asset to Be Leased, or Its Usufruct, by the Institution 3/1 For the permissibility of an Ijarah contract concerning a specified asset, the lease contract should be preceded by acquisition of either the asset to be leased or the usufruct of that asset. 3/1/1 If the asset or the usufruct thereof is owned by the Institution, which should in principle be the case, an Ijarah contract may may be executed as soon as agreement is reached by the two be executed as soon as agreement is reached by the two parties. 3/1/2 However, if the asset is to be acquired by the customer [see item 3/2 below], or by a third party, the Ijarah contract shall not be executed unless and until the Institution has acquired that asset. 239239 Shariah Standard No. (9): Ijarah and Ijarah Muntahia Bittamleek Ownership is possible under a sale contract, even if the title is not registered in the purchasers name (the Institution), and the purchaser has the right to obtain a counter-deed to establish the actual transfer of his ownership of the asset. [see item 3/5 below] 3/2 An asset may be acquired by a party and then leased to that party. In this case, the Ijarah transaction should not be stipulated as a condition of the purchase contract by which the Institution acquires the asset. 3/3 A lessee of an asset may enter into a sub-lease contract with a party other than the owner for a rental that is either the same, lower or higher, payable either currently or on a deferred basis, unless the owner stipulates that the lessee should not assign or sublet the property to stipulates that the lessee should not assign or sublet the property to third parties, or should not do so without his approval. 3/4 The lessee may lease the asset back to its owner in the first lease period for a rental that is lower, same or higher than what he is paying, if the two rentals are paid on a spot basis. However, this is not permissible if it should lead to contract of Inah, by varying the rent or the duration. For example, it is not permissible, if the first rental is one hundred dinars payable on a spot basis, for the lessee to sublet it to the lessor for one hundred and ten dinars payable on a deferred basis, or if the first rental is one hundred and ten dinars payable on a deferred basis, for the second to be for one hundred dinars payable instantly, or if the two rentals are of the same amount, but the payment of the first rental is deferred for one month and the second rental is deferred for two months. 3/5 An Ijarah contract may be executed for an asset undertaken by the lessor to be delivered to the lessee according to accurate specifications, even if the asset so described is not owned by the lessor. In this case, an agreement is reached to make the described asset available during the duration of the contract, giving the lessor the opportunity to acquire or to produce it. It is not a requirement of this lease that the rental should be paid in advance as long as the lease is not executed according to the contract of Salam (or Salaf). Should the lessee receive 240240 Shariah Standard No. (9): Ijarah and Ijarah Muntahia Bittamleek an asset that does not conform to the description, then he is entitled to reject it and demand an asset that conforms to the description. 3/6 An Institutions customer may jointly acquire an asset that he wishes to lease with the Institution, and then lease the Institutions share of the asset from the Institution. In this case, the rental specified as receivable by the Institution should only be in proportion to its share in the ownership of the asset, since the lessee is a co-owner of the asset and therefore has to pay rent only on the share that he does not own. 3/7 An Institution may appoint one of its customers to act as its agent in acquiring on its behalf an asset that is desired by that customer such as equipment, machinery, etc., whose description and price are fixed with a view to the Institutions leasing such asset or assets to the customer after it has acquired their ownership through either actual or constructive possession. Although this type of agency (for the purchase of the assets) is permissible, it is always preferred that the agent is someone other than the customer (prospective lessee) as far as possible.
Concluding an Ijarah Contract and the Forms of Ijarah 4/1 Signature of the contract and the consequences thereof 4/1/1 The lease contract is a binding contract which neither party may terminate or alter without the others consent [see items 5/2/2, 7/2/1, and 7/2/2]. However, an Ijarah contract may be terminated in accordance with item 7/2/1. 4/1/2 The duration of an Ijarah contract must be specified in the contract. The period of Ijarah should commence on the date of execution of the contract, unless the two parties agree on a specified future commencement date, resulting in a future a specified future commencement date, resulting in a future Ijarah, that is, an Ijarah contract to be executed at a future date. 4/1/3 If the lessor fails to deliver the asset to the lessee on the date specified in the Ijarah contract, no rental is due for the period 241241 Shariah Standard No. (9): Ijarah and Ijarah Muntahia Bittamleek between the date specified in the contract and the date of actual delivery, and the rental should be reduced accordingly, unless it is agreed that the lease be extended by an equivalent period after its original expiry date. 4/1/4 Arboun (Earnest Money) may be taken in respect of lease at the execution of the contract of lease, with the lessee having the right to terminate the contract during a specified period of time, and Arboun is treated as an advance payment of the rental. If the Ijarah contract is not executed for a reason attributable to the lessee, the lessor may retain the Arboun. However, it is preferable for the Institution to forgo any amount in excess of the actual damage it has suffered. [see para. 3/2] 4/2 Forms of the Ijarah contract 4/2/1 Ijarah contracts may be executed in respect of the same asset for different periods for several lessees, provided that two contracts are not executed in respect of the same asset for the same period. Such an arrangement is called successive leases, because each Ijarah is considered as being successive to the previous one and not concurrent with it on the basis of its being a future Ijarah. [see item 4/1/2 above] 4/2/2 If the lessor signs an Ijarah contract for a particular asset for a specified period of time, he cannot sign another Ijarah contract with another lessee for the duration of the existing Ijarah period or for any remaining period thereof. [see item 7/1/2 below] 4/2/3 An Ijarah contract may be signed with several lessees being entitled to the same specified usufruct of a particular asset and duration of rent, without specifying a particular period of time for a particular person. In this case, each lessee may benefit from the property during the time assigned to him in accordance with specified rules. This case is one form of Muhaya`ah (time-sharing) in benefiting from the usufruct. 242242 Shariah Standard No. (9): Ijarah and Ijarah Muntahia Bittamleek 4/2/4 A lessee may invite others to share with him in the usufruct he owns. In this case, they become co-owners in the usufruct of the leased property. This can only be done before entering into a sub-lease. If the property is sub-leased after the co-owners having owned the usufruct each co-owner is entitled to a share in the sub-lease rental pro rata to his share in the usufruct.
Subject Matter of Ijarah 5/1 Rules governing benefit and leased property 5/1/1 The leased asset must be capable of being used while preserving the asset, and the benefit from an Ijarah must be permissible by Shariah. For example, a house or a chattel may not be leased for the purpose of an impermissible act by the lessee, such as leasing premises to be used as headquarters by an Institution dealing in interest or to a shopkeeper for selling or storing prohibited goods, or leasing a vehicle to transport prohibited merchandise. 5/1/2 The subject matter of Ijarah may be a share in an undivided asset held in common with the lessee, whether the lessee is a partner with the lessor or not. In this case the lessee may benefit from the leased share in the same way in which the lessor used to benefit from it, i.e., by usufruct division based on Muhyaah i.e. by identifying a particular time (time-sharing) or a particular part of the property, used alternately by the co- owners, or any other means with consent of the other partner. 5/1/3 An Ijarah contract may be executed for a house or a chattel, even with a non-Muslim, if the use to be made of it is permissible, such as a house for residential purposes, a car for transport, or a computer to store data, unless the lessor knows in advance, or has reason to presume, that the use of the asset to be leased will be for an impermissible purpose. 5/1/4 The lessee must use the leased asset in a suitable manner or in conformity with common practice, and comply with conditions which are acceptable in Shariah. He must also avoid causing 243243 Shariah Standard No. (9): Ijarah and Ijarah Muntahia Bittamleek damage to the leased asset by misuse through misconduct or negligence. 5/1/5 The lessor must accept responsibility for any defects of the leased asset which impair the intended use of the asset, and may not exclude his liability for any impairment that the leased asset may sustain, either by his own doing or as a result of events outside his control, which affect the benefits intended to be available under the Ijarah contract. 5/1/6 If the benefit from the leased asset is impaired wholly or partially partially 5/1/6 If the benefit from the leased asset is impaired wholly or as a result of the lessees misconduct, while the property remains under lease, the lessee is obliged to restore or repair the usufruct, and rent for the time during which the benefit is lost is not to be waived. 5/1/7 The lessor may not stipulate that the lessee will undertake the major maintenance of the asset that is required to keep it in the condition necessary to provide the contractual benefits under the lease. The lessor may delegate to the lessee the task of carrying out such maintenance at the lessors cost. The lessee should carry out operating or periodical (ordinary) maintenance. 5/1/8 The leased asset is the responsibility of the lessor throughout the the 5/1/8 The leased asset is the responsibility of the lessor throughout duration of the Ijarah, unless the lessee commits misconduct or negligence. The lessor may take out permissible insurance on it whenever possible, and such insurance expenses must be borne by the lessor. The lessor may take this into account implicitly when the lease rental is to be fixed. However, he may not, after the contract is signed, charge the lessee any cost in excess of the cost anticipated at the time of fixing the rent. The lessor may also delegate to the lessee the task of taking out insurance at the lessors expense. 5/2 Rules governing lease rentals 5/2/1 The lease rental may be in cash or in kind (goods) or benefit (service). The rental must be specified, either as a lump sum 244244 Shariah Standard No. (9): Ijarah and Ijarah Muntahia Bittamleek covering the duration of the Ijarah contract, or by instalments for parts of the duration. It may also be for a fixed or variable amount, according to whatever designated method the two parties agree upon. [see item 5/2/3 below] 5/2/2 The rental is made obligatory by the contract and the lessors entitlement to the rental runs from the time when the lessee starts to benefit from the asset or once the lessor makes the usufruct of the asset available to the lessee, and the entitlement to the rental does not necessarily commence on the date of signing the Ijarah contract. The rental may be paid entirely in advance or in instalments during a period equivalent, or more or less, to the duration of the Ijarah. However, if the asset is made available only after a period longer than what customary practices deem proper, then no payment shall be obligatory. 5/2/3 In case the rental is subject to changes (floating rental), it is In case the rental is subject to changes (floating rental), it is 5/2/3 necessary that the amount of the rental of the first period of the Ijarah contract be specified in lump sum. It is then permissible that the rentals for subsequent periods be determined accord- ing to a certain benchmark. Such benchmark must be based on a clear formula which is not subject to dispute, because it becomes the determining factor for the rentals of the remain- ing periods. This benchmark should be subject to a ceiling, on both maximum and minimum levels. 5/2/4 It may be agreed that the rental should consist of two specified parts: one to be paid or transferred to the lessor and the other to be held by the lessee to cover any expenses or costs approved by the lessor, such as the cost of major maintenance, insurance, etc. The excess of the second part of the rental shall be treated as an advance to the lessor on account, while the lessor shall bear any shortage. 5/2/5 The amendment of future rentals is permissible by the agreement of both parties, i.e. the periods for which the lessee has not yet received any benefit. The rentals of any previous periods which 245245 Shariah Standard No. (9): Ijarah and Ijarah Muntahia Bittamleek have not yet been paid become a debt owed to the lessor by the lessee, and therefore cannot be increased.
Guarantees and Treatment of Ijarah Receivables 6/1 Permissible security, of all kinds, may be taken to secure the rental payments or as a security against misuse or negligence on the part of the lessee, such as a charge over assets, guarantees or an assignment of rights over assets of the lessee held by third parties, even if such rights are a permissible life or property insurance indemnity in favour of the lessee. 6/2 The two parties may agree that the rental be paid fully in advance. It is also permissible to make the rent payable in instalments, in which case the lessor may stipulate that the lessee should immediately pay the remaining instalments if he, after receiving a specified period of due notice, delays, without a valid reason, payment of one instalment or more, provided that the asset shall be made available for the lessee to use for the remaining period of time. Any stipulated upfront rental or accelerated -because of delay of payment- rental is subject to settlement at the end of the Ijarah period or, if the Ijarah contract is terminated earlier, at the time of such termination. Any extension of time by the lessor after the stipulated time for prompt payment is considered as a consent to deferral of payment throughout the extension period and not a right of the lessee, subject always to item 5/2/2 above. 6/3 No increase in the rental due may be stipulated by the lessor in case of delay in payment by the lessee. 6/4 It may be provided in the contract of Ijarah or Ijarah Muntahia Bittamleek that a lessee who delays payment for no good reason undertakes to donate a certain amount or percentage of the rental due in case of late payment. Such donation should be paid to charitable causes under the co-ordination of the Institutions Shariah Supervisory Board. 6/5 In case of foreclosure of the security provided by the lessee, the lessor may deduct from such amounts only what is due in respect 246246 Shariah Standard No. (9): Ijarah and Ijarah Muntahia Bittamleek of rental for previous periods, and not all rental instalments, including instalments which have not yet fallen due and in respect of periods for which the lessee has not had the benefit of the leased asset. The lessor may also deduct from the security all legitimate compensations necessitated by the lessees breach of contract.
Changes to the Ijarah Contract 7/1 Selling of or damage to the leased asset 7/1/1 If the lessor sells the leased asset to the lessee, the Ijarah contract is terminated due to the transfer of the ownership of the leased asset and ownership of usufruct to the lessee. 7/1/2 The lessor may sell the leased asset to a third party other than the lessee, and the title to the asset together with the rights and obligations of the lessor under the Ijarah contract is thereby transferred to the new owner, because the asset and the rights and obligations attached to it become the right of the third party. The lessees consent is not necessary when the lessor decides to sell the asset to a third party. If the purchaser does not know about the Ijarah contract, he may terminate the sale contract, but if he knows about it and consents to it, he takes the place of the previous owner in his entitlement to the rental for the remaining period. 7/1/3 In case of total destruction of the leased asset, the Ijarah contract contract 7/1/3 In case of total destruction of the leased asset, the Ijarah is terminated if it is concluded on an identified asset. In such a case, it may not be stipulated that the rest of the instalments should be paid. 7/1/4 The leased asset in the possession of the lessee is held by the lessee in a fiduciary capacity on behalf of the lessor. The lessee will not be held liable for any damage or destruction of the leased asset unless such damage or destruction is a result of misconduct or negligence on the part of the lessee. In this case, he is obliged to replace the asset if it is replaceable; otherwise, he is liable for the amount of the damage to be determined by valuation. 247247 Shariah Standard No. (9): Ijarah and Ijarah Muntahia Bittamleek 7/1/5 In case of the partial destruction of the leased asset in a manner that impairs the benefits expected from the leased asset, the lessee may terminate the Ijarah contract. Both he and the lessor may also agree to amend the rental in case of partial destruction of the leased property, if the lessee waives his right to termination. The lessor in this case is not entitled to rent for the period during which the lessee was not able to benefit from the asset unless the lessor makes it up (by agreement with the lessee) with a like benefit after the expiry of the period specified in the contract. [see para. 5/1/6] 7/1/6 In an Ijarah Mawsufah fi al-Dhimmah 7/1/6 In an (contract for an unidenti- Ijarah Mawsufah fi al-Dhimmah (contract for an unidenti- fied asset undertaken by the lessor to be delivered according to the agreed specifications), the owner in cases of total and partial destruction must offer an alternative asset having a specification similar to that of the destroyed asset, unless otherwise agreed at the time. The Ijarah shall continue for the remaining time of the contract. If it is not possible to provide a substitute asset, the con- tract will be terminated. [see item 3/5] 7/1/7 If the lessee stops using the leased asset or returns it to the owner without the owners consent, the rental will continue to be due in respect of the remaining period of the Ijarah, and the lessor may not lease the property to another lessee for this period, but must keep it at the disposal of the current lessee unless the lessee relinquishes to the lessor the remaining period of time, in which case the lease expires. [see item 7/2/1 below] 7/2 Termination, expiry and renewal of the Ijarah contract 7/2/1 It is permissible to terminate the lease contract by mutual con- sent but it is not permissible for one party to terminate it except in case of force majeure or there is a defect in the leased asset that materially impairs its use. Termination is also possible when one party secures an option to terminate the contract in which case the party who holds the option may exercise it during the specified period. 248248 Shariah Standard No. (9): Ijarah and Ijarah Muntahia Bittamleek 7/2/2 The lessor may stipulate that the Ijarah contract be terminated if the lessee does not pay the rent or fails to pay it on time. 7/2/3 An Ijarah contract does not terminate with the death of either party thereto. However, the heirs of the lessee may terminate the Ijarah contract if they can prove that the contract has become, as a result of the death of their legator, too onerous for their resources and in excess of their needs. 7/2/4 An Ijarah contract expires with the total destruction of the leased asset in the case of leasing a specific asset or with the inability to enjoy the usufruct owing to the loss of the benefit that the asset was intended to provide. 7/2/5 The two parties may terminate the Ijarah contract before it begins to run. 7/2/6 The lease expires upon the expiry of its term, but it may remain operative for a good cause, such as the late arrival to the place intended in the lease of transportation vehicles, and in the case of a late harvesting period for land leased for crop cultivation. The lease then continues with the rental based on the prevailing market value. An Ijarah may be renewed for another term, and such renewal may be made before the expiry of the original term or automatically by adding a provision in the new contract for such renewal when the new term starts, unless either party serves a notice on the other of its desire not to renew the contract.
Transfer of the Ownership in the Leased Property in Ijarah Muntahia Bittamleek 8/1 In Ijarah Muntahia Bittamleek, the method of transferring the title in the leased asset to the lessee must be evidenced in a document separate from the Ijarah contract document, using one of the following methods: a) By means of a promise to sell for a token or other consideration, or by accelerating the payment of the remaining amount of rental, or by paying the market value of the leased property. 249249 Shariah Standard No. (9): Ijarah and Ijarah Muntahia Bittamleek b) A promise to give it as a gift (for no consideration). c) A promise to give it as a gift, contingent upon the payment of the remaining instalments. In all these cases, the separate document evidencing a promise of gift, promise of sale or a promise of gift contingent on a particular event, should be independent of the contract of Ijarah Muntahia Bittamleek and cannot be taken as an integral part of the contract of Ijarah. 8/2 A promise to transfer the ownership by way of one of the methods specified in item 8/1 above is a binding promise by the lessor. However, a binding promise is binding on one party only, while the other party must have the option not to proceed. This is to avoid a bilateral promise by the two parties which is Shariah impermissible because it resembles a concluded contract. 8/3 In all cases of transfer of ownership by way of gift or sale, it is neces- sary, when the promise is fulfilled, that a new contract be drawn up, since the ownership to the property is not automatically transferred by virtue of the original promise document that was drawn up earlier. 8/4 In case the Ijarah contract is combined, through a separate document, with a gift contingent upon the condition that the remaining rent instalments be paid, the ownership to the leased property is transferred to the lessee if the condition is fulfilled, without the need for any other procedure to be adopted or a document to be signed. However, if the lessees payment is short of even one instalment, the ownership to the property is not transferred to him, since the condition has not been fulfilled. 8/5 If the leased asset was purchased from the lessee before it was leased leased 8/5 If the leased asset was purchased from the lessee before it was back to the lessee on the basis of Ijarah Muntahia Bittamleek, a (reasonable) period of time, between the lease contract and the time of the sale of the asset to the lessee, must have expired, to avoid the contract of Inah. This period must be long enough so that the leased property or its value could have changed. This shall 250250 Shariah Standard No. (9): Ijarah and Ijarah Muntahia Bittamleek also apply to the case of early ownership of the asset where a sale contract is concluded during the Ijarah. [see para. 7/1] 8/6 Subject to item 8/8 below, the rules governing Ijarah must apply to the Ijarah Muntahia Bittamleek, i.e. when a promise is made by the lessor to transfer the ownership in the leased asset to the lessee. None of these rules should be breached under the pretext that the leased asset was bought by the lessor on the basis of a promise by the lessee that he would acquire it or that ownership of it would devolve upon him, or that he would pay rentals in excess of those payable in respect of a similar property which are similar in amount to the instalments of an instalment sale, or that local laws and conventional banking practices consider such a transaction as an instalment sale with a deferred transfer of the ownership. 8/7 Transfer of the ownership in the leased property cannot be made by executing, along with the Ijarah, a sale contract that will become effective on a future date. 8/8 If the leased asset is destroyed or if the continuity of the lease contract becomes impossible up to the expiry period without the cause being attributable to the lessee in either case, then the rental is adjusted based on the prevailing market value. That is, the difference between the prevailing rate of rental and the rental specified in the contract must be refunded to the lessee if the latter rental is higher than the former. This is to avoid loss to the lessee, who agreed to a higher rental payment compared to the prevailing rate of rental in consideration of the lessors promise to pass the title to him upon the expiry of the lease term.
Date of Issuance of the Standard This Standard was issued on 4 Rabi I, 1423 A.H., corresponding to 16 May 2002 A.D. 251251 Shariah Standard No. (9): Ijarah and Ijarah Muntahia Bittamleek Adoption of the Standard The Shariah standard for Ijarah and Ijarah Muntahia Bittamleek was adopted by the Shariah Board in its meeting No. (4) held on 25-27 Safar 1421 A.H., corresponding to 29-31 May 2000 A.D. In its meeting No. (8) In its meeting held in Mecca on 28 Safar - 4 Rabi I, 1423 A.H. No. (8) held in Mecca on 28 Safar - 4 Rabi I, 1423 A.H. corresponding to 11-16 May 2002 A.D., the Shariah Board readopted a resolution to reformat the Shariah rules for Ijarah and Ijarah Muntahia Bittamleek in the form of a Shariah standard. 252252 Shariah Standard No. (9): Ijarah and Ijarah Muntahia Bittamleek Appendix (A) Brief History of the Preparation of the Standard In its meeting No. (1) held on 11 Dhul-Hajjah 1419 A.H., corresponding to 27 February 1999 A.D., the Shariah Board decided to give priority to the preparation of the Shariah rules for Ijarah and Ijarah Muntahia Bittamleek. On Tuesday 13 Dhul-Hajjah 1419 A.H., corresponding to 30 March 1999 A.D., the Fatwa and Arbitration Committee decided to commission a Shariah consultant to prepare a juristic study and an exposure draft on the Shariah Rules for Ijarah and Ijarah Muntahia Bittamleek. In its meeting held on 13-14 Rajab 1420 A.H., corresponding to 22-23 October 1999 A.D., the Fatwa and Arbitration Committee discussed the exposure draft of the Shariah Rules for Ijarah and Ijarah Muntahia Bitamleek, and asked the consultant to make the amendments in light of the comments made by the members. The revised exposure draft of the Shariah Rules was presented to the held in Mecca on 10-15 Ramadan 1420 No. (3) held in Mecca on 10-15 Ramadan 1420 Shariah Board in its meeting No. (3) Shariah Board in its meeting A.H., corresponding to 18-22 December 1999 A.D. The Shariah Board made further amendments to the exposure draft of the Shariah Rules and decided that it should be distributed to specialists and interested parties in order to obtain their comments in order to discuss them in a public hearing. A public hearing was held in Bahrain on 2930 Dhul-Hajjah 1421 A.H., corresponding to 4-5 April 2000 A.D. The public hearing was attended by more than 30 participants representing central Institutions, accounting firms, Shariah scholars, academics and others who are interested in this field. The members responded to the written comments that were sent prior 253253 Shariah Standard No. (9): Ijarah and Ijarah Muntahia Bittamleek to the public hearing as well as to the oral comments that were expressed to the public hearing as well as to the oral comments that were expressed in the public hearing. The Shariah Standards Committee and the Fatwa and Arbitration Com- mittee held a joint meeting on 21-23 Muharram 1421 A.H., corresponding to 26-28 April 2000 A.D., to discuss the comments made about the Shariah Rules. The committee made the amendments which it considered necessary in light of the discussions that took place in the public hearing. The Shariah Board in its meeting No. (4) held on 2527 Safar 1421 A.H. corresponding to 2931 May 2000 A.D., in Al-Madinah Al-Munawwarah discussed the amendments made by the Shariah Studies Committee and the Fatwa and Arbitration Committee, and made the amendments which it considered necessary. Some paragraphs of the standard were adopted in the name of Shariah Rules for Ijarah and Ijarah Muntahia Bittamleek by the unanimous vote of the members of the Shariah Board, while the other paragraphs were adopted by the majority vote of the members, as recorded in the minutes of the Shariah Board. In its meeting No. (7) held on 9-13 Ramadan 1422 A.H. corresponding to 24-28 November 2001 A.D., in Makkah Al-Mukarramah, the Shariah Board decided to convert all Shariah rules for Investments and Financing to Standards and a committee was formed for this purpose. In its meeting No. (8) held in Al-Madinah Al-Munawwarah on 28 Safar

4 Rabi I, 1423 A.H. corresponding to 11-16 May 2002 A.D., the Shariah Board adopted the reformatting of Shariah Rules for Ijarah and Ijarah Muntahia Bittamleek in the name of Shariah Standard No. (9) on Ijarah and Ijarah Muntahia Bittamleek. The committee did not make any changes to the substance. The Shariah Standards Review Committee reviewed the standard in its meeting held in Rabi II, 1433 A.H. corresponding to March 2012 A.D., in the State of Qatar, and proposed after deliberation a set of amendments (additions, deletions, and rephrasing) as deemed necessary, and then submitted the proposed amendments to the Shariah Board for approval as it deemed necessary. 254254 Shariah Standard No. (9): Ijarah and Ijarah Muntahia Bittamleek In its meeting No. (39) held in the Kingdom of Bahrain on 13-15 Muharram 1435 A.H., corresponding to 6-8 November 2014 A.D., the Shariah Board discussed the proposed amendments submitted by the Shariah Standards Review Committee. After deliberation, the Shariah Board approved necessary amendments, and the standard was adopted in its current amended version. 255255 Shariah Standard No. (9): Ijarah and Ijarah Muntahia Bittamleek Appendix (B) The Shariah Basis for the Standard Permissibility of Ijarah and Ijarah Muntahia Bittamleek On the level of the Quran, Allah, the Almighty, says: Ijarah derives permissibility from the Quran, the Sunnah, consensus Ijarah derives permissibility from the Quran, the Sunnah, consensus of Fuqaha and Ijtihad (reasoning). On the level of the Quran, Allah, the Almighty, says: (said one of (said one of them O my father engage him on wages),(3)(3) and (if you had wished, and (if you had wished, them O my father engage him on wages) surely you could have exacted some recompense for it).(4)(4) surely you could have exacted some recompense for it) The authority for the permissibility of Ijarah in the Sunnah is the saying The authority for the permissibility of Ijarah in the Sunnah is the saying Whoever hired a worker must of the Prophet (peace be upon him): Whoever hired a worker must of the Prophet (peace be upon him): inform him of his wages,(5)(5) and his saying: inform him of his wages Give a worker his wages before and his saying: Give a worker his wages before his sweat (body odour) is dried.(6)(6) his sweat (body odour) is dried The permissibility of Ijarah also generated consensus among the legal The permissibility of Ijarah also generated consensus among the legal community. The Ijarah is also acceptable by reasoning because it is a convenient means for people to acquire right to use assets that they do not own since not all people may be able to own tangible assets. The Ijarah Muntahia Bittamleek, on the other hand, is not different in its The Ijarah Muntahia Bittamleek, on the other hand, is not different in its rules from an ordinary Ijarah, except that it is associated with a promise by the lessor to transfer ownership at the end of the Ijarah term. The of this form of Ijarah is confirmed by the resolution of permissibility of this form of Ijarah is confirmed by the resolution of permissibility International Islamic Fiqh Academy which explained the impermissible and the permissible forms of Ijarah Muntahia Bittamleek.(7)(7) and the permissible forms of Ijarah Muntahia Bittamleek. It must be noted that the permissible Ijarah Muntahia Bittamleek is It must be noted that the permissible Ijarah Muntahia Bittamleek is different from hire-purchase as commonly practised by the conventional [Al-Qasas (The Narrative): 26]. (3)(3) [Al-Qasas (The Narrative): 26]. [Al-Kahf (The Cave): 77]. (4)(4) [Al-Kahf (The Cave): 77]. This Hadith has been related by Ibn Majah in his Sunan (5)(5) This Hadith has been related by Ibn Majah in his Majam Al-Zawaid [4: 98]. Majam Al-Zawaid [4: 98]. This Hadith has been reported by Ibn Majah in his Sunan (6)(6) This Hadith has been reported by Ibn Majah in his [4: 98]. Majam Al-Zawaid [4: 98]. Al-Mujam Al-awsat Al-Mujam Resolution of the International Islamic Fiqh Academy No. 110 (4/12). (7)(7) Resolution of the International Islamic Fiqh Academy No. 110 (4/12). ; and Al-Haithami in Majam Al-Zawaid Al-awsat; and Al-Haithami in [2: 817]; and Al-Haythami in Sunan [2: 817]; and Al-Haythami in [2: 817]; and Al-Tabrani in Sunan [2: 817]; and Al-Tabrani in 256256 Shariah Standard No. (9): Ijarah and Ijarah Muntahia Bittamleek banks in the following respects. In hire-purchase, the terms and provisions of sale and leasing are applied to the subject matter at the same time, and subsequently the ownership of the subject matter is transferred to the lessee (buyer), once he pays the last instalment without the need for a separate contract for the transfer of ownership. In the permissible Ijarah Muntahia Bittamleek, on the other hand, the provisions governing Ijarah are applied to the leased asset until the end of the Ijarah term, after which the lessee obtains ownership of the asset in the manner explained in this Standard. It must be noted also that the Ijarah contract intended in this Standard It must be noted also that the Ijarah contract intended in this Standard is the lease of tangible assets (chattels or property), which is a contract period giving a legal title to legitimate and identified usufruct for a defined period giving a legal title to legitimate and identified usufruct for a defined of time in exchange for a legitimate and determined consideration. Promise to Lease an Asset The basis for allowing the Institution to demand payment of money by a party who has promised to take the property as lessee is the need to confirm the commitment of the promissor. This is because a binding promise has financial implications if the promissor retracts the promise. The request for payment of a commitment fee is to cater for financial damage that the Institution may have incurred as a result of the promissor taking back the promise or defaulting in payment. The unified Shariah Supervisory Board of Al Baraka issued a Fatwa in respect to (security deposit) Hamish Jiddiyyah (security deposit) of Al Baraka issued a Fatwa in respect to Hamish Jiddiyyah in Murabahah.(8)(8) This ruling is also applicable to Ijarah. This ruling is also applicable to Ijarah. in Murabahah. Acquisition of the Asset to be Leased, or Its Usufruct, by the Institution The basis for not allowing the leasing of an asset that is not owned by the The basis for not allowing the leasing of an asset that is not owned by the lessor is the Hadith that prohibits one from selling what he does not own,(9)(9) and Ijarah proper is a sale of usufruct. The basis for allowing the and Ijarah proper is a sale of usufruct. The basis for allowing the own, leasing back of an asset to the person from whom the asset was acquired is because such a transaction does not involve any Inah sale. The basis for not allowing a simultaneous combination of Ijarah and The basis for not allowing a simultaneous combination of Ijarah and sale is because making purchase contracts contingent upon leasing contracts is impermissible by an explicit text in the view of a number International Islamic Fiqh Academy Resolution No. 110 (4/12). (8)(8) International Islamic Fiqh Academy Resolution No. 110 (4/12). Fatwa of Unified Shariah Board of Al Baraka No. (9/10). (9)(9) Fatwa of Unified Shariah Board of Al Baraka No. (9/10). 257257 Shariah Standard No. (9): Ijarah and Ijarah Muntahia Bittamleek of jurists. This is prohibited by a well-known Hadith which prohibits (10) two sales in one sale.(10) two sales in one sale. The basis for the permissibility of sub-leasing when the lessor has The basis for the permissibility of sub-leasing when the lessor has allowed it is because the lessee has ownership of the usufruct by virtue of the Ijarah contract, in which case he is entitled to transfer such usufruct for consideration as he deems fit. The basis for impermissibility of sub- leasing when the lessor has not allowed it is because the ownership of usufruct by the lessee is limited in which case the lessee is obliged to consider any limitations on this ownership. The basis for the permissibility of leasing a property on the basis of The basis for the permissibility of leasing a property on the basis of specifications even if the lessor does not own it is that this will not lead to dispute, in which case it is similar to a Salam contract. However, in this case the lessor should not request advance payment of the rentals according to one of the views of the Shafiis and Hanbalis. The basis for preferring that the agent who purchases on behalf of the The basis for preferring that the agent who purchases on behalf of the Institution be someone other than the customer (lessee) is to avoid fictitious transactions and to demonstrate the genuine role of the Insti- tution in making the usufruct of the asset available to the lessee. Contract of Ijarah The basis for the binding nature of an Ijarah contract is because The basis for the binding nature of an Ijarah contract is because Ijarah Ijarah is one of the contracts for transferring ownership that depends on an exchange of counter-values. The Shariah principle is that these contracts are binding because of the Saying of Allah, the Almighty: (... (... contracts are binding because of the Saying of Allah, the Almighty: (11) The basis for allowing cancellation of Fulfil (your) obligations...).(11) Fulfil (your) obligations...) The basis for allowing cancellation of an Ijarah contract due to contingencies is because without the right to cancel the Ijarah contract the lessee would waste money by paying rent for unneeded usufruct due to an event of which he did not contribute to the occurrence. The basis for requiring a designated term for the lease is because without The basis for requiring a designated term for the lease is because without such a designated term there would be an uncertainty that might lead to dispute. The basis for allowing an Ijarah contract take effect based on The Hadith has been related by Abu Dawud in his Sunan (10) (10) The Hadith has been related by Abu Dawud in his The Hadith has been related by Ahmad, Al-Nasai and Al-Tirmidhi. Al-Tirmidhi (11) The Hadith has been related by Ahmad, Al-Nasai and Al-Tirmidhi. Al-Tirmidhi (11) [5: 248]. Nayl Al-Awtar [5: 248]. autheticated the Hadith: see, Nayl Al-Awtar autheticated the Hadith: see, [3: 283]. Sunan [3: 283]. 258258 Shariah Standard No. (9): Ijarah and Ijarah Muntahia Bittamleek future events is because Ijarah is, unlike a sale contract, a contract that involves time and for this it is relevant that it be contingent on future events. The basis for the permissibility of obtaining Arboun (Earnest Money) The basis for the permissibility of obtaining Arboun (Earnest Money) to secure performance is the practice of Umar Ibn Al-Khattab (may Allah be pleased with him) in the presence of some companions of the Prophet (peace be upon him). This practice is also permitted by Imam Ahmad. A resolution has been issued in connection with the permis- sibility of Arboun (Earnest Money) by the International Islamic Fiqh (12) Academy.(12) Academy. The basis for the impermissibility of re-leasing after the lease of the The basis for the impermissibility of re-leasing after the lease of the asset is that under the first contract, the usufruct of the asset no longer belongs to the owner, and a new contract may not be signed with another lessee before the contract with the first lessee is terminated. Hence, this form of Ijarah is not suitable as an investment instrument, because it constitutes an impermissible sale of the rent receivable pursuant to providing new lessees with an asset already leased out to the existing lessee. The form just described is different from the transfer, by the owner, of the ownership of the leased assets to an investor, so that the latter takes his place, wholly or partially, with regard to the ownership of all or some parts of the assets, as well as in the ownership of the usufruct of, and entitlement to his share of the rent from, those assets. Al Baraka Forum has issued a resolution disallowing multiple leases of (13) the same asset after the first Ijarah contract.(13) the same asset after the first Ijarah contract. The basis for allowing successive leases on the same specified usufruct of The basis for allowing successive leases on the same specified usufruct of a particular asset without specifying a particular period for a particular person is because the usufruct -in line with the term assigned to each party- can accommodate the parties. The justification for not allowing a specific term for each person is that each party will know the term to which he is entitled in his turn and because their applications are Baraka considered in order. This rule was supported by a resolution of Al Baraka considered in order. This rule was supported by a resolution of Al (14) Forum.(14) Forum. [Al-Maidah (The Table): 1]. (12) (12) [Al-Maidah (The Table): 1]. Resolution No. 72 (3/8) in respect of Arboun (Earnest Money). (13) Resolution No. 72 (3/8) in respect of Arboun (Earnest Money). (13) Resolution No. (13/4). (14) Resolution No. (13/4). (14) 259259 Shariah Standard No. (9): Ijarah and Ijarah Muntahia Bittamleek The basis for the requirement that incorporating co-lessees must take The basis for the requirement that incorporating co-lessees must take place before any sub-lease contract is signed is because sub-leasing the property means the sub-lessor no longer owns the usufruct, and thus he would be leasing out a benefit of the usufruct that he does not own, which is not permissible in Shariah as stated earlier. The jurists have considered a bankrupt lessor -a person who leases things he does not own- among those who must be restricted in using their property. Subject Matter of Ijarah The basis for the requirement that the leased asset must be capable of The basis for the requirement that the leased asset must be capable of being used while preserving the asset is that the subject of a lease is usufruct and not the asset, as leasing is not possible for things that perish by use. The basis for the requirement that benefit from Ijarah must be permissible is that leasing an asset that will be used in impermissible way makes the lessor an accomplice in doing evil and this is prohibited (Help you one another in as per the saying of Allah, the Almighty: (Help you one another in as per the saying of Allah, the Almighty: (15) Al-Birr and At-Taqwa (virtue, righteousness and piety)).(15) Al-Birr and At-Taqwa (virtue, righteousness and piety)) The basis for the impermissibility of stipulating a defect exclusion The basis for the impermissibility of stipulating a defect exclusion clause in respect to the leased asset is that such a condition defeats the purpose of the contract, which is exchange of usufruct for rentals. If the usufruct is partially or wholly impaired, the receipt of the rentals by the lessor becomes a form of unjust enrichment. The resolution of the International Islamic Fiqh Academy has declared that the lessor must accept responsibility for any destruction or impairment of the leased asset insofar as these events are not sustained as a result of misconduct (16) The Fatwa of the unified or negligence on the part of the lessee.(16) The Fatwa of the unified or negligence on the part of the lessee. Shariah Supervisory Board of Al Baraka states that the lessor is not (17) entitled to exclude his liability in respect of defects in the leased asset.(17) entitled to exclude his liability in respect of defects in the leased asset. The reason why the lessor may not stipulate that the lessee will undertake The reason why the lessor may not stipulate that the lessee will undertake the major maintenance of the leased asset is that this condition defeats the purpose of an Ijarah contract. Again, it is the duty of the lessor to ensure that the usufruct is intact, and this is not possible unless the asset is maintained and kept safe so that the lessor may be entitled Resolution No. (10/1). (15) (15) Resolution No. (10/1). [Al-Maidah (The Table): 2]. (16) [Al-Maidah (The Table): 2]. (16) International Islamic Fiqh Academy Resolution No. 13 (1/3). (17) International Islamic Fiqh Academy Resolution No. 13 (1/3). (17) 260260 Shariah Standard No. (9): Ijarah and Ijarah Muntahia Bittamleek to to the rentals in consideration for the usufruct. The unified Shariah the rentals in consideration for the usufruct. The unified Shariah (18) Supervisory Board of Al Baraka issued a fatwa supporting this.(18) Supervisory Board of Al Baraka issued a fatwa supporting this. The reason why insurance expenses must be borne by the lessor is that The reason why insurance expenses must be borne by the lessor is that the owner of the asset is responsible for insuring it, and the lessor is the owner. This is supported by the resolution issued by the International (19) Islamic Fiqh Academy.(19) Islamic Fiqh Academy. The basis for the permissibility of using a certain benchmark or price The basis for the permissibility of using a certain benchmark or price index to determine rentals of subsequent periods after the expiration of the first period of an Ijarah contract is that the rentals will subsequently be known. This is similar to the principle of Ujrat al- subsequently be known. This is similar to the principle of Ujrat al- MithlMithl (prevailing market rate of rental) and does not lead to dispute. (prevailing market rate of rental) and does not lead to dispute. Again, using a benchmark to determine the rentals is to the benefit of all parties since there is possibility of rental fluctuation that may be in favour of either the lessee or the lessor in view of the fact that the contract remains binding on both parties throughout its term. This rule is supported by a Fatwa issued during Al Barakas 11thth Forum. rule is supported by a Fatwa issued during Al Barakas 11 Forum. The basis for the permissibility of restructuring the rentals for the The basis for the permissibility of restructuring the rentals for the future periods is that such an act is deemed to create a new contract for a new term for which the rentals are not yet due. Hence, the rentals are not regarded as a debt, in which case the prohibition of rescheduling rentals in return for higher payment is not applicable to this. However, increasing previously agreed rentals in exchange for a deferred period of payment is a form of Riba. Guarantees and Treatment of Ijarah Receivables The basis for the permissibility of obtaining guarantees for payment The basis for the permissibility of obtaining guarantees for payment is that this is not contrary to the purpose of an Ijarah contract. Rather guarantees are relevant to credit transactions because they secure per- formance. The basis for the permissibility of a payment acceleration clause is the The basis for the permissibility of a payment acceleration clause is the saying of the Prophet (peace be upon him): Muslims are bound by the saying of the Prophet (peace be upon him): Muslims are bound by the , and because payment on a deferred basis is the conditions they made, and because payment on a deferred basis is the conditions they made right of the lessee (the debtor as to rentals), and the lessee may, based Fatwa of the Unified Shariah Board of Al Baraka No. (1/97). (18) Fatwa of the Unified Shariah Board of Al Baraka No. (1/97). (18) Fatwa of the Unified Shariah Board of Al Baraka No (9/9). (19) Fatwa of the Unified Shariah Board of Al Baraka No (9/9). (19) 261261 Shariah Standard No. (9): Ijarah and Ijarah Muntahia Bittamleek on agreement, choose to pay before time and relinquish the deferral of the date of payment entirely. The lessee may also agree to a stipulation that bases acceleration of payment on the event of default in payment. The basis of the prohibition of increasing the amount of lease receivables The basis of the prohibition of increasing the amount of lease receivables in exchange for a deferral of payment is because this is a form of Riba. The basis for the permissibility of stipulating that a solvent debtor The basis for the permissibility of stipulating that a solvent debtor should undertake to make a payment to charity in case of default is that this is similar to an undertaking to make a donation that is approved by the Maliki scholars, notably Abdullah Ibn Nafi and Muhammad Ibn (20) Ibrahim Ibn Dinar.(20) Ibrahim Ibn Dinar. Changes to the Ijarah Contract The basis for allowing the lessor to sell the leased asset to a third party The basis for allowing the lessor to sell the leased asset to a third party without the consent of the lessee is that the lessor owns the asset and is acting within the limits of his ownership without affecting the right of the lessee that is materialised in the usufruct. If the Ijarah expires, enabling the buyer to take possession of the asset is sufficient to discharge the seller from any responsibility as to delivery in which case the buyer will own the asset excluding the right of the lessee to the usufruct which is attached to the asset even if the ownership is transferred. The Shariah (21) and Supervisory Board of Al Rajhi Banking and Investment Corp.,(21) Supervisory Board of Al Rajhi Banking and Investment Corp., and (22) have issued Shariah Supervisory Board of the Jordan Islamic Bank(22) have issued the Shariah Supervisory Board of the Jordan Islamic Bank the a a resolution in support of this ruling. resolution in support of this ruling. The basis for the termination of the lease contract due to a total destruc- The basis for the termination of the lease contract due to a total destruc- tion of the leased asset is that the rent is in consideration of the benefit of the leased asset and if the latter is destroyed, there is no justification for the payment of the rental. The basis for the entitlement of the lessor to the rentals even though The basis for the entitlement of the lessor to the rentals even though the lessee returns the leased asset to the owner or stops using it is that Ijarah is a binding contract that cannot be terminated unilaterally by the lessee. (20) International Islamic Fiqh Academy Resolution No. 13 (1/3). (20) International Islamic Fiqh Academy Resolution No. 13 (1/3). See: Al-Hattab, Tahrir Al-Kalam Fi Masail Al-Iltizam (21) See: Al-Hattab, (21) in the Fatwas of Kuwait Finance House. Resolution of the Shariah Board of Al Rajhi Banking and Investment Corp. No. (11). (22) Resolution of the Shariah Board of Al Rajhi Banking and Investment Corp. No. (11). (22) (pp. 170). This view appeared Tahrir Al-Kalam Fi Masail Al-Iltizam (pp. 170). This view appeared 262262 Shariah Standard No. (9): Ijarah and Ijarah Muntahia Bittamleek The basis for the The basis for the permissibility of terminating the lease contract in case permissibility of terminating the lease contract in case of intervening contingencies or force majeure is that there is a pressing need which calls for this. This is because if the contract were to be bin- ding in spite of such contingencies, then a person with a valid excuse may incur loss that was not a result of a contract. The Shariah Super- (23) and the unified Shariah visory Board of the Kuwait Finance House(23) visory Board of the Kuwait Finance House and the unified Shariah (24) have issued a supporting Fatwa in Supervisory Board of Al Baraka(24) Supervisory Board of Al Baraka have issued a supporting Fatwa in this regard. The basis for the permissibility that the lessor may stipulate that an The basis for the permissibility that the lessor may stipulate that an Ijarah contract be terminated due to non-payment of rental by the lessee is that contractual stipulations are primarily valid and enforceable. This stipulation does not legalise impermissible acts or invalidate permissible permissibility of this stipulation comes under the acts. Therefore, the of this stipulation comes under the acts. Therefore, the permissibility prophetic Hadith stating: Muslims are bound by the conditions they prophetic Hadith stating: Muslims are bound by the conditions they made except a condition that legalises impermissible act or invalidates (25) permissible act.(25) permissible act The basis of the rule that Ijarah does not terminate with the death of The basis of the rule that Ijarah does not terminate with the death of either party thereto is that the subject-matter of the contract is the asset and as long as the asset is available the Ijarah contract remains unaffected. The basis for the right of the lessees heirs to terminate the Ijarah if they can prove that the contract has become too onerous for their resources is to avoid inflicting damage on the heirs. This exceptional ruling is taken from the Maliki School of law since it serves the interests of the lessee. The heirs of the lessor may not terminate the Ijarah in the event of the death of the lessor because there is no potential damage to them, as they will receive the rentals for the remainder of the term of the contract. Transfer of the Ownership in the Leased Asset in Ijarah Muntahia Bittamleek The basis of the rule that the documents of the lessors promise to The basis of the rule that the documents of the lessors promise to sell and the methods of transfer of ownership be separated from the Ijarah contract is to ensure that the obligations and liabilities are not Fatwas of the Shariah Board of Jordan Islamic Bank No. (18). (23) (23) Fatwas of the Shariah Board of Jordan Islamic Bank No. (18). Fatwa No. (233) and (253). (24) Fatwa No. (233) and (253). (24) Fatwa No. (9/9) of the Unified Shariah Board. (25) Fatwa No. (9/9) of the Unified Shariah Board. (25) 263263 Shariah Standard No. (9): Ijarah and Ijarah Muntahia Bittamleek linked to each other. The International Islamic Fiqh Academy has (26) issued a resolution in this regard.(26) issued a resolution in this regard. The basis for the rule that the promise of a client to take an asset The basis for the rule that the promise of a client to take an asset acquired by the Institution on lease is binding is that the Institution has acquired the asset in order to lease it to the client due to the promise. Therefore, the rule that the promise to take the asset on lease is binding will protect the promisee. The basis for not allowing bilateral promises is that the resemblance The basis for not allowing bilateral promises is that the resemblance of these promises to a contract, i.e. a contract is effected before taking ownership of the subject matter of the contract. The International (27) Islamic Fiqh Academy has issued a resolution in this regard.(27) Islamic Fiqh Academy has issued a resolution in this regard. The basis for the permissibility of a gift contingent upon the expiry of The basis for the permissibility of a gift contingent upon the expiry of the Ijarah term is that a conditional gift is valid. The Prophet (peace be upon him) sent a gift to Negus (the former emperor of Ethiopia) on (28) condition that he was alive at the time of the arrival of the messenger.(28) condition that he was alive at the time of the arrival of the messenger. The basis for the permissibility of leasing an asset to the person from whom it is purchased by way of Ijarah Muntahia Bittamleek on condition that the parties observe the lapse of a period of time is that this prevents the contract from becoming a Inah transaction. This is because the physical changes to the asset or changes in the value of the asset during this period give it the economic characteristics of a different asset. The basis for the requirement that all the rules prescribed for an ordinary The basis for the requirement that all the rules prescribed for an ordinary lease are applicable to Ijarah Muntahia Bittamleek is that a mere promise to transfer ownership does exclude the contract from becoming an Ijarah contract or from the applicable rules. This requirement is necessary in order to prevent a linking of contracts (the sale contract and lease Sunan [1: 312]; Ibn Majah in his [1: 312]; Ibn Majah in his Sunan Mustarak, Edition of Hyderabad, India, 1355 A.H.; Al-Bayhaqi in his This Hadith has been related by a number of companions. It was also related by Ahmad (26) This Hadith has been related by a number of companions. It was also related by Ahmad (26) in his through a good chain of transmission Sunan through a good chain of transmission in his Sunan [2: 783], Mustafa Al-Babi Al-Halabi edition, Cairo, 1372 A.H./1952 A.D.; Al-Hakim in Sunan , Edition of Hyderabad, India, 1355 A.H.; Al-Bayhaqi in his Sunan in Mustarak [6: 70 and 156] and [1: 133], Edition of Hyderabad, India, 1355H; and Al-Daraqutni in his [4: 228] and [3: 77], Dar Al-Mahasin Lil-Tibaah edition, Cairo, 1372 Sunan [4: 228] and [3: 77], Dar Al-Mahasin Lil-Tibaah edition, Cairo, 1372 in his Sunan A.H./1952 A.D. Intenatioanl Islamic fiqh Academy Resolution No. 13 (1/3). (27) (27) Intenatioanl Islamic fiqh Academy Resolution No. 13 (1/3). The Hadith has been related by Ibn Hibban: Sahih Ibn Hibban (28) The Hadith has been related by Ibn Hibban: (28) Ahmad in his Musnad Ahmad in his [11: 516]; and Sahih Ibn Hibban [11: 516]; and [6: 404]. Musnad [6: 404]. 264264 Shariah Standard No. (9): Ijarah and Ijarah Muntahia Bittamleek contract). The International Islamic Fiqh Academy has issued a resolution (29) in support of this ruling.(29) in support of this ruling. The basis for the rule that ownership cannot be made in contingent The basis for the rule that ownership cannot be made in contingent on a future date is that a sale contract cannot be dependent on a future date, as the term sale means that its effect (transfer of ownership) immediately takes place. The basis for allowing recourse to the prevailing market rate of rental The basis for allowing recourse to the prevailing market rate of rental when the transfer of ownership becomes impossible without any cause attributable to the lessee is to protect the lessee against any loss as the lessee has paid more than the prevailing rate of rental in order to acquire title to the asset. If this acquisition of title becomes impossible, then the rental must be adjusted retrospectively to the prevailing market rate. This ruling is analogous to the principle that the price must be discounted when a sold crop has suffered damages due natural calamities. See Note (25). (29) See Note (25). (29) 265265 Shariah Standard No. (9): Ijarah and Ijarah Muntahia Bittamleek Appendix (C) Definitions Ijarah The term Ijarah as used in this standard means leasing of property pursuant to a contract under which a specified permissible benefit in the pursuant to a contract under which a specified permissible benefit in the form of a usufruct is obtained for a specified period in return for a specified permissible consideration. Ijarah Muntahia Bittamleek One of the forms of Ijarah used by Islamic financial Institutions is Ijarah is Ijarah One of the forms of Ijarah used by Islamic financial Institutions Muntahia Bittamleek. This is a form of leasing contract which includes a promise by the lessor to transfer the ownership in the leased property to the lessee, either at the end of the term of the Ijarah period or by stages during the term of the contract, such transfer of the ownership being executed through one of the means specified in the Standard. 266266 Shariah Standard No. (10) Salam and Parallel Salam (Revised Standard) Contents Subject ................................................................................................... Preface ................................................................................................... Preface ..................................................................... Statement of the Standard ..................................................................... Statement of the Standard ..............................................................................

Scope of the Standard ..............................................................................
Scope of the Standard .....................................................................................
Contract of Salam .....................................................................................
Contract of Salam
1. Subject Matter of Salam ........................................................................... Subject Matter of Salam ........................................................................... .....................................................................
Changes to al-Muslam Fihi .....................................................................
Changes to al-Muslam Fihi .....................................................................
Delivery of al-Muslam Fihi .....................................................................
Delivery of al-Muslam Fihi ............................................................................................
Parallel Salam ............................................................................................
Parallel Salam
Salam Sukuk Issues.................................................................................. Date of Issuance of the Standard .......................................................
1. Date of Issuance of the Standard ....................................................... ...................................................................... Adoption of the Standard ...................................................................... Adoption of the Standard Appendices Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (b): TheThe Shariah Basis for the Standard..................................... Appendix (b): Shariah Basis for the Standard..................................... Appendix (c): Definitions.............................................................................. Appendix (c): Definitions.............................................................................. PagePage 271271 272272 273273 276276 278278 279279 280280 281281 284284 289289 269269 IN THE NAME OF ALLAH, THE ALL-MERCIFUL, THE MOST MERCIFUL All praise be to Allah, the Lord of all the worlds, and blessings and peace be upon our master, Muhammad, and his household and all his companions Preface The aim of the standard is to explain the rules for and limitations of Salam and Parallel Salam in respect to concluding a Salam contract, the subject matter of Salam and changes to the contract, whether in the event of ability to deliver or otherwise. The standard also explains rulings in respect to issuing Salam Sukuk. 271271 Shariah Standard No. (10): Salam and Parallel Salam Statement of the Standard
Scope of the Standard This standard covers Salam and Parallel Salam transactions, whether the Institution is the buyer or the seller, and issuing Salam Sukuk. This standard does not cover Istisnaa (manufacturing or supplier contract) because the latter is covered by a separate standard.
Contract of Salam 2/1 General framework for Salam contracts 2/1/1 It is permissible to initiate through negotiations several Salam contracts (with different parties). Each operation will end at its due date. It is also permissible to draw up a general framework or a master agreement that consists of an understanding to conclude successive Salam contracts, each of which will take place at an appropriate time. In this latter case, the transaction involved shall be concluded on the basis of a memorandum of understanding in which the contracting parties determine the framework of the contract and the intention of the parties to buy and sell. The parties shall also determine the quantity and specifications of the goods, the manner of their delivery, the basis for determining the price, and the manner of payment. The types of guarantees and other prospective arrangements shall also be specified in the memorandum. The execution of each Salam contract may then take place separately at the appropriate date. 2/1/2 If the Salam contract is concluded on the basis of what was initially agreed in the memorandum of understanding, the contents of the memorandum become part and parcel of the when the contract. This will hold true unless the parties agreed when the contract. This will hold true unless the parties agreed 272272 Shariah Standard No. (10): Salam and Parallel Salam contract was concluded to exempt themselves from some of the obligations referred to in the memorandum of understanding. 2/2 Form of a Salam contract A contract of Salam may be concluded using the word Salam, or Salaf, or sale, or any term that indicates sale of a prescribed commodity for deferred delivery in exchange for immediate payment of the price.
Subject Matter of Salam 3/1 Capital of Salam contract and its conditions 3/1/1 It is permissible for the capital of Salam to be in the form of fungible goods (such as wheat and other cereals) in which case the parties must make sure that they do not fall into Riba. The capital may also be items of material value (such as livestock). It is also permissible for it to be in the form of the general usufruct of a particular asset, such as living in a house or having the use of an aircraft or a ship for a certain period. In such a case, when a party is granted access to the usufruct through delivery of the asset, this is regarded as immediate receipt (possession) of the Salam capital. 3/1/2 The capital of Salam should be made known to the two parties in a manner that removes all uncertainty and eliminates the possibility of dispute. In principle, the capital of Salam should be in the form of cash. In this case, the currency of payment, the amount and the manner of payment shall be clearly defined. If the capital of Salam is in the form of fungibles,(1)(1) then the If the capital of Salam is in the form of fungibles, then the kind, type, specifications and quantity of these shall be clearly defined. 3/1/3 The capital in a Salam contract must be paid immediately at the exception place where the contract is concluded. However, as an exception place where the contract is concluded. However, as an to this ruling, payment may be delayed for two or three days at (1)(1) Fungibles are goods that share common features such that they do not differ significantly. Fungibles are goods that share common features such that they do not differ significantly. Any fungibles can be replaced by any other in the event of destruction, without need to assess the value of the item destroyed or the one replacing it. 273273 Shariah Standard No. (10): Salam and Parallel Salam most. Even if such a short delay has been stipulated earlier, this will not affect the Salam contract provided that the period of delay is not equal to or greater than the delivery period for al- Muslam Fihi. 3/1/4 It is not permitted that a debt be recognised as the capital of Salam, such as using as the capital of Salam loans or debts owed by the seller to the Institution as a result of previous transactions. 3/2 Al-Muslam Fihi and its conditions 3/2/1 Salam contracts are permitted for fungible goods, like those that may be weighed, measured or counted, the articles of which do not differ in any significant manner, provided that no Riba ensues. 3/2/2 Among the items for which variations in numbers make no difference are the products of companies that manufacture goods in approximate units that are identified by trademarks, standardised specifications and are regularly and commonly available at any time. However, this rule must be read together with item 3/2/8. 3/2/3 Salam is not permitted for anything specific like this car. Nor is it permitted for anything for which the seller may not be held responsible, like land, buildings or trees; or for articles whose values change according to subjective assessment, like jewellery and antiques. Also, it is not permissible to stipulate that al-Muslam Fihi must be from a specific piece of land. However, on the delivery date the seller may present the buyer with whatever items are available (and meet the contract specifications), irrespective of whether such items are from his own fields or factories or elsewhere. 3/2/4 It is not permissible for al-Muslam Fihi to be an amount of currency, gold or silver, if the capital of the Salam contract was paid in the form of currency, gold or silver. 274274 Shariah Standard No. (10): Salam and Parallel Salam 3/2/5 Al-Muslam Fihi must be the kind of article for which a specification may be drawn up so that the seller may be held responsible for its conformity to the specification. It will be sufficient if the specification is explained in a manner that removes uncertainty, except for minor discrepancies that are customarily ignored, considered acceptable, and not usually regarded as grounds for dispute. 3/2/6 It is a requirement that al-Muslam Fihi be clearly known to the contracting parties in a manner that eliminates any possibility of uncertainty or ambiguity. The reference for determining descriptions that are used to specify and identify al-Muslam Fihi is customary practice and the experience of experts. 3/2/7 It is a requirement that the parties know the quantity of al-Mus- lam Fihi. The quantity of each item is determined according to its condition and nature with regard to weight, measurement, volume and number. 3/2/8 It is a requirement that al-Muslam Fihi be commonly available under normal circumstances at the place where it should be on the delivery date, so that the commodity will be accessible to the seller in order to discharge his obligation by delivering it to the buyer. 3/2/9 It is a requirement that the date of delivery for al-Muslam Fihi be known in a manner that eliminates any uncertainty or ambiguity which may lead to a dispute. There is no Shariah objection to the contracting parties setting various dates objection to the contracting parties setting various dates on on which the delivery of al-Muslam Fihi may take place, in instalments, provided the capital of Salam was paid at the time the contract was originally concluded. 3/2/10 In principle, the parties may designate the place at which al- Muslam Fihi is to be delivered. If the parties to the contract do not determine the place of delivery, then the place at which the contract was concluded will be regarded as the place of delivery unless it turns out to be impossible to make delivery 275275 Shariah Standard No. (10): Salam and Parallel Salam to such a place. In that case, the place of delivery should be determined according to customary practice. 3/3 Security for al-Muslam Fihi Al-Muslam Fihi may be secured by a mortgagee or a guarantee or any other permissible means of securing payment.
Changes to al-Muslam Fihi 4/1 Selling al-Muslam Fihi before taking possession It is not permitted for the buyer to sell al-Muslam Fihi before taking possession of it. 4/2 Replacement of al-Muslam Fihi It is permissible for the buyer to exchange al-Muslam Fihi for other goods, except currency, after the delivery date falls due, as long as such goods, except currency, after the delivery date falls due, as long as such a substitution was not stipulated in the contract. This rule applies whether or not the substitute is similar in kind to al-Muslam Fihi. This is provided that the substitute is suitable for being exchanged as al-Muslam Fihi for the capital of the Salam contract, and that the market value of the substitute should not be greater than the market value of al-Muslam Fihi at the time of delivery. 4/3 Cancellation (Iqalah) of a Salam contract of a Salam contract 4/3 Cancellation (Iqalah) It is permissible, when both parties agree, to cancel the entire Salam contract in return for repayment in full of the amount of the capital of Salam. Partial cancellation, that is, cancellation of the delivery of part of al-Muslam Fihi, in return for repayment of a corresponding part of the capital of Salam, is also permissible.
Delivery of al-Muslam Fihi 5/1 The seller is under an obligation to deliver al-Muslam Fihi to the buyer on the due date in accordance with the terms of the contract, such as agreed specifications and quantity. The buyer, on the other hand, must accept the goods if they meet the specifications explained in the contract. If the buyer refuses to accept al-Muslam Fihi, he shall be compelled to do so. 276276 Shariah Standard No. (10): Salam and Parallel Salam 5/2 If the seller offers delivered goods of a quality that is superior to that required by the contractual specifications, the buyer must accept the goods, provided that the seller shall not seek a higher price for the better quality. This may be considered one of the ways in which a contract is ethically fulfilled. However, this will apply only if the (inferior) description specified in the contract is not itself deemed vital. 5/3 If the quality of the delivered goods is inferior to that required by the contractual specifications, the buyer is entitled either to reject or to accept the goods in that condition. If he accepts the goods, his action is considered as ethical acceptance. It is also permissible for the two parties to agree to a settlement on terms for acceptance of the goods even at a discounted price. 5/4 It is not permitted for a seller to deliver al-Muslam Fihi in the form of a commodity different from the one agreed upon if the commodity is considered to belong to the same genus as al-Muslam Fihi (e.g., al-Muslam Fihi is corn and the commodity that the seller wants to deliver is wheat). However, the delivery of al-Muslam Fihi in the form of a different type of commodity from that agreed upon may take place only on the basis of the conditions for the replacement of al-Muslam Fihi by other goods. [see item 4/2] 5/5 Delivery of al-Muslam Fihi may take place before the due date, on condition that the goods conform to the agreed specifications and quantities. If the buyer has a valid reason for rejecting the goods, then he will not be compelled to accept them. Otherwise, the buyer will be forced to accept the goods. 5/6 If the seller fails to perform his obligation, owing to insolvency, he should be granted an extension of time for delivery. 5/7 It is not permitted to stipulate a penalty clause in respect of delay in the delivery of al-Muslam Fihi. 5/8 In case all or part of al-Muslam Fihi is not available to the seller on the due date, the buyer shall have the following options: 277277 Shariah Standard No. (10): Salam and Parallel Salam 5/8/1 To wait until al-Muslam Fihi is available. 5/8/2 To cancel the contract and recover the paid capital. It is also permissible for the parties to agree to replacement of al-Muslam Fihi by other goods. [see item 4/2]
Parallel Salam 6/1 It is permissible for the seller to enter into a separate, independent Salam contract with a third party in order to acquire goods of a similar specification to those specified in the first Salam contract, so that the first Salam obligation will be discharged by delivering these goods. Hence, the seller in the first Salam contract becomes the buyer in the second Salam contract. 6/2 It is permissible for the buyer to conclude a separate parallel Salam with a third party for the purpose of selling, on the basis of Salam, a commodity whose description corresponds to the description of the commodity to be acquired through the first Salam contract. In this situation, the buyer in the first Salam contract becomes the seller in the second Salam contract. 6/3 In both the two situations mentioned in items 6/1 and 6/2, it is not not 6/3 In both the two situations mentioned in items 6/1 and 6/2, it is permissible for the parties to link the obligations under the two Salam contracts together so that the execution of the obligations of one contract is contingent on the outcome of the other. Hence, it is necessary that both the obligations and the rights under the two contracts stand alone in all respects. Therefore, if one party breaches his obligation under the first Salam contract, the other party (the injured party) has no right to relate this damage or loss to the party with whom he concluded a Parallel Salam. Consequently, he has no right on the basis of his loss or damage under the first Salam contract to terminate the second Salam contract or to delay in performing it. 6/4 All the rules of Salam as explained in items 1-5 above are applicable to Parallel Salam as well. 278278 Shariah Standard No. (10): Salam and Parallel Salam
Salam Sukuk Issues It is not permitted to issue tradable Sukuk based on the debt from a Salam contract. [see item (4/1)]
Date of Issuance of the Standard This Shariah Standard was issued on 29 Safar 1422 A.H., corresponding to 23 May 2001 A.D. 279279 Shariah Standard No. (10): Salam and Parallel Salam Adoption of the Standard The Shariah Standard on Salam and Parallel Salam was adopted by the Shariah Board in its meeting No. (6) held on 25-29 Safar 1422 A.H., corresponding to 19-23 May 2001 A.D. In its meeting No. (8) held in Mecca on 28 Safar - 4 Rabi I 1423 A.H., corresponding to 11-16 May 2002 A.D., the Shariah Board readopted a resolution to reformat the Shariah Rules for Salam and Parallel Salam in the form of a Shariah Standard. 280280 Shariah Standard No. (10): Salam and Parallel Salam Appendix (A) Brief History of the Preparation of the Standard In its meeting No. (5) held in Makkah Al-Mukarramah on 8-12 Ramadan 1421 A.H., corresponding to 4-8 December 2001 A.D., the Shariah Board decided to give priority to the preparation of the a Shariah rules for Salam and Parallel Salam. On Monday 11 Shawwal 1420 A.H., corresponding to 17 January 2000 A.D., the Fatwa and Arbitration Committee decided to commission a Shariah consultant to prepare a juristic study and an exposure draft on the Shariah Rules for Salam and Parallel Salam. In its meeting held in Bahrain on 21-23 Muharram 1421 A.H., corre- sponding to 26-28 April 2000 A.D., the Fatwa and Arbitration Committee discussed the exposure draft of the Shariah rules for Salam and Parallel Salam and asked the consultant to make the amendments in light of the comments made by the members. In its meeting No. (4) held in Abu Dhabi, United Arab Emirates, on 14 Shaban 1421 A.H., corresponding to 10 November 2000 A.D., the Fatwa and Arbitration Committee discussed the exposure draft and made some relevant amendments. The revised exposure draft of the Shariah rules was presented to the Shariah Board in its meeting No. (5) held in Makkah Al-Mukarramah on 8-12 Ramadan 1421 A.H., corresponding to 4-8 December 2000 A.D. The Shariah Board made further amendments to the exposure draft of the standard and decided that it should be distributed to specialists and interested parties in order to obtain their comments to discuss them in a public hearing. 281281 Shariah Standard No. (10): Salam and Parallel Salam A public hearing was held in Bahrain on 4-5 Dhul-Hajjah 1421 A.H., corresponding to 27-28 February 2001 A.D. The public hearing was attend- ed by more than 30 participants representing central banks, institutions, accounting firms, Shariah scholars, academics and others interested in this field. Members of the Shariah Studies Committee responded to the written comments that were sent prior to the public hearing as well as to the oral comments that were expressed in the public hearing. The Fatwa and Arbitration Committee held its meeting No. (5) in Bahrain on 15 Dhul-Hajjah 1421 A.H., corresponding to 10 March 2001 A.D., to discuss the comments made about the exposure draft. The committee made the necessary amendments in light of both the written comments that were received and oral comments that took place in the public hearing. The Shariah Board in its meeting No. (6) held in Al-Madinah Al-Mun- awwarah on 25-29 Safar 1422 A.H., corresponding to 19-23 May 2001 A.D., discussed the amendments made by the Fatwa and Arbitration Committee, and made the necessary amendments. The standard was adopted in the name of Shariah rules for Salam and Parallel Salam. Some paragraphs were adopted by the unanimous vote of the members of the Shariah Board while the other paragraphs were adopted by the majority vote of the members, as recorded in the minutes of the Shariah Board. The Shariah Board decided in its meeting No. (7) The Shariah Board decided in its meeting held in Makkah Al- No. (7) held in Makkah Al- Mukarramah on 9-13 Ramadan 1422 A.H., corresponding 24-28 November 2001 A.D., to reformat all Shariah rules in a form of standards and a committee was formed for this purpose. In its meeting No. (8) held in Al-Madinah Al-Munawwarah on 28 Safar

4 Rabi I, 1423 A.H., corresponding to 11-16 May 2002 A.D., the Shariah Board adopted the reformatted version of the Shariah rules for Investment and Financing No. (3) on Salam and Parallel Salam with the title of Shariah Standard No. (9) on Salam and Parallel Salam, without any substantial changes in the content. The Shariah Standards Review Committee reviewed the standard in its meeting held in Rabi II, 1433 A.H., corresponding to March 2012 A.D., 282282 Shariah Standard No. (10): Salam and Parallel Salam in the State of Qatar, and proposed after deliberation a set of amendments (additions, deletions, and rephrasing) as deemed necessary, and then submitted the proposed amendments to the Shariah Board for approval as submitted the proposed amendments to the Shariah Board for approval as it deemed necessary. In its meeting No. (39) held in the Kingdom of Bahrain on 13-15 Muharram 1435 A.H., corresponding to 6-8 November 2014 A.D., the Shariah Board discussed the proposed amendments submitted by the Shariah Standards Review Committee. After deliberation, the Shariah Board approved necessary amendments, and the standard was adopted in its current amended version. 283283 Shariah Standard No. (10): Salam and Parallel Salam Appendix (B) The Shariah Basis for the Standard Permissibility of Salam A contract of Salam derives its permissibility from the Quran, the consensus of Fuqaha). On the level of the Quran, Sunnah and Ijma ( ). On the level of the Quran, Sunnah and Ijma (consensus of Fuqaha (O ye who believe! When you deal with each Allah, the Almighty, says: (O ye who believe! When you deal with each Allah, the Almighty, says: other, in transactions involving future obligations in a fixed period time, reduce them to writing).(2)(2) Ibn Abbas said: I declare that a Salaf (Salam) reduce them to writing) Ibn Abbas said: I declare that a Salaf (Salam) contract in which the commodity is guaranteed for future delivery has (O ye who believe! When been permitted by Allah and then he read: (O ye who believe! When been permitted by Allah and then he read: you deal with each other, in transactions involving future obligations in a fixed period time, reduce them to writing) in a fixed period time, reduce them to writing). It is reported that . It is reported that Ibn Abbas said: This verse is a revelation for the particular purpose of making Salam permissible.(3)(3) making Salam permissible. On the level of Sunnah, Ibn Abbas is reported to have said: The The On the level of Sunnah, Ibn Abbas is reported to have said: Prophet (peace be upon him) has came to Medina and found that people were selling dates for deferred delivery after a duration of one or two years on a Salam basis. The Prophet (peace be upon him) said: Whoever pays for dates on a deferred delivery basis (Salam) should do so on the basis of . In another text of the Hadith the Prophet a specified scale and weight. In another text of the Hadith the Prophet a specified scale and weight (peace be upon him) said: Whoever pays on a deferred delivery basis (peace be upon him) said: Whoever pays on a deferred delivery basis should do so on the basis of a specified scale, weight and date of delivery.(4)(4) should do so on the basis of a specified scale, weight and date of delivery The scholars are unanimous on the permissibility of a Salam contract. Ibn Mundhir said that the scholars agreed that a Salam contract -i.e, a contract [Al-Baqarah (The Cow): 282]. (2)(2) [Al-Baqarah (The Cow): 282]. Zad Al-Masir Fi Ilm Al-Tafsir [1: 336]; and Ibn Kathir, See: Ibn Al-Jawzi, Zad Al-Masir Fi Ilm Al-Tafsir (3)(3) See: Ibn Al-Jawzi, Quran Al-Azim [1: 496]. Quran Al-Azim [1: 496]. The Hadith has been related by Al-Bukhari, Muslim and others. See: Sahih Al- (4)(4) The Hadith has been related by Al-Bukhari, Muslim and others. See: Sahih Al- [3: 1226], Sahih Muslim [3: 1226], [2: 781], Damascus: Dar Al-Qalam edition; and Sahih Muslim Bukhari [2: 781], Damascus: Dar Al-Qalam edition; and Bukhari Beirut: Dar Al-Fikr edition. Tafsir Al- [1: 336]; and Ibn Kathir, Tafsir Al- 284284 Shariah Standard No. (10): Salam and Parallel Salam in which a person sells to his fellow man a specific and determined thing by weight or measure for a future defined date of deliveryis permissible.(5)(5) weight or measure for a future defined date of deliveryis permissible. Wisdom of Making Salam Permissible The wisdom of making Salam permissible lies in the fact that Salam facilitates a type of financing for people in need of it. In particular, farmers, market gardeners and merchants, among others, need working capital for their businesses and for their living expenses in order to operate. Hence, Salam is made permissible so that these businesses may benefit from it. The buyer may benefit from its permissibility as well, by acquiring the commodity at a price below the market price. Similarly, a contract of Salam responds to the needs of a large number of business enterprises at different levels, ranging from small and medium- sized enterprises to conglomerates that are involved in agricultural and industrial production or trade and the like. In order for these businesses to be productive, they need working capital in the form of either cash or assets. Hence, Salam has provided an investment opportunity in the form of financing of the working capital for trade. It also covers the demands of those in need of liquidity, as long as they are able to fulfill the orders they receive in return at the due date. Although the contract of Salam is commonly used by agricultural busi- nesses, its permissibility is not, however, confined to these fields. It can also be used in other investment opportunities, such as industry or trade. The contract of Salam also meets immediate needs for liquidity. This is because it gives the seller flexibility in using the sale proceeds (before the commodity is delivered), and the opportunity to arrange for the counter- value (al-Muslam Fihi) and its delivery to the buyer at the date of delivery. Subject Matter of a Salam Contract The basis for the permissibility of presenting usufruct as capital in The basis for the permissibility of presenting usufruct as capital in a Salam contract is the view of the Maliki scholars. This is regarded as immediate receipt of the capital based on the Shariah maxim that says: (5)(5) Ibn Al-Mundhir, Ibn Al-Mundhir, Al-Ijma Matbaat Hajar edition. Al-Ijma (P. 54); and Ibn Qudamah; (P. 54); and Ibn Qudamah; Al-Mughni [6: 385], Cairo: Al-Mughni [6: 385], Cairo: 285285 Shariah Standard No. (10): Salam and Parallel Salam Taking possession of part of a thing is like taking possession of the whole thing.(6)(6) Hence, this is not a sale of debt (because the buyer has Hence, this is not a sale of debt (because the buyer has whole thing. received control over the usufruct).(7)(7) received control over the usufruct). The basis for the requirement that the capital of Salam must be known The basis for the requirement that the capital of Salam must be known contracts to the two parties is that a Salam contract is one of the exchange contracts to the two parties is that a Salam contract is one of the exchange in which the consideration need to be known so as to remove any uncertainty.(8)(8) uncertainty. The basis for the requirement that the capital must be paid at the The basis for the requirement that the capital must be paid at the conclusion of a Salam contract is the saying of the Prophet (peace be upon him): Whoever pays on a deferred delivery basis should do so on upon him): Whoever pays on a deferred delivery basis should do so on the basis of specifying the scale.(9)(9) The the basis of specifying the scale means payment Islaf means payment in advance. Salam was so named because the capital must be paid in (10) advance. If payment is delayed, the transaction is not called Salam.(10) advance. If payment is delayed, the transaction is not called Salam. Again, any delay in payment of the capital and dispersal of the parties (11) which is prohibited, renders the transaction a sale of debt for debt(11) which is prohibited, renders the transaction a sale of debt for debt and the scholars agreed on its prohibition. Ibn Rushd said: As for sale of debt for debt, Muslim scholars are unanimous regarding its (12) prohibition.(12) prohibition. The basis for it not being permitted that a debt be capital in Salam is The basis for it not being permitted that a debt be capital in Salam is because this would render the transaction a form of sale of debt and this is prohibited by the Shariah. The basis for the impermissibility of Salam where the subject matter is The basis for the impermissibility of Salam where the subject matter is A man came a specific and identified thing is the Hadith stating that A man came a specific and identified thing is the Hadith stating that The Taslif Taslif or or Islaf [1: 300]. Al-Muhadhdhab [1: 300]. [4: 347]. Al-Sharh Al-Saghir [4: 347]. [2: 37]. Sharh Muntaha Al-Iradat [2: 37]. [2: 987]; Ibn Juzay, Al-Qawanin Al-Fiqhiyyah Al-Maunah [2: 987]; Ibn Juzay, Al-Qawanin Al-Fiqhiyyah [6: 411]; Al-Mughni [6: 411]; [5: 301]; Ibn Qudamah, Al-Mughni Badai Al-Sanai [5: 301]; Ibn Qudamah, Al-Dardir, Al-Sharh Al-Saghir (6)(6) Al-Dardir, Al-Buhuti, Sharh Muntaha Al-Iradat (7)(7) Al-Buhuti, Al-Qadi Abdul-Wahhab, Al-Maunah (8)(8) Al-Qadi Abdul-Wahhab, (P. 202); Al-Kasani, (P. 202); Al-Kasani, Badai Al-Sanai and Al-Shirazi, Al-Muhadhdhab and Al-Shirazi, The Hadith has been related by Al-Bukhari, Muslim and others: Sahih Al-Bukhari (9)(9) The Hadith has been related by Al-Bukhari, Muslim and others: Sahih Al-Bukhari [2: 781], Damascus: Dar Al-Qalam edition; and [3: 1226], Beirut: Dar Sahih Muslim [3: 1226], Beirut: Dar [2: 781], Damascus: Dar Al-Qalam edition; and Sahih Muslim Al-Fikr edition. , [6: 408] Al-Mughni, [6: 408] Ibn Qudamah, Al-Mughni (10) Ibn Qudamah, (10) [5: 202]; Ibn Rushd (the grandson) Bidayat Al- See: Al-Kasani, Badai Al-Sanai Bidayat Al- Badai Al-Sanai [5: 202]; Ibn Rushd (the grandson) (11) See: Al-Kasani, (11) Mujtahid Wa Nihayat Al-Muqtasid [2: 205], Beirut, Dar Al-Qalam edition; Al-Qadi Mujtahid Wa Nihayat Al-Muqtasid [2: 205], Beirut, Dar Al-Qalam edition; Al-Qadi Al-Maunah [2: 988]; and Al-Zaylai, Abdul-Wahhab, Tabyin Al-Haqaiq Sharh [2: 988]; and Al-Zaylai, Tabyin Al-Haqaiq Sharh Abdul-Wahhab, Al-Maunah [4: 117]. Kanz Al-Daqaiq [4: 117]. Kanz Al-Daqaiq Ibn Rushd, Bidayat Al-Mujtahid [2: 150]. Bidayat Al-Mujtahid [2: 150]. (12) Ibn Rushd, (12) 286286 Shariah Standard No. (10): Salam and Parallel Salam to the Prophet (peace be upon him) and said; The kin of so and so from the Jews had embraced Islam. However, they are hungry and I am afraid they may become apostates. The Prophet (peace be upon him) asked the people around him; Who has something (money)? One Jew said; I have so and so (he mentioned a sum of money), may be he said; I have three hundred dinars and I will pay such and such price for the products of the farm of the kin of so and so. The Prophet (peace be upon him) said: (buy) With such and such price to be delivered after such and such period, but (13) Again, if a Salam contract not for the products of the kin of so and so.(13) Again, if a Salam contract not for the products of the kin of so and so is concluded for providing products from a specific farm, there might not be products from this farm at the time of delivery, and this leads to Gharar (uncertainty). The basis for the requirement that the subject-matter of Salam be com- The basis for the requirement that the subject-matter of Salam be com- monly available under normal circumstances where it is required is to remove uncertainty and to ensure that the seller will be able to deliver it at the date of delivery. Changes to a Salam Contract The basis for the impermissibility of selling the subject-matter of Salam The basis for the impermissibility of selling the subject-matter of Salam before taking possession of it is because such an action is a form of sale of debts which is not permissible. The basis for the impermissibility of substituting the subject-matter of The basis for the impermissibility of substituting the subject-matter of Salam with a commodity, the price of which is higher than the prevalent market value of the subject-matter of Salam at the date of delivery is to deter the buyer from making a compound profit on one deal. The basis for the permissibility of the termination of a Salam by The basis for the permissibility of the termination of a Salam by agreement (Iqalah) is because the Prophet (peace be upon him) has encouraged Iqalah in general and Salam is not an exception from this concession. Salam is also a form of sale and since sale contracts admit Iqalah, so too does a Salam contract. Again, Iqalah is actually (13) The Hadith has been related by Ibn Majah and Abu Dawud. See: (13) Sunan Ibn Majah The Hadith has been related by Ibn Majah and Abu Dawud. See: Sunan Ibn Majah [2: 765-766]; and [3: 744]. Al-Shawkani said: There is an Sunan Abu Dawud [3: 744]. Al-Shawkani said: There is an [2: 765-766]; and Sunan Abu Dawud unknown narrator in the chain of transmission of this Hadith. This is because Abu Dawud narrated it through Muhammad Ibn Kathir from Sufyan from Abu Ishaq from a Najrani man from Ibn Umar. Therefore, the Hadith is not of a strong authority. See: Nayl Al-Awtar See: [5: 345-346]. Nayl Al-Awtar [5: 345-346]. 287287 Shariah Standard No. (10): Salam and Parallel Salam permitted for the sale of tangible goods in consideration of the need of contracting parties to be able to deal with regret and a desire to withdraw from the contract. In the case of Salam, the possibility that the parties may regret concluding the transactions is greater than in the sale of tangible goods because Salam is a low cost form of sale for (14) which permissibility of Iqalah is easily applicable in Salam.(14) which permissibility of Iqalah is easily applicable in Salam. Delivery of al-Muslam Fihi The basis for not allowing penalty clauses in Salam is because al-Muslam Fihi is considered to be a debt; and it is not permitted to stipulate payment in excess of the principal amount of debts. Parallel Salam The basis for the permissibility of Parallel Salam is that it represents The basis for the permissibility of Parallel Salam is that it represents two Salam deals that are separable from each other despite the fact that the descriptions of the subject-matter in the two contracts are similar. However, the contract does not lead to two sales in one, which is impermissible. The basis for the impermissibility of tradeable Salam Sukuk is because The basis for the impermissibility of tradeable Salam Sukuk is because trading with such Sukuk is a form of sale of debt which is prohibited. (14) See: Al-Kasani, (14) See: Al-Kasani, Badai Al-Sanai [5: 214]. Badai Al-Sana`i [5: 214]. 288288 Shariah Standard No. (10): Salam and Parallel Salam Appendix (C) Definitions SalamSalam A Salam transaction is the purchase of a commodity for deferred delivery in exchange for immediate payment. It is a type of sale in which the price, known as the Salam capital, is paid at the time of contracting while the delivery of the item to be sold, known as al-Muslam Fihi (the subject-matter of a Salam contract), is deferred. The seller and the buyer are known as al- respectively. Salam is also Muslam Ilaihi and al-Muslam or Rab al-Salam respectively. Salam is also Muslam Ilaihi and al-Muslam or Rab al-Salam known as Salaf (literally; borrowing). Parallel Salam If the seller enters into another separate Salam contract with a third party to acquire goods, the specification of which corresponds to that of the commodity specified in the first Salam contract, so that he (the seller) can fulfil his obligation under that contract, then this second contract is called, in contemporary custom, Parallel Salam or . The Salam Muwazi. The called, in contemporary custom, Parallel Salam or Salam Muwazi following is an example of such a contract. An Institution on one hand buys a specified quantity of cotton from farmers on a Salam basis and, in turn, the buyer in the first Salam contract enters into a new separate Salam contract with textile mills so as to provide them, by means of that new Salam contract, with cotton, the specifications of which are similar to the specifications of the cotton to be acquired under the first Salam contract, without making the execution of the second Salam contract contingent on the execution of the first Salam contract. Iqalah Iqalah or cancellation of a contract is a bilateral agreement of the contract- ing parties to abate and remove the legal effect of a contract. 289289 Shariah Standard No. (10): Salam and Parallel Salam Mithlis (Fungibles) Items that are mutually interchangeable, i.e., items whose units are identical (in specifications), and if destructed, are guaranteed by other identical units without consideration to their value. 290290 Shariah Standard No. (11) Istisnaa and Parallel Istisnaa (Revised Standard) Contents Subject ................................................................................................... Preface ................................................................................................... Preface ..................................................................... Statement of the Standard ..................................................................... Statement of the Standard ..............................................................................

Scope of the Standard ..............................................................................
Scope of the Standard ......................................................................................
Istisnaa Contract ......................................................................................
Istisnaa Contract .....................................
Subject-Matter of, and Guarantees in, Istisnaa.....................................
Subject-Matter of, and Guarantees in, Istisnaa ..................................................................
Changes to Istisnaa Contract ..................................................................
Changes to Istisnaa Contract .........................
Supervision of the Execution of an Istisnaa Contract .........................
Supervision of the Execution of an Istisnaa Contract ........................................
Delivery and Disposal of the Subject-Matter ........................................
Delivery and Disposal of the Subject-Matter ........................................................................................
Parallel Istisnaa ........................................................................................
Parallel Istisnaa ............................................................
Date of Issuance of the Standard ............................................................
Date of Issuance of the Standard ...................................................................... Adoption of the Standard ...................................................................... Adoption of the Standard Appendices Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (b): TheThe Shariah Basis for the Standard.................................... Appendix (b): Shariah Basis for the Standard.................................... Appendix (c): Definitions............................................................................. Appendix (c): Definitions............................................................................. PagePage 295295 296296 298298 302302 304304 305305 307307 308308 309309 310310 313313 319319 293293 IN THE NAME OF ALLAH, THE ALL-MERCIFUL, THE MOST MERCIFUL All praise be to Allah, the Lord of all the worlds, and blessings and peace be upon our master, Muhammad, and his household and all his companions Preface The objective of this standard is to explain the Shariah rulings and lim- itations applicable to Istisnaa and parallel Istisnaa transactions in respect to concluding an Istisnaa contract, the subject-matter of Istisnaa and changes to the contract. The standard also explains issues relating to the execution of the contract and the supervision of its execution. 295295 Shariah Standard No. (11): Istisnaa and Parallel Istisnaa Statement of the Standard
Scope of the Standard The standard covers Istisnaa and parallel Istisnaa transactions whether the Institution is acting as an ultimate purchaser or is acting as a manufacturer or as a builder for construction.(1)(1) or as a builder for construction.
Istisnaa Contract 2/1 Conclusion of an Istisnaa contract at the time of contracting or after the bilateral promise 2/1/1 It is permissible that the Institution and a customer conclude an Istisnaa contract before the Institution assumes title to the subject-matter to be sold to the customer or to the materials from which the subject-matter will be produced (manufactured or constructed). 2/1/2 It is permissible for the Institution to benefit from any price offers or quotations that the customer has obtained from other dealers or suppliers to assist it in the evaluation of expenses and the computation of prospective profit. 2/1/3 It is not permissible that the Institutions role in the Istisnaa be that of a financial intermediary between a buyer and a third party, especially if the buyer has become unable to meet his obligations toward such a third party, and this prohibition applies whether such a role would take place before or after applies whether such a role would take place before or after the commencement of the work. [see item 4/2/2] The Arabic term Istisnaa applies to both manufacturing and construction, and (1)(1) The Arabic term Istisnaa applies to both manufacturing and construction, and there is no convenient term in English that covers both manufacturers and builders. Therefore, the term manufacturer will be used in this standard to designate a party acting as manufacturer or contractor in an Istisnaa contract, and the term subject- matter will be used to designate the goods or buildings that are the subject-matter of the contract. 296296 Shariah Standard No. (11): Istisnaa and Parallel Istisnaa 2/2 Form and conditions of an Istisnaa contract 2/2/1 A contract of Istisnaa is binding on the contracting parties provided that certain conditions are fulfilled, which include specification of the type, kind, quality and quantity of the subject-matter to be produced. Moreover, the price of the subject-matter must be known and, if necessary, the delivery date must be determined. If the subject-matter does not conform to the specification agreed upon, the customer has the option to accept or to refuse the subject-matter. 2/2/2 Since a contract of Istisnaa is binding, the parties to the contract are inevitably bound by all obligations and consequences flowing from their agreement. In other words, the contracting parties need not to renew an exchange of offer and acceptance after the subject-matter is completed. This is different from the promise in a contract of Murabahah, which requires the signature of a sale contract through a new offer and acceptance by the parties when possession of the items to be sold is taken by the Institution. 2/2/3 It is not permitted for the manufacturer to stipulate in the contract of Istisnaa that he is not liable for defects. 2/2/4 It is not permissible to conclude Istisnaa contracts or pro- cesses of Istisnaa in a manner that makes it a legal device for a mere interest-based financing. Examples are a transaction in which the Institution buys items from the contractor on a cash payment basis and sells them back to the manufacturer on a deferred payment basis at a higher price; or where the party ordering the subject-matter to be produced is the manufactur- er himself; or where one third or more of the facility in which the subject-matter will be produced belongs to the customer. All the circumstances mentioned above would make the deal an interest-based financing deal in which the subject-matter never genuinely changes hands, even if the deal is won through competitive bidding. This rule is intended to avoid sale and Bay al-Inah).). buy back transactions (Bay al-Inah buy back transactions ( 297297 Shariah Standard No. (11): Istisnaa and Parallel Istisnaa
Subject-Matter of, and Guarantees in, Istisnaa 3/1 The rulings concerning al-Masnoo 3/1/1 An Istisnaa contract is permissible only for raw materials that can be transformed from their natural state by a manufacturing or construction process involving labour. Therefore, Istisnaa is valid only in so far as the supplier has agreed to provide a subject-matter that is manufactured or constructed. 3/1/2 It is permissible that a contract of Istisnaa be concluded for the production of a subject-matter having unique descriptions according to the requirement of the ultimate purchaser even if such a subject-matter has no substitutes in the market, provided the subject-matter is subject to specification. Similarly, it is permissible that the subject-matter of a contract of Istisnaa be items that have perfect substitutes in the market, and can be substituted for one another in fulfilling an obligation, because they share common characteristics by virtue of the process of manufacture or construction. This rule applies whether the items to be produced are intended for consumption or for use with their substance kept intact. 3/1/3 It is not permissible that the subject-matter of an Istisnaa contract be an existing and identified capital asset. For example, it is invalid for the Institution to conclude a contract to sell a particular designated car or factory on the basis of Istisnaa. This is because Istisnaa is a sale contract applicable to items that are identified by specification, not by designation. Unless the items are completely or partially delivered, the ultimate purchaser has no prior right (in the event that the supplier is declared bankrupt or insolvent) over a third party to the items that are the subject-matter of the contract while they are still in the process of being produced and have not yet been delivered to him. In addition, the ultimate purchaser cannot be regarded as the owner of the materials in the possession of the subject- the manufacturer for the purpose of producing the subject- the manufacturer for the purpose of producing 298298 Shariah Standard No. (11): Istisnaa and Parallel Istisnaa matter of the contract, unless the manufacturer has previously undertaken, as a guarantee for the completion of the work, that such materials will only be used for the order of the ultimate purchaser. 3/1/4 The contract of Istisnaa may be concluded with a condition that the production shall be carried out by the Institution using its own resources, in which case it has to abide by this condition and has no right to assign the process of production to another entity. 3/1/5 It is permissible for the manufacturer to fulfil his obligation in an Istisnaa contract by using items produced by his own resources or items produced by other parties that existed before the contract was concluded. The latter option is, however, only valid if the ultimate purchaser did not stipulate that the manufacturer should use his own resources. However, this rule should not be used as a device for deferment of consideration (the price and the commodity) of a sale of a subject-matter that is to be delivered in the future based on its specification as given by the seller, but which are not intended to be produced. 3/1/6 The manufacturer is under an obligation to produce the sub- ject-matter according to specification and within the period agreed upon or within such reasonable time as the nature of the work may permit, in accordance with accepted practice that is recognised by experts. 3/1/7 The parties may agree on a period during which the manu- facturer will be liable for any defects or the maintenance of the subject-matter. They may also leave the determination of liability relating to defects and maintenance to customary practice. 3/1/8 It is permissible to draw up an Istisnaa contract for real estate developments on designated land owned either by the ultimate either of them purchaser or the contractor, or on land in which either of them purchaser or the contractor, or on land in which 299299 Shariah Standard No. (11): Istisnaa and Parallel Istisnaa owns the usufruct. This is permissible because the contract involves the construction of specified buildings that will be built and sold according to specification and the contract of Istisnaa in this case does not concern a particular identified place (i.e. the land). 3/2 Price and guarantees of Istisnaa contract 3/2/1 It is a requirement that the price for an Istisnaa contract be known at the conclusion of the contract, in which case it can be in the form of cash or tangible goods or the usufruct of an asset for a particular duration, whether such usufruct is related to an asset other than the subject-matter or to the sub- ject-matter itself. The use of usufruct of the subject-matter itself as consideration for an Istisnaa contract is relevant to situations when a government offers a preferential contract giving usufruct to the builder or manufacturer for a partic- ular duration, commonly known as Build Operate Transfer (BOT). 3/2/2 The price of an Istisnaa contract may be deferred or paid in instalments within a certain period of time, or if delivery of the subject-matter is to be made in stages a portion of the price may be paid immediately while the balance is paid by instalments according to the stages of delivery. It is also permissible to connect payment with the stage of completion of the work, (such that a payment is made at the end of each stage), provided the stages of this type of work are by custom subject to specification and their identification will not lead to dispute. 3/2/3 If the process of manufacture or construction is divided into into 3/2/3 If the process of manufacture or construction is divided phases, or payment is designed according to the stage of completion of the work, then the manufacturer or contractor is entitled to request that the ultimate buyer make payment accordingly for each stage that has been carried out according to specification. 300300 Shariah Standard No. (11): Istisnaa and Parallel Istisnaa 3/2/4 It is permissible that the price of Istisnaa transactions vary in accordance with variations in delivery date. There is also no objection to a number of offers being subject to negotiation, provided that eventually only one offer will be chosen for concluding the Istisnaa contract. This is to avoid uncertainty and lack of knowledge that may lead to dispute. 3/2/5 A contract of Istisnaa cannot be drawn up on the basis of a Murabahah sale, for example, by determining the price of Istisnaa on a cost- plus basis. 3/2/6 If the actual costs incurred by the Institution to bring the subject-matter to completion are substantially less than the estimated costs or the Institution secures a discount from the party with whom it contracted on a Parallel Istisnaa basis to acquire the subject-matter in order to fulfil its contractual obligation, the Institution is not obliged to give a discount to the ultimate purchaser and the latter is not entitled to the amount or part thereof the Institution has gained over the estimated costs. The same rule applies conversely when the actual costs of production are substantially greater than the estimated costs. 3/3 Guarantees 3/3/1 It is permissible for the Institution, acting either in the capacity of the manufacturer or of the ultimate purchaser, to give or demand accordingly Arboun as a guarantee, which will either be part of the price, if the contract is fulfilled, or forfeited, if the contract is rescinded. However, it is preferable that the amount forfeited be limited to an amount equivalent to the actual damage suffered. 3/3/2 In an Istisnaa contract, it is permissible for the Institution, whether acting in the capacity of manufacturer or in the ca- pacity of the ultimate purchaser, to demand guarantees that it considers sufficient to secure fulfilment of its rights against 301301 Shariah Standard No. (11): Istisnaa and Parallel Istisnaa an ultimate purchaser or a manufacturer. It is also permissible for the institution, when acting in the capacity of an ultimate purchaser, to give guarantees requested by the manufacturer, which can be in a form of a mortgage, personal guarantee, assignment of rights, a current account, or an investment ac- count or consent to blocking withdrawal from an account.
Changes to Istisnaa Contract 4/1 Amendments, changes and introduction of new conditions 4/1/1 It is permissible, after the conclusion of an Istisnaa contract, for the manufacturer and the ultimate purchaser to agree on amending the manufacturing or construction specifications previously agreed upon or introducing additional specification accordingly requirements on condition that the price is adjusted accordingly requirements on condition that the price is adjusted and a reasonable period for the execution of the new requirements is granted. It is also permissible to state in the contract that the consideration for amendments or introduction of additional requirements shall be determined and added to the original price as per the expert opinion, custom or an identified price index which preclude any uncertainty that may potentially lead to dispute. 4/1/2 The ultimate purchaser cannot oblige the manufacturer to introduce modifications and changes to the subject matter of an Istisnaa contract without the consent of the manufacturer. 4/1/3 It is not permissible for amendments and changes to the contract to be agreed on the basis that an additional sum will be paid in consideration for an extension of the period of payment. However, a rebate for pre-payment is permissible provided it is not stipulated at the conclusion of the contract. 4/2 Intervening contingencies (force majeure) 4/2/1 It is permissible, by way of agreement of the contracting parties price or arbitration or judicial procedure, to amend the contract price or arbitration or judicial procedure, to amend the contract 302302 Shariah Standard No. (11): Istisnaa and Parallel Istisnaa of an Istisnaa contract upwards or downwards, as a result of of an Istisnaa contract upwards or downwards, as a result of intervening contingencies (force majeure). This rule must be read together with item 4/1/3 above. 4/2/2 It is permissible for the Institution to replace a contractor and enter into an Istisnaa contract with a customer to complete a project which had been started by the previous contractor of such a customer. In this case, an assessment of the project should be undertaken on the basis of the existing status of the project. The cost of this assessment is chargeable to the account of the customer, in which case all outstanding debts, if any, that arise from the incomplete Istisnaa contract shall be the personal responsibility of the customer. The parties may after this conclude a new Istisnaa contract for the remaining work. The Institution is not bound to deal with the previous contractor. Rather, the Institution has the right to stipulate that the work needed to complete the project will be carried out by any means it deems fit. 4/2/3 In the case of constructing buildings or public utilities on land owned by the ultimate purchaser, it is permissible to stipulate that the ultimate purchaser has the right to perform the contract of Istisnaa at the expense of the manufacturer if the latter fails to perform the contract or to complete the work within a particular period of time, and that this performance will be effected from the date the manufacturer halted the work. 4/2/4 If the contractor is unable to continue to discharge his obligation, obligation, 4/2/4 If the contractor is unable to continue to discharge his the ultimate purchaser (the owner of the land) is not entitled to acquire ownership of the incomplete building structures or utilities that are already in place without giving consideration to the contractor. However, this rule depends on the cause of the failure to continue the work. If the failure to perform is due to the misconduct of the contractor, the ultimate purchaser is liable only for the value of the building structure and the builder for any actual is liable to compensate the ultimate purchaser for any actual is liable to compensate the ultimate purchaser 303303 Shariah Standard No. (11): Istisnaa and Parallel Istisnaa damage or loss he suffered. If the failure to perform is due to the misconduct of the ultimate purchaser, the contractor is entitled to the value of the work he has completed and compensation for any damage or loss. However, if the failure to perform has not been caused by either of them, the ultimate purchaser is liable only for the value of the building structure that is already in place and neither of them has any responsibility to pay compensation for the loss or damage the other party had suffered. [see item 4/2/3] 4/2/5 It is permissible that a contract of Istisnaa includes a clause to the effect that if any additional conditions are inserted into the contract at a later date as a result of directives of the relevant authorities, and these additional conditions lead to extra expenses that cannot, by virtue of the terms of the contract, be borne by the manufacturer because they were not in the original contract as signed or there is no law making such payment compulsory, the extra expenses will be borne by the ultimate purchaser.
Supervision of the Execution of an Istisnaa Contract 5/1 It is permissible for the seller and purchaser to appoint technically experienced consulting firm to represent it in determining whether the subject-matter conforms to the contractual specification, and to advise the Institution as to whether payment for the subject-matter, or delivery or acceptance of it, under the terms of the contract, should take place, and they should adhere to its resolutions 5/2 It is permissible for the Institution, when acting as the manufacturer, to draw-up an independent and separate contract of agency appoint- ing the ultimate purchaser as an agent of the Institution to supervise the manufacturing or construction process so as to ensure that the items produced conform to contractual specification. 5/3 It is permissible for the manufacturer and the ultimate purchaser to agree on the party who will bear the additional costs of supervision of an Istisnaa contract. 304304 Shariah Standard No. (11): Istisnaa and Parallel Istisnaa
Delivery and Disposal of the Subject-Matter 6/1 The manufacturer is discharged from liability if the subject-matter is delivered to either the ultimate purchaser or to a person appointed by him or if the ultimate purchaser is enabled to exercise full control over the subject-matter. 6/1/1 If the condition of the subject-matter does not conform to the contractual specifications at the date of delivery, the purchaser has the right to reject the subject-matter or ultimate purchaser has the right to reject the subject-matter or ultimate to accept it in its present condition, in which case the acceptance constitutes satisfactory performance of the contract. It is also constitutes satisfactory performance of the contract. It is also contracting parties to agree on acceptance permissible for the contracting parties to agree on acceptance permissible for the of a subject-matter that fails to conform to the specification even if such an arrangement involves a price discount. 6/1/2 If the seller offers to deliver a better quality, then the purchaser shall accept his conditions, provided that the seller shall not charge any additional amounts for the better quality, which may be considered one of the ways in which a contract is ethically fulfilled, unless the quality specified in the contract is particularly pursued by the purchaser. 6/2 It is permissible that delivery of the subject-matter takes place before the due date, on condition that the subject-matter meets the specifications agreed upon, in which case the ultimate purchaser is obliged to accept the subject-matter. If the ultimate purchaser is unwilling to take delivery of the subject-matter, the rule on this point depends on whether or not there is justification for this refusal. If there is a good reason for the rejection of the subject-matter, the ultimate purchaser shall not be obliged to accept it. If there is not a good reason for rejecting it, then the ultimate purchaser will be obliged to accept the subject-matter. 6/3 The delivery of the subject-matter may take place through constructive possession, by enabling the ultimate purchaser to take control over the subject-matter after the production process is completed. At this 305305 Shariah Standard No. (11): Istisnaa and Parallel Istisnaa point, the liability of the manufacturer in respect of the subject-matter comes to an end and the liability of the ultimate purchaser begins. If after enabling the ultimate purchaser to take control over the subject- matter any loss or damage subsequently occurs to the subject-matter without any proof of negligence or misconduct on the part of the manufacturer, then the ultimate purchaser is liable. This is therefore the demarcation line between the liabilities of the two parties: the liability of the manufacturer and the liability of the ultimate purchaser. 6/4 If the ultimate purchaser refuses to accept the subject-matter without a good reason after he is enabled to take possession, the subject-matter will remain in the possession of the manufacturer on a trust basis, in which case the manufacturer will not be liable for loss or damage that occurs to it, unless such loss or damage is a result of negligence or misconduct on the part of the manufacturer. The ultimate purchaser bears the expenses for the safe keeping of the subject-matter. 6/5 It is permissible to state in a contract of Istisnaa that the manufacturer will act as the agent of the ultimate purchaser to sell the subject- matter if there is a delay on the part of the purchaser in taking delivery of the subject-matter within a particular period of time. In this case, the manufacturer will sell the subject-matter on behalf of the ultimate purchaser and, after deducting the agreed contract price, the balance, if any, will be returned to the purchaser. If the price obtained is less than the contract price, the manufacturer shall have a right of recourse to the ultimate purchaser for the recovery of the remaining balance. In addition, the ultimate purchaser will bear the expenses incurred in selling the subject-matter. 6/6 It is permissible for the contract of Istisnaa to include a fair penalty clause stipulating an agreed amount of money for compensating the ultimate purchaser adequately if the manufacturer is late in delivering the subject-matter. Such compensation is permissible only if the delay is not caused by intervening contingencies (force majeure). However, it is not permitted to stipulate a penalty clause against the ultimate purchaser for default on payment. [see item 2/1/2 of the Shariah Standard No. (3) on Procrastinating Debtor] 306306 Shariah Standard No. (11): Istisnaa and Parallel Istisnaa 6/7 It is not permissible to sell the subject-matter prior to taking either actual or constructive possession of it [see item 6/4]. However, it is permissible to conclude an Istisnaa contract to sell an item on the basis of description or specification that is similar to an item to be Istisnaa Muwazi: : acquired from a manufacturer, and this is called Istisnaa Muwazi acquired from a manufacturer, and this is called Parallel Istisnaa [see item 7]. 6/8 It is permissible for the Institution acting in the capacity of ultimate purchaser to appoint, after taking possession of the subject-matter, the manufacturer as an agent to sell the subject-matter to latters customers on behalf of the Institution. This agency is permissible whether it is carried out free of charge, or for consideration either in the form of a fixed fee or a particular percentage of the sale price, on condition that the contract of agency and the contract of Istisnaa were not entered into in connection with each other.
Parallel Istisnaa 7/1 It is permissible for the Institution to buy items on the basis of a clear and unambiguous specification and to pay, with the aim of providing liquidity to the manufacturer, the price in cash when the contract is concluded. Subsequently, the Institution may enter into a contract with another party in order to sell, in the capacity of manufacturer or supplier, items whose specification conforms to the wishes of that other party, on the basis of parallel Istisnaa, and fulfil its contractual obligation accordingly. This is permissible on condition that the delivery date stipulated in the parallel (sale) contract must not precede that stipulated in the original purchase contract, and, moreover, the two contracts should remain separate from each other. [see item 3/1/4] 7/2 It is permissible for the Institution, acting in the capacity of the producer or supplier, to conclude an Istisnaa contract with the aim of selling such items to the customer on a deferred payment basis, and to enter into a Parallel Istisnaa contract on an immediate payment basis with a manufacturer or builder to acquire such items as per the specifications in the first contract and sell them to the customer. This This specifications in the first contract and sell them to the customer. 307307 Shariah Standard No. (11): Istisnaa and Parallel Istisnaa is permissible on condition that the two contracts should remain separate and, moreover, be subject to the matters set out in item 3/1/4. 7/3 As a result of concluding an Istisnaa contract in the capacity of a producer or supplier, the Institution must assume liability for ownership risk and maintenance and insurance expenses prior to delivering the subject-matter to the ultimate purchaser (the customer). delivering the subject-matter to the ultimate purchaser (the customer). Moreover, the Institution is not permitted, in the Parallel Istisnaa contract concluded with the manufacturer, to transfer to the latter the risk arising from its obligations towards the customer. 7/4 It is not permissible to make any contractual link between the obligations under two contracts (the contract of Istisnaa and the contract of Parallel Istisnaa) when they are concluded. Therefore, it is also not permissible for a party to an ordinary Istisnaa contract (I) to withdraw his contractual obligations or delay delivering the subject-matter of the contract because the obligation under Parallel Istisnaa did not take place or (II) to increase the price of the goods to be delivered because of an increase in the cost of goods in the Parallel Istisnaa. However, there is no restriction on the right of the Parallel Istisnaa. However, there is no restriction on the right of the concluding Institution to stipulate conditions and requirements when concluding Institution to stipulate conditions and requirements when a Parallel Istisnaa contract as a purchaser, including a penalty clause similar to, or different from, that which the customer has stipulated in the first Istisnaa contract in which the Institution is the supplier.
Date of Issuance of the Standard This Standard was issued on 29 Safar 1422 A.H., corresponding to 23 May 2001 A.D. 308308 Shariah Standard No. (11): Istisnaa and Parallel Istisnaa Adoption of the Standard The Shariah Standard on Istisnaa and Parallel Istisnaa was adopted by the Shariah Board in its meeting No. (6) held on 25-29 Safar 1422 A.H., corresponding to 19-23 May 2001 A.D. In its meeting No. (8) held in Makkah Al-Mukarramah on 28 Safar - 4 Rabi I, 1423 A.H., corresponding to 11-16 May 2002 A.D., the Shariah Board readopted a resolution to reformat the Shariah rules for Istisnaa and Parallel Istisnaa in the form of a Shariah standard. 309309 Shariah Standard No. (11): Istisnaa and Parallel Istisnaa Appendix (A) Brief History of the Preparation of the Standard In its meeting No. (5) held in Makkah Al-Mukarramah on 8-12 Ramadan 1421 A.H. corresponding to 4-8 December, 2000 A.D., the Shariah Board decided to give priority to the preparation of the a Shariah rules for Istisnaa and Parallel Istisnaa. On Monday 11 Shawwal 1420 A.H. corresponding to 17 January 2000 A.D., the Fatwa and Arbitration Committee recommended to the Shariah Board the commissioning of a Shariah consultant to prepare a juristic study and an exposure draft on the Shariah Rules for Istisnaa and Parallel Istisnaa. In its meeting held in Bahrain on 21-23 Muharram 1421 A.H., corre- sponding to 26-28 April 2000 A.D., the Fatwa and Arbitration Committee discussed the exposure draft of the Shariah Rules for Istisnaa and Parallel Istisnaa and asked the consultant to make amendments in light of the comments made by the members. In its meeting No. (4) held in Abu Dhabi, United Arab Emirates on 14 Shaban 1421 A.H. corresponding to 10 November 2000 A.D., the Fatwa and Arbitration Committee discussed the exposure draft and made some relevant amendments. The revised exposure draft of the Shariah Rules was presented to the Shariah Board in its meeting No. (5) held in Makkah Al-Mukarramah on 8-12 Ramadan 1421 A.H. corresponding to 4-8 December 2000 A.D. The Shariah Board made further amendments to the exposure draft of the standard and decided that it should be distributed to specialists and interested parties to obtain their comments in order to discuss them in a public hearing. 310310 Shariah Standard No. (11): Istisnaa and Parallel Istisnaa A A public hearing public hearing was held in Bahrain on 4-5 Dhul-Hajjah 1421 A.H., was held in Bahrain on 4-5 Dhul-Hajjah 1421 A.H., was attended public hearing was attended corresponding to 27-28 February 2001 A.D. The public hearing corresponding to 27-28 February 2001 A.D. The by more than thirty participants representing central banks, Institutions, accounting firms, Shariah scholars, academics and others who are interested in this field. Members of the Shariah Studies Committee responded to the as well as to the public hearing as well as to the written comments that were sent prior to the public hearing written comments that were sent prior to the public hearing. oral comments that were expressed in the public hearing oral comments that were expressed in the in No. (5) in The Fatwa and Arbitration Committee held its meeting No. (5) The Fatwa and Arbitration Committee held its meeting Bahrain on 15 Dhul-Hajjah 1421 A.H., corresponding to 10 March 2001 Bahrain on 15 Dhul-Hajjah 1421 A.H., corresponding to 10 March 2001 A.D., to discuss the comments made about the exposure draft. The committee made the necessary amendments in light of both the written comments that were received and oral comments that took place in the public hearing. public hearing The Shariah Board in its meeting No. (6) held in Al-Madinah Al-Mun- awwarah on 25-29 Safar 1422 A.H., corresponding to 19-23 May 2001 A.D., discussed the amendments made by the Fatwa and Arbitration Committee, and made necessary amendments. The standard was adopted in the name of Shariah Rules for Istisnaa and Parallel Istisnaa. Some paragraphs were adopted by the unanimous vote of the members of the Shariah Board while the other paragraphs were adopted by the majority vote of the members, as recorded in the minutes of the Shariah Board. The Shariah Board decided in its meeting No. (7) held in Makkah Al-Mukarramah on 9-13 Ramadan 1422 A.H. corresponding 24-28 No- vember 2001 A.D. to reformat all Shariah rules in the form of standards and a committee was formed for this purpose. In its meeting No. (8) held in Al-Madinah Al-Munawwarah on 28 Safar

4 Rabi I 1423 A.H. corresponding to 11-16 May 2002 A.D., the Shariah Board adopted the reformatting of the Shariah Rules for investment and Financing No. (4) on Istisnaa and Parallel Istisnaa in the name of Shariah Standard No. (11) on Istisnaa and Parallel Istisnaa without any substantial changes in the content. The Shariah Standards Review Committee reviewed the standard in its meeting held in Rabi II 1433 A.H. corresponding to March 2012 A.D. 311311 Shariah Standard No. (11): Istisnaa and Parallel Istisnaa in the State of Qatar, and proposed after deliberation a set of amendments (additions, deletions, and rephrasing) as deemed necessary, and then submitted the proposed amendments to the Shariah Board for approval as it deemed necessary. In its meeting No. (4) held in Al-Madinah Al-Munawwarah, Kingdom of Saudi Arabia on 27-29 Shaban 1436 A.H. corresponding to 14-16 June 2015 A.D., the Shariah Board discussed the proposed amendments submitted by the Shariah Standards Review Committee. After deliberation, the Shariah Board approved necessary amendments, and the standard was adopted in its current amended version. 312312 Shariah Standard No. (11): Istisnaa and Parallel Istisnaa Appendix (B) The Shariah Basis for the Standard Legitimacy of Istisnaa Contract The legitimacy of Istisnaa is based on the request of the Prophet (peace be upon him) that a pulpit (a platform) for preaching and a finger ring be manufactured for him. An Istisnaa contract is also permissible on be manufactured for him.(2)(2) An Istisnaa contract is also permissible on the basis of the principle of Istihsan (Shariah approbation), the general principles of contracts and transactions and the objectives of Shariah. The Istisnaa is a binding contract and not a mere promise. The International Islamic Fiqh Academy has issued a resolution in support of the legitimacy of Istisnaa.(3)(3) of Istisnaa. Istisnaa Contract The basis for it not being permissible that the role of the Institution The basis for it not being permissible that the role of the Institution remain as a mere financier for a deal concluded between the supplier and the ultimate purchaser is that this would lead to involvement in a Riba transaction which makes the Istisnaa contract a mere cover-up and not a real Istisnaa. The basis for stating that an Istisnaa contract is binding is the view of The basis for stating that an Istisnaa contract is binding is the view of Majjalat Al-Ahkam Al-Adliyyah, , Imam Abu Yusuf, as stated in the Majjalat Al-Ahkam Al-Adliyyah Imam Abu Yusuf, as stated in the (known in English by the name the Mejelle), that the manufacturer has spent money in order to manufacture and to deliver according to speci- fication. If the ultimate purchaser has a right to refuse the manufactured goods, then the manufacturer will incur losses. The Hadith in which the Prophet (peace be upon him) requested the manufacture of (2)(2) The Hadith in which the Prophet (peace be upon him) requested the manufacture of finger ring has been related by Al-Bukahri and Muslim: [5: 220]; Sahih Al-Bukhari [5: 220]; finger ring has been related by Al-Bukahri and Muslim: Sahih Al-Bukhari and [3: 1655]). The Hadith in which the Prophet (peace be upon him) Sahih Muslim [3: 1655]). The Hadith in which the Prophet (peace be upon him) and Sahih Muslim requested the manufacture of a pulpit for preaching has been related by Al-Bukhari in his his Sahih International Islamic Fiqh Academy Resolution No. 65 (3/7). (3)(3) International Islamic Fiqh Academy Resolution No. 65 (3/7). [2: 908]. Sahih [2: 908]. 313313 Shariah Standard No. (11): Istisnaa and Parallel Istisnaa The basis for the impermissibility of the manufacturer including a defect The basis for the impermissibility of the manufacturer including a defect exclusion clause in an Istisnaa contract is that a valid Istisnaa is a sale of specified goods to be delivered in the future and exclusion of liability as to defects is valid only in the sale of particular identified goods. This prohibition of excluding liability as to defects in Istisnaa is one feature that makes it different from an ordinary sale. The basis for the impermissibility of drawing up Istisnaa contracts or The basis for the impermissibility of drawing up Istisnaa contracts or procedures in a way that appears to be a mere interest-based financing is the need to avoid involvement in a Riba transaction, a potential Riba or Inah sales. Subject Matter of, and Guarantees in, an Istisnaa Contract The basis for the impermissibility of concluding an Istisnaa contract The basis for the impermissibility of concluding an Istisnaa contract for items that are not manufactured or constructed is that items that are not the subject of transformation by manufacture or construction by man, that is natural things such as animals, fruits and vegetables, are not by definition covered by the term Istisnaa which means a sale of materials on condition that they be subjected to transformation by a manufacturing or construction process. The basis for the permissibility of concluding an Istisnaa for manufac- The basis for the permissibility of concluding an Istisnaa for manufac- tured items that either have or do not have equivalents in the market is because it is normal for people to deal in these kinds of item. As a principle, rules that are based on customary practice will change whe- never such customary practice is changed. Therefore, any customary transaction that is subject to specifications may be a subject-matter of Istisnaa, regardless of whether it is for use or consumption. The basis for not allowing the subject-matter of Istisnaa to be a specific The basis for not allowing the subject-matter of Istisnaa to be a specific identified item is that an Istisnaa contract involves a sale for future delivery based on a specification. Therefore, if the items to be sold are specific identified items, the transaction involves selling identified items that the seller does not own, which is prohibited by the saying Do not sell what you own not.(4)(4) of the Prophet (peace be upon him): Do not sell what you own not of the Prophet (peace be upon him): (4)(4) The Hadith has been related by Al-Tirmidhi in his The Hadith has been related by Al-Tirmidhi in his Sunan Shakir; and Al-Albani, Irwa Al-Ghalil Shakir; and Al-Albani, [5: 132]. Irwa Al-Ghalil [5: 132]. [3: 534], edited by Ahmad Sunan [3: 534], edited by Ahmad 314314 Shariah Standard No. (11): Istisnaa and Parallel Istisnaa Again, items to be manufactured or constructed do not yet exist and thus cannot be specific and identified. The non-existent item is to be produced and delivered later and this constitutes a non-monetary obligation of the supplier.(5)(5) obligation of the supplier. The basis for the permissibility of a stipulation by the ultimate purchaser The basis for the permissibility of a stipulation by the ultimate purchaser that the manufacture be carried out by the Institution itself is because this stipulation does affect the purpose of the contract. Rather, this condition is relevant in this contract because the ultimate purchaser may be interested in the items that are produced by a particular supplier due to this suppliers distinguished competence in manufacturing or construction and the quality of the items manufactured or constructed by this supplier. The basis for the permissibility of the manufacturer presenting to the The basis for the permissibility of the manufacturer presenting to the ultimate purchaser either what he has produced or what other parties have produced, if the ultimate purchaser did not stipulate to the contrary, is because this satisfies the purpose of the contract. This is the case because the items are being delivered according to the specifications that are laid down in the contract. The basis for the permissibility of stipulating a time-period during which The basis for the permissibility of stipulating a time-period during which manufacturer remains liable for any manufacturing or construction defects is that such a stipulation serves the purpose of the contract. This is because the ultimate purchaser wants to use the subject-matter and this is not possible unless the subject-matter is free from defects. The basis for the requirement that the price be known is to remove any The basis for the requirement that the price be known is to remove any lack of knowledge and uncertainty that may lead to dispute. The basis for the permissibility in Istisnaa of payment on deferred The basis for the permissibility in Istisnaa of payment on deferred terms or on an instalment basis is that labour (i.e. transformation and added value) is an important part of the items to be sold and this makes the transaction similar to a leasing contract in which it is permissible for the rentals to be paid on a deferred or instalment basis without this being considered as a sale of debt for debt which is prohibited. The same ruling applies to Istisnaa. (5)(5) See: See: Majallat Al-Ahkam Al-Adliyyah, article (158). Majallat Al-Ahkam Al-Adliyyah, article (158). 315315 Shariah Standard No. (11): Istisnaa and Parallel Istisnaa The basis for the permissibility of offering a difference in the price for The basis for the permissibility of offering a difference in the price for an Istisnaa contract relating to a difference in the date of delivery is that Istisnaa is analogous to an Ijarah contract. The fuqaha have stated that it is permissible to give a labourer in Ijarah an option regarding wages depending on whether the worker finishes the work in one day or in two days. The hirer may say two dinars if the worker finishes in one day or one dinar if he finishes in two days. Istisnaa is similar to this. There is a resolution issued during the Al Baraka Annual Forum supporting this ruling.(6)(6) supporting this ruling. The basis for not allowing a contract of Istisnaa to be drawn up on the The basis for not allowing a contract of Istisnaa to be drawn up on the basis of a Murabahah sale, for example, by determining the price of Istisnaa on a cost- plus basis, is because the subject-matter of Murabahah should be something already in existence, the cost of which is known and which is owned prior to the conclusion of a Murabahah sale. An Istisnaa contract, on the other hand, is concluded prior to ownership of the subject-matter, because (I) it is a sale based on a specification giving rise to a future obligation, and (II) the actual cost will be known only after the completion of the work, and, (III) the price in a contract of Istisnaa should be known when the contract is concluded. The basis for deciding that the Institution is not obliged to give The basis for deciding that the Institution is not obliged to give a discount when the actual costs of the manufacture are substantially greater than the estimated costs or when it secures a discount from the manufacturer is because the Istisnaa contract and Parallel Istisnaa contract are independent in terms of obligation and effects. The Shariah Supervisory Board of the Kuwait Finance House has issued a Fatwa in this respect.(7)(7) this respect. The basis for the permissibility of the Institution acquiring all necessary The basis for the permissibility of the Institution acquiring all necessary guarantees is that these guarantees secure its rights and this request does affect the purpose of a contract. Changes to an Istisnaa Contract The basis for the impermissibility of extending the date of payment in The basis for the impermissibility of extending the date of payment in return for consideration is because that is Riba. See: Resolution No. (13/7). (6)(6) See: Resolution No. (13/7). , Fatwa No. (447). Al-Fatawa Al-Shariyyah Fi Al-Masail Al-Iqtisadiyyah, Fatwa No. (447). (7)(7) Al-Fatawa Al-Shariyyah Fi Al-Masail Al-Iqtisadiyyah 316316 Shariah Standard No. (11): Istisnaa and Parallel Istisnaa The basis for the permissibility of discounting for unconditional earlier The basis for the permissibility of discounting for unconditional earlier payment is the saying of the Prophet (peace be upon him) in the case of Ubay Ibn Kab (may Allah be pleased with him) and his debtor: Write Ubay Ibn Kab (may Allah be pleased with him) and his debtor: Write off a portion of your debt.(8)(8) The International Islamic Fiqh Academy has off a portion of your debt The International Islamic Fiqh Academy has issued a resolution in support of this rule.(9)(9) issued a resolution in support of this rule. The ultimate purchaser (the owner of the land) is not entitled to acquire The ultimate purchaser (the owner of the land) is not entitled to acquire ownership of incomplete building structures or utilities that are already in place without giving consideration to the builder if the builder is unable to continue to discharge his obligation. The basis for this is that the construction was initiated by the builder at the request of the ultimate purchaser and such a request is stronger than a mere permission to build on the latters land. The basis for the permissibility of a contract of Istisnaa including a clause The basis for the permissibility of a contract of Istisnaa including a clause that the manufacturer is not liable for extra expenses that result from additional conditions inserted into the contract at a later date as a result of directives of the relevant authorities, is because this condition is agreed upon by the parties and does not affect the purpose of Istisnaa contract. The Shariah Supervisory Board of Kuwait Finance House has issued (10) a Fatwa in respect to this ruling.(10) a Fatwa in respect to this ruling. The basis for the permissibility of a penalty clause in an Istisnaa contract The basis for the permissibility of a penalty clause in an Istisnaa contract is that such a clause is in the interest of the contract and because it is laid down in respect to an obligation regarding items that must be produced and delivered in the future and not in respect to monetary debt. Supervision of the Execution of an Istisnaa Contract The basis for the permissibility for the Institution, when acting as the ultimate purchaser, to appoint a technically experienced consulting firm and the permissibility for the Institution, when acting as the manufacturer, to appoint the ultimate purchaser as an agent is because agency is permissible and there is nothing against it in an Istisnaa contract provided it is done with the agreement of the parties. The Hadith has been related by Al-Bukhari in his Sahih (8)(8) The Hadith has been related by Al-Bukhari in his International Islamic Fiqh Academy Resolution No. 64 (7/2). (9)(9) International Islamic Fiqh Academy Resolution No. 64 (7/2). See: Fatwa No. (251). (10) See: Fatwa No. (251). (10) [1: 179] and [2: 965]. Sahih [1: 179] and [2: 965]. 317317 Shariah Standard No. (11): Istisnaa and Parallel Istisnaa Delivery and Disposal of the Subject-Matter The basis for the impermissibility of selling the items to be produced prior to taking either actual or constructive possession of them is that such an action is considered as selling a non-existent item. It is also considered as selling what one does not own because it is not available for the seller at the time of conclusion of the contract. Parallel Istisnaa The basis for the permissibility of the Institution entering into a contract with another party in order to sell, in the capacity of manufacturer, builder or supplier, items whose specification conforms to the wishes of that other party, on the basis of Parallel Istisnaa, is that in such a case there are two separate deals of Istisnaa. There is no link between the two contracts; hence, this is not an instance of two sales in one deal, which is impermissible. The separation of the two contracts also has the effect of making the transaction a type of non-Riba-based financing. 318318 Shariah Standard No. (11): Istisnaa and Parallel Istisnaa Appendix (C) Definitions Istisnaa Contract Istisnaa is a contract of sale of specified items to be manufactured or constructed, with an obligation on the part of the manufacturer or builder (contractor) to deliver them to the customer upon completion. Parallel Istaisnaa Another form of Istisnaa, known in modern custom as Parallel Istisnaa , takes effect through two separate contracts. In al-Istisnaa al-Muwazi, takes effect through two separate contracts. In al-Istisnaa al-Muwazi the first contract, the Islamic Financial Institution acts in the capacity of a manufacturer, builder or supplier and concludes a contract with the customer. In the second contract, the Institution acts in the capacity of a purchaser and concludes another contract with a manufacturer, builder or supplier in order to fulfil its contractual obligations towards the customer in the first contract. By this process, a profit is realised through the difference in price between the two contracts and, in most cases, one of the two contracts is concluded immediately, (i.e. the Istisnaa contract entered into with the manufacturer, builder or supplier), while the second contract (i.e. the contract entered into with the customer) is concluded later. Difference Between Istisnaa and Ijarah The contract of Istisnaa differs from the contract of Ijarah in the sense that the latter is a contract of services without any commitment to supply materials whereas the former requires that the manufacturer or builder provide both services for the transformation or construction process and ultimately to supply the materials in the form of the finished items. Difference Between Istisnaa and a Standard Construction Contract The contract of Istisnaa also differs from a standard construction contract providing in that the latter is regarded as an Ijarah contract if it is confined to providing in that the latter is regarded as an Ijarah contract if it is confined to 319319 Shariah Standard No. (11): Istisnaa and Parallel Istisnaa services only, with the materials to be provided by the customer (the person who engaged the Institution to carry out the construction work). But if a construction contract requires the builder to provide both the services and the materials needed to fulfil the contract, then it is an Istisnaa contract. Difference Between Istisnaa and Salam The Istisnaa contract also differs from a Salam contract in the sense that the former is a contract that involves a sale of specified items that have by nature to be manufactured or constructed. In other words, an Istisnaa contract is applicable to materials that require transformation by a manufacturing or construction process. The Salam, on the other hand, is a contract of sale of specified goods, the permissibility of which is not attached to a condition that the goods must be manufactured or constructed. 320320 Shariah Standard No. (12) Sharikah (Musharakah) and Modern Corporations (Revised Standard) Contents Subject PagePage ................................................................................................... Preface ................................................................................................... Preface ..................................................................... Statement of the Standard ..................................................................... Statement of the Standard ..............................................................................

Scope of the Standard ..............................................................................
Scope of the Standard ..................
Definitions, Classifications and Types of Sharikat al-Aqd ..................
Definitions, Classifications and Types of Sharikat al-Aqd ...................
First Category: Traditional Fiqh-Nominate Partnerships ...................
First Category: Traditional Fiqh-Nominate Partnerships ........... 3/1 General rulings of Sharikah, especially Sharikat al-Inan ........... 3/1 General rulings of Sharikah, especially Sharikat al-Inan 3/2 Partnership in creditworthiness or reputation .............................. 3/2 Partnership in creditworthiness or reputation .............................. Service partnerships (professional or vocational partnerships 3/3 3/3 Service partnerships (professional or vocational partnerships and partnerships in skilled trades) ............................................... and partnerships in skilled trades) ............................................... ..............................................
Second Category: Modern Corporations ..............................................
Second Category: Modern Corporations .................................................................................. 4/1 Stock company .................................................................................. 4/1 Stock company 4/2 Joint-liability company ..................................................................... 4/3 Partnership in commendum ........................................................... 4/4 Company limited by shares.............................................................. 4/5 Allotment/particular (Muhassah) partnership.............................. .......................................................................
Diminishing Musharakah .......................................................................
Diminishing Musharakah
Date of Issuance of the Standard............................................................ ...................................................................... Adoption of the Standard ...................................................................... Adoption of the Standard Appendices Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (b): TheThe Shariah Basis for the Standard.................................... Appendix (b): Shariah Basis for the Standard.................................... Appendix (c): Definitions............................................................................. Appendix (c): Definitions............................................................................. 325325 326326 327327 337337 338338 342342 343343 344344 345345 346346 348348 349349 350350 352352 363363 323323 IN THE NAME OF ALLAH, THE ALL-MERCIFUL, THE MOST MERCIFUL All praise be to Allah, the Lord of all the worlds, and blessings and peace be upon our master, Muhammad, and his household and all his companions Preface The objective of this standard is to explain the basis and general rulings for Sharikat al-Aqd, (contractual partnership) which is known today as Musharakah, including the rulings for joint partnership, reputation (cred- itworthiness) partnership, vocation partnership, diminishing partnership and modern corporations. The explanation of these partnerships includes definitions, rulings applicable to each partnership and the Shariah lim- itations that must be taken into account by Islamic financial Institutions (Institution/Institutions).(1)(1) (Institution/Institutions). The word (Institution/Institutions) is used here to refer, in short, to Islamic financial (1)(1) The word (Institution/Institutions) is used here to refer, in short, to Islamic financial institutions including Islamic Banks. 325325 Shariah Standard No. (12): Sharikah (Musharakah), and Modern Corporations Statement of the Standard
Scope of the Standard This standard covers all forms of traditional Fiqh-nominate partnerships that operate on the basis of Sharikat al-Aqd (contractual partnership), except the partnerships that are explicitly excluded by this standard as indicated below. The standard also applies to all modern forms of partnerships including diminishing Musharakah. The standard does not cover ownership partnership where the parties jointly own an asset. It does not include rules for Sharikat al-Mufawadah because the practical application of this form of partnership is rare and, if need be, reference should be made to Fiqh books. The standard does not cover Mudarabah, because this form of partnership has a separate standard. In the same vein, it does not cover sharecropping partnerships, such as irrigation and agricultural partnerships. The standard also does not cover, as far as modern partnerships are concerned, regulatory policies and procedures necessary for operations in the market.
Definition, Classifications and Types of Sharikat al-Aqd 2/1 Definition of Sharikat al-Aqd Sharikat al-Aqd (contractual partnership) means an agreement be- tween two or more parties to combine their assets, labour or liabilities for the purpose of making profits. 2/2 Classifications of Sharikat al-Aqd Sharikat al-Aqd is classified into two main categories: First Category: First Category: Traditional Fiqh-Nominate Partnerships. Traditional Fiqh-Nominate Partnerships. Second Category: Second Category: Modern Corporations. Modern Corporations. 2/2/1 The traditional Fiqh-nominate partnerships are as follows: a) Sharikat al-Inan (contractual partnership) 326326 Shariah Standard No. (12): Sharikah (Musharakah), and Modern Corporations credit- b) Sharikat al-Wujuh or Al-Dhimam, i.e. partnership of credit- b) Sharikat al-Wujuh or Al-Dhimam, i.e. partnership of (liability partnership) worthiness or reputation (liability partnership) worthiness or reputation c) Sharikat al-Amal (vocational partnerships and partnerships for undertaking difficult work or accepting jobs) 2/2/2 Modern corporations and their well-known forms are as fol- lows: a) Stock company b) Joint-liability company c) Partnership in commendum d) Company limited by shares e) Allotment (Muhassah) partnership f) Diminishing partnership (this partnership has originated from Sharikat al-Inan)
First Category: Traditional Fiqh-Nominate Partnerships 3/1 General rulings for Sharikah, especially Sharikat al-Inan Sharikat al-Inan is a partnership between two or more parties whereby each partner contributes a specific amount of money in a manner that gives each one a right to deal in the assets of the partnership, on condition that the profit is distributed according to the partnership agreement and that the losses are borne in accordance with the contribution of each partner to the capital. 3/1/1 Conclusion of a Sharikah contract 3/1/1/1 A Sharikah contract can be concluded by agreement between the parties concerned on the basis of offer and acceptance. The contract of partnership should, if necessary, be documented and registered officially. The objectives of the partnership must be clearly spelt out in the document of partnership or in the articles of association of the company. 3/1/1/2 It is permissible for the Institution to enter into a part- nership contract with non-Muslims or conventional banks to carry out operations acceptable by Shariah 327327 Shariah Standard No. (12): Sharikah (Musharakah), and Modern Corporations unless it has become evident that the funds or items presented by these entities for the purpose of the part- nership are from non-permissible sources. In operating a partnership with non-Muslims or conventional banks, a partnership with non-Muslims or conventional banks, arrangements must be made to obtain all necessary assurances and guarantees that rules and principles of the Shariah are observed during operations of the partnership. Among such guarantees is one to the effect that the operations of the company be either managed or supervised by an entity that observes the Shariah rules. 3/1/1/3 It is permissible for the Institutions to include con- ventional banks as partners in a syndicated financing which operates on the basis of Shariah, provided that the Institution secures the right to manage the partner- ships operations and that such operations are subject to the Shariah supervision. [see Shariah Standard No. (24) on Syndicated Financing] 3/1/1/4 It is permissible for the partners to amend at any point of time the terms of a partnership contract. They may make changes to the ratio of profit-sharing, taking into account that any losses are shared according to the share of each partner in the partnership capital. 3/1/2 The capital of Sharikah 3/1/2/1 In principle, the capital of Sharikah should be con- tributed in the form of monetary assets on which one can rely in order to determine the amount of the capital and to recognise profit or loss. Nevertheless, it is permissible, with the agreement of all partners, to provide tangible assets (commodities) as the capital of Sharikah after the monetary values of these assets are determined and expressed in currency in order to know the share contributed by each partner. 328328 Shariah Standard No. (12): Sharikah (Musharakah), and Modern Corporations 3/1/2/2 If partners have contributed their partnership cap- ital in different currencies, these currencies must be translated into the currency of the Sharikah at current exchange rates so as to determine the shares and liabilities of each partner. 3/1/2/3 The share of each partner in the capital should be determined, whether it is contributed in the form of one lump sum or by more than one payment over time; i.e., when there is a need for additional funds to increase the capital. 3/1/2/4 It is not permitted that debts (receivables) alone be used as a contribution to the Sharikah capital. However, debts may form part of the contribution to the capital where they become inseparable from other assets that can be presented as a contribution to the capital in Sharikah, such as when a manufacturing firm use its net assets as a contribution to the capital. [see Shariah Standard No. (21) on Financial Paper] 3/1/2/5 The funds of current accounts, although they are juristically classified as loans to the Institutions, can be presented as a contribution to the capital in a Sharikah either with the Institution itself or with a third party. 3/1/3 Managing a Sharikah venture 3/1/3/1 In principle, each partner is entitled to act in the interest of the partnership in the following transactions: spot or deferred sales; taking possession or custody of the partnership receivables; making payments or deposits and providing or receiving a mortgage on behalf of the partnership; asking for payment of debts, admission of liabilities, taking up legal actions, cancellation of liabilities, taking up legal actions, cancellation of of contracts, rejecting defective goods, renting the assets and of the partnership, processing transfers of rights and of the partnership, processing transfers of rights 329329 Shariah Standard No. (12): Sharikah (Musharakah), and Modern Corporations debts; requesting credit facilities in the interest of partnership; and doing what is customary in the interest of trading. A partner is not entitled to act against the interest of the partnership or to perform actions that will damage the partnership, such as giving actions that will damage the partnership, such as giving out grants or loans, unless all the partners have consented to such an action. However, the partner may give out short-term minor loans that will not, according to customary practice, affect the operation of partnership. 3/1/3/2 It is permissible for the partners to agree that the management of the partnership will be restricted to certain partners or to a single partner. In this case, the other partners are bound to abide by their consent not to act on behalf of the partnership. 3/1/3/3 It is permissible for the partners to appoint a manager other than one of the partners and pay him a fixed remuneration that will be included in the expenses of the Sharikah. It is also permissible that the partners set aside a portion of the investment profit plus a fixed remuneration as a form of incentive for the manager. However, if the management is carried out from the outset for a percentage share in the profit earned, this action classifies the manager as a Mudarib and he is only entitled to a share in the profit, if any, and deserves no further remuneration for management services. 3/1/3/4 It is not permitted, in a Sharikah contract, to specify a fixed remuneration for a partner who contributes in managing the Sharikah funds or provides some form of other services, such as accounting. However, it is permissible to give him a greater share of profit than he would receive solely on the basis of his share in the partnership capital. 330330 Shariah Standard No. (12): Sharikah (Musharakah), and Modern Corporations 3/1/3/5 It is permissible that one of the partners be appointed to provide services that are mentioned in item 3/1/3/4 provided that the appointment is based on an inde- pendent contract from the Sharikah contract so that he may be dismissed as a manager at any point of time without the need to amend or to terminate the Shari- kah contract. In this case, the appointed partner may earn a specific remuneration. 3/1/4 Guarantees in a Sharikah contract 3/1/4/1 All partners in a Sharikah contract maintain the assets of the Sharikah on a trust basis. Therefore, no one is liable except in cases of misconduct, negligence or breach of contract. It is not permitted to stipulate that a partner in a Sharikah contract guarantees the capital of another partner. 3/1/4/2 It is permissible for a partner in a Sharikah contract to stipulate that another partner provides a personal guarantee or a mortgage to cover cases of misconduct, negligence or breach of contract. 3/1/4/3 A third party may provide a guarantee to make up a loss of capital of some or all partners. This guar- antee is circumscribed with the conditions that (I) the legal capacity and financial liability of such a third party as a guarantor are independent from the Sharikah contract, (II) the guarantee should neither be provided for consideration nor linked in any manner to the Sharikah contract; (III) the third party guarantor should not own more than a half of the capital in the entity to be guaranteed, and (IV) the guaranteed entity should not own more than a half of the capital in the entity that undertakes to provide a guarantee. In case of a third partys under- taking to guarantee, the partner benefiting from such 331331 Shariah Standard No. (12): Sharikah (Musharakah), and Modern Corporations an undertaking is not, however, entitled either to claim that the Sharikah contract becomes null and void or to refuse to meet his obligations under the contract if the guarantor fails to meet his volun- tary promise to cover the loss of his capital, on the grounds that he (the beneficiary) entered into the Sharikah contract taking into account the state of such a third partys undertaking to guarantee the loss of his capital. 3/1/5 The outcome of Sharikah investments (profit and loss) 3/1/5/1 The Sharikah contract should incorporate a provision specifying the manner of sharing profits between the parties. The allocation of profits must be made in a manner that gives each partner an undivided per- centage of profit, not a sum of money or a percentage of the capital. [see item 3/1/5/9] 3/1/5/2 It is not permitted to defer the determination of the profit percentages due to each partner until the re- alisation of profit. The profit percentage for each partner must be determined at the conclusion of Sharikah contract. The parties may bilaterally agree to amend the percentages of profit-sharing on the date of distribution. Also, a partner may relinquish, on the date of distribution, a part of the profit that is due to him in favour of another party. 3/1/5/3 In principle, the shares of profit may be in proportion to the percentage of each partners contribution to the Sharikah capital. Nevertheless, the partners may agree to make profit-sharing not proportionate to their contributions to capital, provided the additional percentage of profit over the percentage of contribution to the capital is not in favour of a sleeping partner. If a partner did not stipulate a condition that he be 332332 Shariah Standard No. (12): Sharikah (Musharakah), and Modern Corporations a sleeping partner, then he is entitled to stipulate an additional profit share over his percentage of contribution to the capital even if he did not work. 3/1/5/4 It is a requirement that the proportions of losses borne by partners be commensurate with the proportions of their contributions to the Sharikah capital. It is not permitted, therefore, to agree on holding one partner or a group of partners liable for the entire loss or liable for a percentage of loss that does not match their share of ownership in the partnership. It is, however, valid that one partner takes, without any prior condition, the responsibility of bearing the loss at the time of the loss. 3/1/5/5 It is permissible for the partners to agree on the It is permissible for the partners to agree on the 3/1/5/5 adoption of any method of allocation of profit, either permanent or variable, for example, by agreeing that the percentages of profit shares in the first period are one set of percentages and in the second period are another set of percentages, depending on the disparity of the two periods or the magnitude of the realised profit. This is allowed provided that using such a method does not lead to the likelihood of a partner being precluded from participation in profit. 3/1/5/6 It is not permitted to start the allocation of profit be- tween the partners unless the operating costs, expenses and taxes are deducted in calculating the profit and the capital of the Sharikah is maintained intact. 3/1/5/7 It is not permitted that the conditions or modes of profit allocation in a Sharikah contract include any clause or condition that may result in the probable violation of the principle of sharing profit. For example, if a pre- determined amount of profit or a specific percentage of capital is assigned to one of the partners, this assignment will be rendered void. If the assignment 333333 Shariah Standard No. (12): Sharikah (Musharakah), and Modern Corporations is amended before profit comes forth, profit shall be divided in accordance with what partners agreed on as to amendment. Otherwise, profit shall be divided based on each partners respective share in capital. 3/1/5/8 Taking into account the provisions of item 3/1/5/3, it is permissible to agree that if the profit realised is above a certain ceiling, the profit in excess of such a ceiling belongs to a particular partner. The parties may also agree that if the profit is not over the ceiling or is below the ceiling, the distribution will be in accordance with their agreement. 3/1/5/9 The profit may be finally distributed on the basis of the proceeds of selling all the existing assets, known as actual valuation, or on the basis of constructive valuation of assets which means valuation of the assets of the Sharikah at fair value. The receivables must be valued at the cash value that is expected to be realised, i.e. after deduction of an allowance for doubtful debts. In valuing receivables, it is not permitted to take account of the time value of money (interest) or the notion of discount on the basis of current value, i.e. a discount of the amount of the debt as consideration for earlier payment, and cash amounts shall be recognized as is. 3/1/5/10 It is not permitted that the final allocation of profit take place based on expected profit, i.e. it is necessary that the allocation of profit take place on the basis of actual profit earned through actual or constructive valuation of the sold assets. 3/1/5/11 It is permissible to allocate some funds to any of the partners on account, i.e. before actual or constructive valuation, on condition that the final actual settlement will take place at a later stage. In this case, the parties 334334 Shariah Standard No. (12): Sharikah (Musharakah), and Modern Corporations should undertake to reimburse to the Sharikah any amount that they have received in excess of their share of profit after actual or constructive valuation. 3/1/5/12 If the subject matter of Sharikah is assets acquired for leasing that bring in income or the subject matter is services that bring in revenue, then the amount distributed to the partners annually is on account, and it is subject to settlement and reimbursement at the end of the Sharikah. 3/1/5/13 It is permissible, based on the articles of association It is permissible, based on the articles of association 3/1/5/13 or a decision of the partners, not to distribute the profits of the company. It is also permissible to set aside periodically a certain ratio of profit as a solvency reserve or as a reserve for meeting losses of capital (investment risk reserve) or as a profit equalisation reserve. 3/1/5/14 It is permissible to agree on setting aside a proportion of profit for non-partners as a charitable donation. 3/1/6 Maturity of Sharikah 3/1/6/1 Each partner is entitled to terminate the Sharikah (i.e. to withdraw from the partnership) after giving his partner/s due notice to this effect, in which case he shall be entitled to his share in the partnership, and this withdrawal would not necessitate the termination of the partnership of the remaining partners. It is permissible for the partners to enter into a binding promise for the continuity of the partnership for a period of time. In this case, it is permissible for the parties to agree to terminate the partnership before such a fixed period. In all these cases, the obligations and actions that took place before termination will remain unaffected and they will continue to exist. 335335 Shariah Standard No. (12): Sharikah (Musharakah), and Modern Corporations 3/1/6/2 It is permissible for a partner to issue a binding promise to buy, either within the period of operation or at the time of liquidation, all the assets of the Sharikah as per their market value or as per agreement at the date of buying. It is not permissible, however, to promise to buy the assets of the Sharikah on the basis of face value. 3/1/6/3 A Sharikah venture comes to an end at the expiry date or before the expiry date if the partners agree to terminate it prematurely, or, in the case of part- nership in a particular business, by actual liquidation of the assets that constitute the subject matter of the partnership. The termination of a Sharikah can take place on the basis of constructive liquidation. In this case, the Sharikah will be regarded as if it has been ended and the parties have commenced a new part- nership whereby the assets that were not sold through actual liquidation, but have been valued on the basis of constructive liquidation, will be considered as the capital of the new partnership. If the liquidation is based on the expiry date, then all the existing assets shall be sold according to current market values and the proceeds will be used as follows: a) Payment of liquidation expenses. b) Payment of financial liabilities from the net assets of the partnership. c) Distribution of the remaining assets among the partners in accordance with their percentage of contribution to the capital. If the assets fall short and the partners do not recover all of their contri- buted capital, the distribution shall take place on a pro rata basis to the shares of capital. 336336 Shariah Standard No. (12): Sharikah (Musharakah), and Modern Corporations (liability partnership) 3/2 Partnership in creditworthiness or reputation (liability partnership) 3/2 Partnership in creditworthiness or reputation 3/2/1 A partnership in creditworthiness (partnership of liability) is a bilateral agreement between two or more parties to conclude a a partnership to buy assets on credit on the basis of their reputation partnership to buy assets on credit on the basis of their reputation for the purpose of making profit, whereby they undertake to fulfil their obligations according to the percentages determined by the parties. In addition, the parties should determine for each partner the percentage of profit sharing and of liability sharing, which latter may, by agreement, differ, downwards or upwards, from the percentage of profit sharing. 3/2/2 The partnership in creditworthiness has no monetary cap- ital. This is because the subject matter of the partnership is an obligation or a liability that is contingent on creditworthiness (outstanding reputation). This is the obligation of the partners to pay the amount of debts created through purchases on credit, which form the liability of the partners. Therefore, the parties should agree on the ratio of liability for which each partner is responsible when paying such debts. 3/2/3 The profit shall be distributed according to the agreement. However, the loss will be borne by each partner according to the ratio that each partner had undertaken to bear in proportion to overall assets that are purchased on credit. It is not permitted that the contract of partnership incorporates a provision that specifies a lump sum from the profit for a particular partner. 3/3 Service partnerships (professional or vocational partnerships and partnerships in skilled trades) 3/3/1 A service partnership is an agreement between two or more parties to provide services pertaining to a profession, vocation or skilled trade or to render some services or professional advice or to manufacture goods, and to share profit according to an agreed upon ratio. 337337 Shariah Standard No. (12): Sharikah (Musharakah), and Modern Corporations 3/3/2 The service partnership has no monetary capital. This is because the subject matter of the partnership is rendering services. There is no Shariah implication regarding any disproportion in the services the partners or their representatives may have rendered. The partners may also distribute different types of services among themselves and may assign some or all partners a set of services or a particular service in a way that will achieve the integration and purpose of the overall service to be rendered. 3/3/3 The profit shall be distributed among the partners according to the agreed ratio, but the contract should not specify that a lump sum be paid from the profit to a particular partner. 3/3/4 If the service partnership requires capital goods (e.g., equip- ment or tools), then it is permissible for each party to provide the necessary goods that his services require, in which case each partner owns the goods he has provided. The partners may con- tribute funds to acquire the goods on the basis of a partnership in ownership. It is also permissible for a party to a Sharikah contract to provide the capital goods required by the partner- ship in consideration for fees that will be charged against the Sharikah operation as expenses.
Second Category: Modern Corporations 4/1 Stock company 4/1/1 Definition of a stock company 4/1/1/1 A stock company is a company of which the capital is partitioned into equal units of tradable shares and each shareholders (co-owners) liability is limited to his share in the capital. It is a form of financing part- nership. The rules of Sharikat al-Inan apply to this nership. The rules of Sharikat al-Inan apply to this company except on the issue of the limited liability of the shareholders and the fact that this type of compa- ny cannot be unilaterally terminated by one party or a minority of its shareholders. [see items 4/1/2/1 and 4/1/2/9] 338338 Shariah Standard No. (12): Sharikah (Musharakah), and Modern Corporations 4/1/1/2 The stock company has a juristic personality through its incorporation by law in such a way that it cannot avoid its obligations to people dealing with it. This separates the liability of the company from the liability of its shareholders (the co-owners) and also establishes for it a separate legal capacity as required for necessary legal arrangements, irrespective of the legal capacity of the shareholders. By definition, a stock company is entitled to initiate legal claims through its representative. It is subject to the jurisdiction of the place of its incorporation. 4/1/2 Shariah Rulings relating to a stock company 4/1/2/1 The contract forming a stock company is binding during the duration designated by the articles of association for the continuity of the company on the basis of the undertaking of the parties not to dissolve the company unless the majority of the partners have consented to do so. Therefore, no one is entitled to dissolve (to terminate) the company in respect to his shares. However, a shareholder is entitled to sell his shares or to relinquish title to them in favour of another person. 4/1/2/2 It is permissible for the issuer of shares to add a certain percentage to the actual value of the shares on the subscription date in order to recover issuing expenses, provided that such percentage is appropriately estimated to reflect the actual expenses incurred. 4/1/2/3 It is permissible to issue new shares in order to increase the capital provided the new shares are issued at the fair value of the old shares. This should be done in accordance with the opinion of experts in valuation of the companys assets. In other words, the new issues can be issued at a premium or at a discount to their nominal value, or issued at a market value. 339339 Shariah Standard No. (12): Sharikah (Musharakah), and Modern Corporations 4/1/2/4 It is permissible that a shareholder underwrite an issue of shares without any consideration. In such a case, there is an agreement between a person and the company on the date of incorporation of the company, or of a share issue, to the effect that such a person is undertaking to buy all or part of the shares issued. In other words, it means an undertaking to subscribe all the remaining shares that are not subscribed at its nominal value. However, it is permissible for a shareholder to ask for consideration for services provided other than the underwriting, such as conducting feasibility studies or marketing the shares. 4/1/2/5 It is permissible that a part of payment for subscrip- tion of shares be made in an instalment and that the other instalments be deferred. In this case, the paid instalment is a contribution to the Sharikah capi- tal, and the deferral of some instalments constitutes an undertaking to increase his share of capital in the company subsequently. This is permissible provid- ed the instalments cover all the shares and that the companys liability is confined to the value of the subscribed shares. 4/1/2/6 It is not permitted to purchase shares using interest- based loans, provided by either a broker or any other person, in consideration for mortgaging the shares as a security for payment. 4/1/2/7 It is not permitted for someone to sell shares that he does not own and the promise of a broker to lend the shares to him at the date of delivery does not constitute ownership or possession of the shares. This is not allowed especially if the broker stipulates that the seller must pay the price of the shares so that he can deposit it and earn interest in return for such a loan. 340340 Shariah Standard No. (12): Sharikah (Musharakah), and Modern Corporations 4/1/2/8 In the legitimate public interest, it is permissible for the relevant authorities to organise trading in shares in such a way that trading will not take place except through specific licensed stockbrokers. 4/1/2/9 It is permissible to restrict the liability of a company to its paid up capital if this is made public, in order to make the customers of the company aware of the financial position of the company without any uncertainty or lack of transparency. 4/1/2/10 It is permissible to sell shares in the company subject to rules and regulations of the company that do not conflict with Shariah, such as pre-emptive rights of the existing shareholders to purchase the shares. 4/1/2/11 It is permissible to mortgage the companys shares. However, this is subject to the rules and regulations of the company vis--vis the right of the shareholders to mortgage their ownership rights to undivided shares in the company. 4/1/2/12 It is permissible to issue shares to the order of (nominative shares). 4/1/2/13 It is permissible to issue bearer shares. This is ex- ecuted by handing over to the investor a certificate that represents a right to shares in the company and receiving their value in cash or acquiring a counter deed recognising a debt against the shareholder. In this case, the common ownership of shares repre- sented by the certificate is vested in the holder of the certificate of shares at any time. 4/1/2/14 It is not permitted to issue preference shares, i.e. shares that have special financial characteristics that give them a priority at the date of liquidation of the company or at the date of distribution of profit. However, it is 341341 Shariah Standard No. (12): Sharikah (Musharakah), and Modern Corporations permissible to grant certain shares, in addition to being entitled to rights attached to common shares, certain procedural and administrative privileges, such as a right of vote. 4/1/2/15 It is not permitted to issue Tamattu 4/1/2/15 It is not permitted to issue (enjoyment) Tamattu (enjoyment) shares: shares that entitles the holder a participation in the net profit, but not to vote and which are gradually redeemed before the termination of the company through distribution of profits. 4/2 Joint-liability company 4/2/1 Definition of Joint-liability Company 4/2/1/1 A joint-liability company is a form of personal partner- ship. It is a necessary requirement that this partnership is publicly declared as a registered company assigned a unique title (trademark). 4/2/1/2 A joint-liability company has a juristic personality and independent financial liability unrelated to the liability of the partners. Nevertheless, all the partners are per- sonally responsible for the obligations and liabilities of the company if the existing assets cannot meet the lia- bilities of the company. 4/2/1/3 In addition to maintaining documents of the joint- liability company, the partners are also obliged to maintain commercial documents relating to external trade activities. 4/2/2 Shariah Rulings relating to Joint-liability Companies 4/2/2/1 A creditor of a joint-liability company is entitled to demand fulfilment of all or part of his rights from any of the partners in any way the creditor deems fit. Therefore, the creditor is not obliged to claim such fulfilment from the company first. 342342 Shariah Standard No. (12): Sharikah (Musharakah), and Modern Corporations 4/2/2/2 The contract of a joint-liability partnership is not bind- ing; hence, a partner is entitled to withdraw from the partnership on the following conditions: a) If the partners did not set a duration for the company. If they agreed on a duration, then such duration must be observed. b) The partner should notify the other partners of the b) The partner should notify the other partners of the intention to withdraw. c) If the unilateral withdrawal from the partnership would not cause damage to other partners. 4/2/2/3 It is not permissible for the partner to bring in a sub- stitute for himself without the agreement of the other partners. 4/3 Partnership in commendum 4/3/1 Definition of partnership in commendum 4/3/1/1 Partnership in commendum is a form of financing partnership. This is because the personality of the op- erating partner is important for the sleeping partner and because there is a difference in terms of determi- nation of the ownership of the partners, whereby the ownership is calculated based on disproportionate lots and not on the basis of proportionate shares that are equal in number. 4/3/1/2 This form of company consists of managing partners and sleeping partners. The managing partners in this partnership are jointly liable for the obligations of the company from their personal wealth on the basis of joint-liability. The liability of each sleeping partner is limited to the number of lots he owns and his liability does not extend to his personal assets. It is permissible to limit the liability of some investors 343343 Shariah Standard No. (12): Sharikah (Musharakah), and Modern Corporations without any consideration for limiting their liability, in which case the company consists of joint-liability partners and partners with limited liability. [see item 4/1/2/9] 4/3/1/3 It is not permissible for the sleeping partners to interfere in the operations of the company. The law does not even allow that their names be mentioned on the date of the registration of the company. Only the funds collected from the sleeping partners are mentioned. 4/3/1/4 The management of the company may be delegated either to one of the joint liability partners or to a third party. The sleeping partners are not entitled to manage the company. 4/3/2 Shariah Rulings relating to the partnership in commendum 4/3/2/1 Profit must be distributed according to the ratio of lots or agreement. Losses are borne by managing and sleeping shareholders partners, according to the ratio of their shares in the capital. 4/3/2/2 It is not permissible to stipulate that a sleeping part- ner has a right to an amount of profit according to a particular percentage of the capital or a lump sum. [see item 3/1/5/8] 4/4 Company limited by shares 4/4/1 Definition of a company limited by shares The company limited by shares is a form of personal partnership. The subscription in this company is in accordance with equal numbers of shares and it comprises of managing partners and sleeping partners. 4/4/2 Shariah Rulings relating to the company limited by shares 4/4/2/1 The managing partners in this company are liable for the obligations of the company from their personal 344344 Shariah Standard No. (12): Sharikah (Musharakah), and Modern Corporations assets on the basis of joint liability. They are in the position of a person who works as a Mudarib and simultaneously participates in a partnership. The sleeping partners liability is limited to the number of the shares each partner owns and does not extend to his own assets. In this case, the liability of sleeping partners is equivalent to that of the capital providers in a Mudarabah contract. It is permissible to limit the liability of some investors without any consideration for limiting their liability, in which case the company consists of joint liability partners and partners with limited liability. [see item 4/1/2/9] 4/4/2/2 It is not permissible for the sleeping partners to inter- fere in the operations of the company. The law does not even allow that their names are mentioned on the date of the registration of the company. Only the funds collected from the sleeping partners are mentioned. 4/4/2/3 The management of the company may be delegated either to one of the managing partners or to a third party. The sleeping partners are not entitled to manage the company. 4/4/2/4 Profit must be distributed according to the ratio of par- ticipation or agreement. Losses are borne by the man- aging shareholding partners and sleeping shareholding partners according to their shares in the capital. And any excess losses shall be borne by managing partners. 4/4/2/5 It is not permissible to stipulate that a sleeping part- ner has a right to an amount of profit according to a particular percentage of the capital or a lump sum. 4/5 Allotment/particular (Muhassah) partnership 4/5/1 Definition of allotment partnership 4/5/1/1 The definition of Sharikat al-Inan is applicable to an al- partner- lotment partnership [see item 3/1]. This type of partner- lotment partnership [see item 3/1]. This type of 345345 Shariah Standard No. (12): Sharikah (Musharakah), and Modern Corporations ship belongs to the personal (private) form of company. The reason for this is that the partners take into account before concluding a partnership each ones financial strength and ability to meet financial obligations from his personal assets. 4/5/1/2 Sharikat al-Muhassah has no juristic personality because people other than the partners do not know about it. This partnership does not have any separate financial liability as an entity. 4/5/2 Shariah rulings relating to Muhassah Company 4/5/2/1 The rulings for and basis of a Muhassah company do not differ from those for an Inan partnership. [see item 3/1] 4/5/2/2 The liability of partners is personal and, as such, they are liable for the liabilities of the company from their personal assets. The rules for and classification of an allotment partnership do not differ from Inan part- nership. 4/5/2/3 The contract of a Muhassah partnership is not binding. However, if the parties agree to make it binding for a particular period of time, then they shall be bound by such an agreement. [see 4/3/2/2] 4/5/2/4 A partner in Sharikat al-Muhassah is entitled to terminate his partnership on condition that (I) he notifies other partners of his intention to withdraw and (II) the unilateral withdrawal from partnership would not cause damage to other partners or clients of the company. The partnership can be liquidated by way of actual or constructive liquidation of the companys assets.
Diminishing Musharakah 5/1 Diminishing Musharakah is a form of partnership in which one of the partners promises to buy the equity share of the other partner 346346 Shariah Standard No. (12): Sharikah (Musharakah), and Modern Corporations gradually until the title to the equity is completely transferred to him. in It is necessary that this buying and selling should not be stipulated in It is necessary that this buying and selling should not be stipulated the partnership contract. In other words, the buying partner is is allowed the partnership contract. In other words, the buying partner allowed to give only a promise to buy. This promise should be independent to give only a promise to buy. This promise should be independent of the partnership contract. In addition, the buying and selling agreement must be independent of the partnership contract. It is not permitted that one contract be entered into as a condition for concluding the other. 5/2 The general rules for partnerships must be applied to a diminishing partnership, especially the rules for Sharikat al-Inan. Therefore, it is not permitted that the contract of diminishing partnership include any clause that gives any of the parties a right to withdraw his share in the capital. 5/3 It is not permitted to stipulate that one partner should bear all the cost of insurance or maintenance on the ground that he will eventually own the subject matter of the partnership. 5/4 Each partner should contribute part of the capital. The contribution may be in the form of cash or tangible assets that can be translated into a monetary value, for example, a land for building or equipment required for the operation of partnership. The loss, if any, shall be borne periodically by the parties in accordance with the participation ratio of each partner as the equity stake of one partner decreases and the stake of the other partner increases. 5/5 The ratio of profit or income of the partnership that each partner (the Institution and customer) is entitled to should be clearly determined. However, it is permissible for the partners to agree on a ratio of profit sharing that is disproportionate to the ratio of equity ownership. It is also permissible for the partners either to maintain the ratio of profit already determined even if the ratio of equity shares has changed, or to agree on amending the ratio of profit sharing due to the change in the ratio of equity shares. In doing so, they must ensure that the principle of allocation of losses in accordance with the ratio of equity share of ownership is maintained. 347347 Shariah Standard No. (12): Sharikah (Musharakah), and Modern Corporations 5/6 It is not permitted to stipulate that one partner has a right to receive a lump sum out of the profits. [see item 3/1/5/8] 5/7 It is permissible for one of the partners to give a binding promise that entitles the other partner to acquire, on the basis of a sale contract, his equity share gradually, according to the market value or a price agreed at the time of acquisition. However, it is not permitted to stipulate that the equity share be acquired at their original or face value, as this would constitute a guarantee of the value of the equity shares of one partner (the Institution) by the other partner, which is prohibited by Shariah. 5/8 The partners may arrange for the acquisition of the equity share of the Institution in a manner that serves the interests of both parties. This includes, for example, a promise by the Institutions client to set aside a portion of the profit or the return he may earn from the partnership for the acquisition of a percentage of the equity of the Institution. The subject matter of the partnership may be divided into shares, in which case the Institutions partner can purchase a particular number of these shares at certain intervals until the partner becomes the owner of the entire shares and consequently becomes the sole owner of the subject matter of the partnership. 5/9 It is permissible for either of the partners to rent or to lease the share of the other partner for a specified amount and for whatever duration, in which case each partner will remain responsible for the periodical maintenance of his share on a timely basis.
Date of Issuance of the Standard This Standard was issued on 4 Rabi I, 1423 A.H., corresponding to 16 May 2002 A.D. 348348 Shariah Standard No. (12): Sharikah (Musharakah), and Modern Corporations Adoption of the Standard The Shariah Standard on Sharikah (Musharakah) and Modern Corporations was adopted by the Shariah Board in its meeting No. (8) held in Al-Madinah Al-Munawwarah on 28 Safar - 4 Rabi I, 1423 A.H., corresponding to 11-16 May 2002 A.D. 349349 Shariah Standard No. (12): Sharikah (Musharakah), and Modern Corporations Appendix (A) Brief History of the Preparation of the Standard In its meeting No. (5) In its meeting held in Makkah Al-Mukarramah on 8-12 Ramadan No. (5) held in Makkah Al-Mukarramah on 8-12 Ramadan 1421 A.H., Corresponding to 4-8 December 2000 A.D., the Shariah Board decided to give priority to the preparation of a Shariah Standard on Sharikah (Musharakah) and Modern Corporations. On Saturday 15 Dhul-Hajjah 1421 A.H., corresponding to 10 March 2001 A.D., the Fatwa and Arbitration Committee recommended to the Shariah Board the commissioning of a Shariah consultant to prepare a juristic study and an exposure draft on the Shariah Rules for Sharikah (Musharakah) and Modern Corporations. In its meeting held on 18 Muharram 1422 A.H., corresponding to 12 April 2001 A.D., the Fatwa and Arbitration Committee discussed the exposure draft of the Shariah Rules for Sharikah (Musharakah) and Modern Corporations and asked the consultant to make amendments in light of the comments made by the members. The Committee also held a meeting on 20 Jumada II 1422 A.H., corresponding to 8 September 2001 A.D. and made some amendments in light of the comments made by the members. The revised exposure draft of the Standard was presented to the Shariah Board in its meeting No. (7) held in Makkah Al-Mukarramah on 9-13 Ramadan 1422 A.H., corresponding to 24-28 November 2001 A.D. The Shariah Board made further amendments to the exposure draft of the standard and decided that it should be distributed to specialists and interested parties in order to public hearing. obtain their comments and discuss them in a public hearing obtain their comments and discuss them in a A public hearing was held in Bahrain on 2920 Dhul-Hajjah 1422 A.H., attended corresponding to 2-3 February 2002 A.D. The public hearing was attended corresponding to 2-3 February 2002 A.D. The public hearing was by more than thirty participants representing central banks, institutions, 350350 Shariah Standard No. (12): Sharikah (Musharakah), and Modern Corporations accounting firms, Shariah scholars, academics and others who are interested in this field. Some of the members of the Shariah Board responded to the written comments that were sent prior to the public hearing written comments that were sent prior to the as well as to public hearing as well as to public hearing. the oral comments that were expressed in the public hearing the oral comments that were expressed in the The Shariah Standards Committee in its meeting held on 21-22 Dhul- Hajjah 1422 A.H., corresponding to 6-7 March 2002 A.D., in the Kingdom of Bahrain discuss the comments made about the exposure draft. The Committee made the necessary amendments, which it deemed necessary in light of both the discussions that took place in the public hearing, and the written comments that were received. The Shariah Board in its meeting No. (8) held on 28 Safar 4 Rabi I, 1423 A.H., corresponding to 11-16 May 2002 A.D., in Al-Madinah Al Munawwarah discussed the amendments made by the Shariah Standards Committee, and made the necessary amendments, which it deemed necessary. Some paragraphs of the standard were adopted by the unanimous vote of the members of the Shariah Board, while the other paragraphs were adopted by the majority vote of the members, as recorded in the minutes of the Shariah Board. The Shariah Standards Review Committee reviewed the standard in its meeting held in Rabi II 1433 A.H., corresponding to March 2012 A.D. in the State of Qatar, and proposed after deliberation a set of amendments (additions, deletions, and rephrasing) as deemed necessary, and then submitted the proposed amendments to the Shariah Board for approval as it deemed necessary. In its meeting No. (41) held in Al-Madinah Al Munawwarah, Kingdom of Saudi Arabia on 27-29 Shaban 1436 A.H., corresponding to 14-16 June 2015 A.D., the Shariah Board discussed the proposed amendments submitted by the Shariah Standards Review Committee. After deliberation, the Shariah Board approved necessary amendments, and the standard was adopted in its current amended version. 351351 Shariah Standard No. (12): Sharikah (Musharakah), and Modern Corporations Appendix (B) The Shariah Basis for the Standard Permissibility of Partnership The Fuqaha have classified partnerships into four categories, namely Sharikat al-Inan (contractual partnership), Sharikat al-Abdan (skilled trade partnership), Sharikat al-Mufawadah (agency-like partnership) Sharikat al-Wujuh (creditworthiness or reputation partnership). The and Sharikat al-Wujuh (creditworthiness or reputation partnership). The and most important of all is Sharikat al- Inan (contractual partnership). The most important of all is Sharikat al- Inan (contractual partnership). The permissibility of this form of partnership is established by the Quran, the Sunnah and practical consensus of the Fuqaha. The permissibility of Sharikah is supported by the Saying of Allah, the (And, verily, many partners oppress one another, except Almighty: (And, verily, many partners oppress one another, except Almighty: those who believe and do righteous good deeds, and they are few).(2)(2) those who believe and do righteous good deeds, and they are few) Among the Sunnah provisions that support the permissibility of part- nership is the case of Al-Saib Ibn Abu Al-Saib Al-Makhzumi who was a partner of the Prophet (peace be upon him) in business at the beginning of Islam. On the day when the Prophet (peace be upon him) conquered Mecca, he met Al-Saib, then he (peace be upon him) said: Welcome my Mecca, he met Al-Saib, then he (peace be upon him) said: Welcome my brother and my partner. He jokes not (i.e. he is serious in business) and do not argue (unnecessarily).(3)(3) not argue (unnecessarily). Moreover, partnership is one of the main transactions in all societies since the advent of Islam. This constitutes, therefore, a practical consensus for the permissibility and validity of partnerships. The partnerships for which the jurists have clarified their rules are the origins of the modern corporations, such as joint-stock companies whose [Sad: 24] (2)(2) [Sad: 24] The Hadith had been related by Al-Hakim who deemed it authentic [2: 61]. Al- (3)(3) The Hadith had been related by Al-Hakim who deemed it authentic [2: 61]. Al- Dhahabi agreed with Al-Hakim. 352352 Shariah Standard No. (12): Sharikah (Musharakah), and Modern Corporations financial standing and obligations are related to the volume of the shares of the company and on its juristic personality, not on the personality of the shareholders. Therefore, the general rules for various partnerships in Shariah will govern modern forms of corporations. However, the procedural systems relating to representation of partnership companies and bureaucratic, administrative and accounting procedures are required by Maslahah (consideration of the public good or common need), which is an acceptable source for validating human actions provided it is employed in line with the principles of Shariah. The general basis of Sharikah is agency (Wakalah) because each partner is acting as a principal partner, on one hand, and acting in the interest of the partnership, on the other hand, as an agent for the remaining partners. Unlike other partnerships, combines rules of agency Sharikat al-Mufawadah combines rules of agency Unlike other partnerships, Sharikat al-Mufawadah and guarantee simultaneously. Conclusion of Sharikah Contract It is permitted to conclude a partnership contract with non-Muslims It is permitted to conclude a partnership contract with non-Muslims or conventional banks for carrying out permissible operations in asso- ciation with necessary guarantees that they will observe Shariah pre- cepts and principles. The Shariah basis for this is the Hadith stating: The Messenger of Allah has prohibited concluding partnership with Jews and Christians unless the selling and buying is in the hands of the MuslimMuslim..(4)(4) The cause of the prohibition is the fear of being involved in The cause of the prohibition is the fear of being involved in interest-based transactions or in concluding impermissible contracts and this fear is absent when there are guarantees to observe and apply Shariah rulings.(5)(5) Al Baraka Forum has issued a resolution in support Shariah rulings. Al Baraka Forum has issued a resolution in support of partnership between Islamic banks and conventional banks.(6)(6) of partnership between Islamic banks and conventional banks. The basis for the permissibility of an agreement on amending the terms The basis for the permissibility of an agreement on amending the terms of partnership and the profit sharing ratio is that this action does not lead to a possibility of precluding a partner from getting a share of profit.(7)(7) profit. (4)(4) Musannaf Ibn Abu Shaybah (5)(5) See: Ibn Qudamah, (6)(6) See: Resolution No. (9/1): (7)(7) See: Resolution No. (11/8): Musannaf Ibn Abu Shaybah [6: 9]. [6: 9]. See: Ibn Qudamah, Al-Mughni [7: 110-111]. Al-Mughni [7: 110-111]. See: Resolution No. (9/1): Fatawa Nadwat Al Baraka See: Resolution No. (11/8): Fatawa Nadwat Al Baraka No. 9, (P. 151). Fatawa Nadwat Al Baraka No. 9, (P. 151). No. 11, (P. 194). Fatawa Nadwat Al Baraka No. 11, (P. 194). 353353 Shariah Standard No. (12): Sharikah (Musharakah), and Modern Corporations Capital of Sharikah The basis for the requirement that a payment of contribution to The basis for the permissibility that Sharikah capital may be contributed The basis for the permissibility that Sharikah capital may be contributed in the form of tangible assets other than cash, after valuation, is that the purpose of Sharikah is to give partners a right to use the contributed money freely and to share the profit. This objective is realisable even if the capital is contributed in the form of tangible assets just as it is in the case of a contribution in cash. Therefore, it is just as valid to present tangible assets for Sharikah investment as to present cash. At the liquidation, each one of the partners will be entitled to the equivalent value of the assets presented at the conclusion of the Sharikah.(8)(8) This is the view of the presented at the conclusion of the Sharikah. This is the view of the Maliki and the Hanbali scholars.(9)(9) Maliki and the Hanbali scholars. Sharikah The basis for the requirement that a payment of contribution to Sharikah capital in a currency different from the designated currency of partnership must be valued according to the current exchange rate at the time of payment is that this action is a currency exchange between two currencies which is permitted provided it is carried out at the current exchange rate. This is evidenced by the Hadith in which Ibn Umar asked the Prophet (peace be upon him) concerning selling camels at (a place in Medina called Al-Baqi) in a currency and collecting payment in a different currency. The Prophet (peace be upon him) endorsed the transaction provided it had taken place (10) according to the current exchange rate.(10) according to the current exchange rate. The basis for the requirement that the investments of parties in the The basis for the requirement that the investments of parties in the capital should be properly determined is that failure to do so will lead to ambiguity in respect to the capital. It is not permissible that the capital of Sharikah be ambiguous since certainty as to the amount of the capital is a benchmark for sharing profit. The equitable distribution of profit is not possible if the amount of capital contributed by each (11) party is ambiguous.(11) party is ambiguous. The basis for rejecting payment of partnership capital in receivables The basis for rejecting payment of partnership capital in receivables alone is that debts owed to a partner by another partner cannot actually be used in partnership operations, as they are not assets in possession. Al-Mughni [7: 124] (8)(8) Al-Mughni [7: 124] Hashiyat Al-Dusuqi [2: 517]; and (9)(9) Hashiyat Al-Dusuqi The source of the Hadith has been stated earlier. (10) The source of the Hadith has been stated earlier. (10) [7: 125]. Al-Mughni [7: 125]. (11) Al-Mughni (11) [2: 517]; and Al-Mughni [5: 17]. Al-Mughni [5: 17]. 354354 Shariah Standard No. (12): Sharikah (Musharakah), and Modern Corporations Again, this may potentially lead to Riba when the partner is the one (12) However, if the receivables are combined with other assets in debt.(12) However, if the receivables are combined with other assets in debt. and the ratio of debt to the total assets is negligible, then debt and the other assets can be presented as a contribution to partnership capital. (things dependent on Tabaiyyah (things dependent on The basis for this is the principle of Tabaiyyah The basis for this is the principle of another thing) as per the legal maxim: A thing which in fact follows from another thing follows it also in law and judgment cannot be given separately for a thing that follows from another and the legal maxim: The law is flexible in things that follow from another. The basis for allowing current accounts as capital in partnership is The basis for allowing current accounts as capital in partnership is that, in spite of their being considered as loan, they are presumed to be possessed by the accountholders because the funds are available on demand. This is because the Institutions are obliged by their regulations and directives of the supervisory bodies to pay the owner on demand or accept cheques against these accounts irrespective of the financial situation of the Institution. Managing a Partnership The basis for the right of each partner to participate in the management The basis for the right of each partner to participate in the management of the partnership is that partnership is based on elements of agency and trust. The element of agency requires that each party be entitled to be involved in the operations in a manner that is in the interest of the partnership. The element of trust requires that each party act for the (13) benefit of the partnership.(13) benefit of the partnership. The basis for not allowing a fixed remuneration for a partner who The basis for not allowing a fixed remuneration for a partner who assists in the management is that this may lead to guaranteeing the capital of this partner, or to his not being exposed to risk of loss, if any, in proportion to his contribution in the capital. The basis for the permissibility of appointing, by a separate independent The basis for the permissibility of appointing, by a separate independent contract, one partner to manage the partnership and the permissibility of paying him wages is that the partner becomes an employee of the company and he is not acting in the capacity of a partner. Hashiyat Al-Dusuqi [3: 517]; and (12) Hashiyat Al-Dusuqi (12) See: Al-Mughni (13) See: (13) [7: 128]. Al-Mughni [7: 128]. [3: 517]; and Al-Mughni [5: 17]. Al-Mughni [5: 17]. 355355 Shariah Standard No. (12): Sharikah (Musharakah), and Modern Corporations Guarantees in Partnership The basis of the requirement that a partner is not liable except in cases The basis of the requirement that a partner is not liable except in cases of misconduct or negligence, and of the im of a stipu- permissibility of a stipu- of misconduct or negligence, and of the impermissibility lation to the effect that a partner guarantees the capital of another partner, is that partnership operates on the basis of trust, and to hold a trustee liable for losses (except in the case of misconduct or negli- (14) gence) is impermissible.(14) gence) is impermissible. The basis for allowing a party to a partnership to require a guarantee or The basis for allowing a party to a partnership to require a guarantee or a mortgage from another party as security against cases of misconduct and the like is that this requirement does not conflict with the rules for partnership. Again, the general principle of contracts and partnerships (15) is that parties are required to observe stipulated terms as far as possible.(15) is that parties are required to observe stipulated terms as far as possible. The basis for the permissibility of a promise to guarantee by a third party The basis for the permissibility of a promise to guarantee by a third party whose financial liability is independent from the parties to a partnership is that this action is a mere charitable act and an undertaking that is independent of the partnership contract. In other words, a fulfilment of a promise by a third party is not a condition for the of the permissibility of the a promise by a third party is not a condition for the permissibility contract. In addition, the third partys guarantee does not adversely affect the established Shariah principle against guaranteeing capital or profit. A resolution was issued by International Fiqh Academy in support of (16) the permissibility of a third partys promise to guarantee.(16) the permissibility of a third partys promise to guarantee. The basis for the requirement that the guaranteeing Institution should The basis for the requirement that the guaranteeing Institution should not be the owner of the guaranteed Institution or vice versa is that by ownership the transaction becomes in substance a guarantee by a partner of the capital of another partner. Outcome of Partnership Investment (Profit and Loss) The basis for the impermissibility of an agreement to determine the The basis for the impermissibility of an agreement to determine the profit share on the basis of a lump sum or a percentage of the capital is because this is inconsistent with the sharing of profit and because profit is not realised unless the capital is maintained intact. Al-Kafi [2: 230]; and See: Ibn Qudamah, Al-Kafi (14) [2: 230]; and Al-Mubdi (14) See: Ibn Qudamah, See: Fatwa (1/5) of Al Baraka First Forum, 1403 A.H.: Qararat Wa Fatawa Nadwat Qararat Wa Fatawa Nadwat (15) See: Fatwa (1/5) of Al Baraka First Forum, 1403 A.H.: (15) (P. 18). Al Baraka (P. 18). Al Baraka International Fiqh Academy resolution No. 30 (5/4). (16) International Fiqh Academy resolution No. 30 (5/4). (16) [4: 256]. Al-Mubdi [4: 256]. 356356 Shariah Standard No. (12): Sharikah (Musharakah), and Modern Corporations The basis for the impermissibility of deferring the statement of the profit The basis for the impermissibility of deferring the statement of the profit ratio of each party until profit is realised is because such a procedure involves uncertainty which may potentially lead to dispute. However, the parties are entitled to amend the profit ratio or to relinquish a right to profit on the date of distribution. This is because the profit belongs to them; hence, it is permissible for them to make amendments or relinquishments. The basis for the requirement that the profit share may be either pro- The basis for the requirement that the profit share may be either pro- portionate or disproportionate to the contribution of each party in the capital is that an individual deserves a share in profit on the basis of the funds contributed, the work done or the risk borne. If an indivi- dual is involved in any of these three, then it is allowed for the parties to agree on a profit ratio accordingly. This is the opinion of the Hanafi (17) and Hanbali schools.(17) and Hanbali schools. The basis for the impermissibility of one party bearing losses or that The basis for the impermissibility of one party bearing losses or that each party bear a portion of losses that may not be proportionate to the share of each party in the capital is the saying of Ali Ibn Abu Talib (may Allah be pleased with him): Profit distribution is according to agreement of the partners and loss must be borne in proportion to the (18) Therefore, it is a void condition that one contribution in the capital.(18) contribution in the capital. Therefore, it is a void condition that one party should bear the loss of other parties and such a condition facili- tates misappropriation of the property of others. The basis for the permissibility of the partners agreeing on any method The basis for the permissibility of the partners agreeing on any method for allocation of profit, whether fixed or variable during a particular period, is that this agreement is circumscribed with a condition that the method adopted should not contravene any Shariah principle, which means the method should not preclude a party from sharing in profit. The basis for not allowing final distribution of profit before deduction The basis for not allowing final distribution of profit before deduction of expenses and expenditure is that there is no profit unless the capital is maintained intact. Al-Hidayah Sharh Al-Bidayah [3: 7-8], Al-Maktabah Al-Islamiyyah [3: 7-8], Al-Maktabah Al-Islamiyyah [5: 4], Al- Al-Mubdi [5: 4], Al- Badai Al-Sanai [6: 62-63]; and Ibn Muflih, See: Al-Mirghinani, Al-Hidayah Sharh Al-Bidayah (17) See: Al-Mirghinani, (17) edition; Al-Kasani, edition; Al-Kasani, Badai Al-Sana`i Maktab Al-Islami edition This Athar has been reported by Ibn Abu Shaybah in his Musannaf Maktabat Al-Rushd. (18) This Athar has been reported by Ibn Abu Shaybah in his (18) [6: 62-63]; and Ibn Muflih, Al-Mubdi [4: 268], Riyadh: Musannaf [4: 268], Riyadh: 357357 Shariah Standard No. (12): Sharikah (Musharakah), and Modern Corporations The basis for the impermissibility of specifying a lump sum profit The basis for the impermissibility of specifying a lump sum profit amount for one partner is that this action is inconsistent with sharing in profit. The basis for not allowing a partner to earn a share of profit and a fee The basis for not allowing a partner to earn a share of profit and a fee simultaneously is that this fee is a lump sum that may preclude sharing in profit due to the possibility that the partnership business may not realise enough profit to cover it. The basis for allowing a partner to receive, based on a separate contract, a fee is that the contract that entitles a partner to a fee is not part of the partnership contract and because this fee is not inconsistent with sharing in profit, as the partner in this case is considered to be a third party. The basis for the permissibility of an agreement that if the profit The basis for the permissibility of an agreement that if the profit realised is above a certain ceiling, the profit over such ceiling belongs to a particular partner, is because this constitutes a valid condition that is a particular partner, is because this constitutes a valid condition that is (19) Moreover, the capital provider not inconsistent with profit sharing.(19) Moreover, the capital provider not inconsistent with profit sharing. is the one who will bear losses, if any. The basis for the permissibility of distributing profit based on construc- The basis for the permissibility of distributing profit based on construc- (20) tive valuation is that the use of this method is permitted by Shariah(20) tive valuation is that the use of this method is permitted by Shariah and was used in a number of cases, such as Zakah and theft. The basis permissibility of constructive valuation is also the saying of the for the of constructive valuation is also the saying of the for the permissibility Prophet (peace be upon him): If a co-owner of a slave frees his part, the Prophet (peace be upon him): If a co-owner of a slave frees his part, the slave will be set free against his property if he has property; otherwise, it (21) will be valued by fair value and freed.(21) will be valued by fair value and freed. The basis for the permissibility of distributing funds to partners on The basis for the permissibility of distributing funds to partners on account, i.e. subject to settlement and refund of any additional profit acquired over the contribution to the capital on the date of actual liquidation, is because this action causes no damage to any of the partners since the distributed funds on account are subject to settle- ment at a later stage. Al-Bahr Al-Zakhkhar [5: 83], Dar Al-Kitab Al-Islami edition. (19) (19) Al-Bahr Al-Zakhkhar [5: 83], Dar Al-Kitab Al-Islami edition. See: Resolution No. (4) of the Islamic Fiqh Academy under the auspices of Muslim (20) See: Resolution No. (4) of the Islamic Fiqh Academy under the auspices of Muslim (20) World League that was issued in the 16thth session held in Mecca on 21-26/10/1422 World League that was issued in the 16 session held in Mecca on 21-26/10/1422 A.H.; the International Islamic Fiqh Academy resolution No. 30 (5/4) and Fatwa No. (8/2) issued during the Al Barakas 8thth Forum on Islamic Economics in (8/2) issued during the Al Barakas 8 Fatawa Al Forum on Islamic Economics in Fatawa Al (P. 134). Baraka (P. 134). Baraka This Hadith has been related by Muslim, See: Sahih Muslim (21) This Hadith has been related by Muslim, See: (21) [2: 1140]. Sahih Muslim [2: 1140]. 358358 Shariah Standard No. (12): Sharikah (Musharakah), and Modern Corporations The basis for allowing distribution of partnership revenues, including The basis for allowing distribution of partnership revenues, including the capital assets, prior to liquidation of the partnership is that the partners suffer no damage from this and also the distribution is subject (22) to review and reimbursement when liquidation is actually effected.(22) to review and reimbursement when liquidation is actually effected. Termination of Partnership The basis for the rule that termination of partnership will not affect The basis for the rule that termination of partnership will not affect obligations and actions that took place before it is protection of the remaining partners against any potential damage. The basis for the impermissibility of a promise by one of the partners The basis for the impermissibility of a promise by one of the partners to buy assets of the partnership at face value is that this constitutes a guarantee of the capital which is prohibited by Shariah. The basis for the permissibility of a promise to buy the assets of partnership at the market value is that this does not constitute a guarantee of capital. Modern Corporations The permissibility of modern corporations is dependent on the prin- The permissibility of modern corporations is dependent on the prin- ciple of Shariah that human transactions are, in principle, permissible (MubahMubah) as long as there is no clear injunction against them, espe- ) as long as there is no clear injunction against them, espe- cially in view of the fact that the categorisation of any one or more of these corporations had parallels in Shariah-nominate contracts, such as Inan partnership, Mudarabah and the like.(23) as Inan partnership, Mudarabah and the like. (23) Stock Companies The basis for the permissibility of underwriting issues of shares without The basis for the permissibility of underwriting issues of shares without taking consideration is that this is an undertaking that does not involve an impermissible act, such as taking a commission for a guarantee. The International Islamic Fiqh Academy has issued a resolution in this (24) respect.(24) respect. The basis for the impermissibility of buying shares using an interest- The basis for the impermissibility of buying shares using an interest- based loan provided by a stockbroker or other party against a mortgage of the shares is that this is an interest-based transaction secured by (22) See: International Islamic Fiqh Academy Resolution No. 30 (5/4), and resolution of See: International Islamic Fiqh Academy Resolution No. 30 (5/4), and resolution of (22) Islamic Fiqh Academy under the auspices of Muslim World League during its 16th session. (23) See: Abdul-Aziz Al-Khayyat, (23) See: Abdul-Aziz Al-Khayyat, Al-Sharikat See: The International Islamic Fiqh Academy Resolution No. 63 (1/7). (24) See: The International Islamic Fiqh Academy Resolution No. 63 (1/7). (24) [2: 158-159]. Al-Sharikat [2: 158-159]. 359359 Shariah Standard No. (12): Sharikah (Musharakah), and Modern Corporations (25) In this case, both transactions are prohibited by an explicit shares.(25) shares. In this case, both transactions are prohibited by an explicit source that indicates that Allah, the Almighty, has cursed a person who lives on interest-based transactions, a person who pays such interest, and a person who notarises or acts as a witness for such transactions. The basis for the impermissibility of selling shares that the seller does The basis for the impermissibility of selling shares that the seller does not own is that this constitutes selling of an item that one does not own or an involvement in a transaction without bearing a risk which is prohibited by Shariah. The basis for allowing a mortgage of shares is that mortgaging is per- The basis for allowing a mortgage of shares is that mortgaging is per- missible. Moreover, anything that can be sold may be presented as a mortgage as in the case of shares unless the bylaws of the company state otherwise in which case the conditions stated must be observed. The basis for the permissibility of shares to the order of (nominative The basis for the permissibility of shares to the order of (nominative shares) is that this is a form of transferring ownership of shares to another investor. The acceptance by the remaining shareholders of the bylaws of the company that give a right to transfer is an implied (26) The basis for the permissibility consent to the transfer of ownership.(26) consent to the transfer of ownership. The basis for the permissibility of bearer shares is that it is a sale of shares by a shareholder to another investor. The acceptance by the remaining shareholders of the bylaws of the company that give a right to sell is an implied consent to the sale. The fact that the identification and personality of the new shareholder (the purchaser) is not known to other shareholders will not affect the (27) sale as they may be provided with this information if need be.(27) sale as they may be provided with this information if need be. The basis for the impermissibility of issuing preference (preferred) The basis for the impermissibility of issuing preference (preferred) shares is that preference shares are inconsistent with profit sharing and (28) involve depriving other partners of their fair share of profit.(28) involve depriving other partners of their fair share of profit. The basis for the impermissibility of issuing shares that entitle the holder The basis for the impermissibility of issuing shares that entitle the holder gradually a participation in the net profit and entitles the company to gradually a participation in the net profit and entitles the company to redeem the participation through the distribution of profits before the termination of the company, is because the funds the certificate holders receive constitute profit in respect of their shares. The claim that the (25) See: International Islamic Fiqh Academy Resolution No. 63 (1/7). (25) See: International Islamic Fiqh Academy Resolution No. 63 (1/7). (26) See: International Islamic Fiqh Academy Resolution No. 63 (1/7). (26) See: International Islamic Fiqh Academy Resolution No. 63 (1/7). (27) See: International Islamic Fiqh Academy Resolution No. 63 (1/7). (27) See: International Islamic Fiqh Academy Resolution No. 63 (1/7). (28) See: International Islamic Fiqh Academy Resolution No. 63 (1/7). (28) 360360 Shariah Standard No. (12): Sharikah (Musharakah), and Modern Corporations participations are redeemed in consideration for the distributed profit is invalid. Therefore, the certificate holders remain owners of the shares (29) and are entitled to proceeds when the company is liquidated.(29) and are entitled to proceeds when the company is liquidated. Joint Liability Company The basis for the of the undertaking of partners in a joint permissibility of the undertaking of partners in a joint The basis for the permissibility liability company to be jointly responsible is that the joint liability in liability company to be jointly responsible is that the joint liability in this way is subject to the rules for guarantees. The permission granted by each of them to the others to act on behalf of the company is subject to the rules of agency as in the case of Mufawadah partnership which combines elements of guarantee and agency. The partners have consented to be liable jointly because there is no gain at the expense of (30) any of the partners and no one is to be cheated.(30) any of the partners and no one is to be cheated. The basis for the impermissibility of bringing in a substitute partner The basis for the impermissibility of bringing in a substitute partner in a joint liability company when the other partners did consent to it is that the personality of the partner is significant for the partners because the liability of the company includes his personal assets and the substi- tute may not be in the same financial position as the partner. Partnership in Commendum The basis for the impermissibility of sleeping partners of partnership in The basis for the impermissibility of sleeping partners of partnership in commendum or company limited by shares being entitled to interfere in the management of the company is that they have agreed not to do so and this agreement does not affect the rules of partnership. The reason why the financial liability of the sleeping partners in The reason why the financial liability of the sleeping partners in partnership in commendum is limited to their shares is that they are in the position of capital providers in a Mudarabah contract. Allotment (Particular) Partnership The basis for the permissibility of unilateral termination of participation in this kind of partnership by any of the partners is that, in principle, unilat- eral termination of participation is allowed provided such action inflicts no damage to any of the partners as per the saying of the Prophet (peace be upon him): No harm to be inflicted and no reciprocal harm. him): (31) No harm to be inflicted and no reciprocal harm.(31) See: International Islamic Fiqh Academy Resolution No. 63 (1/7). (29) (29) See: International Islamic Fiqh Academy Resolution No. 63 (1/7). See: Abdul-Aziz Al-Khayyat, Al-Sharikat (30) See: Abdul-Aziz Al-Khayyat, (30) The Hadith has been related by Ibn Majah in his Sunan (31) The Hadith has been related by Ibn Majah in his (31) [2: 235]. Al-Sharikat [2: 235]. [2: 784]. Sunan [2: 784]. 361361 Shariah Standard No. (12): Sharikah (Musharakah), and Modern Corporations Diminishing Partnership The basis for saying that all the general rules for partnerships, especially The basis for saying that all the general rules for partnerships, especially the rules for Inan partnership, are applicable to diminishing partnerships is to safeguard this new form of partnership from becoming a mere interest-based financing transaction in which a client undertakes to pay another party for his finance in addition to a share in the partnership income. The basis for the impermissibility of one partner being responsible for The basis for the impermissibility of one partner being responsible for the expenses of insurance or maintenance is that this condition is in (32) conflict with the nature of the partnership contract.(32) conflict with the nature of the partnership contract. See: Fatwa No. (219) of the Fatwas of Kuwait Finance House. (32) See: Fatwa No. (219) of the Fatwas of Kuwait Finance House. (32) 362362 Shariah Standard No. (12): Sharikah (Musharakah), and Modern Corporations Appendix (C) Definitions Contract Partnership (Sharikat al-Aqd) Contract partnership is an agreement between two or more parties to combine their assets or to merge their services or obligations and liabilities with the aim of making profit. Partnership of Ownership (Sharikat al-Milk) Partnership of ownership (Sharikat al-Milk) is the combination of the assets of two or more persons in a manner that creates a state of sharing the realised profit or income or benefiting from an increase in the value of the partnership assets. This combination of assets for making profit necessitates bearing losses, if any. The ownership partnership is created by events beyond the partners control such as the inheritance rights of heirs in the legacy of a deceased person. This partnership is also created by the wish of the partners such as when two or more parties acquire common shares in a particular asset. Mufawadah Partnership Mufawadah partnership is any partnership in which the parties are equal in all respects, such as funds contributed by them, their right to act and their liability, from the commencement of the partnership to the date of its termination. Sharecropping Partnership (Muzaraah) Sharecropping is partnership in crops in which one party presents land to another for cultivation and maintenance in consideration for a common defined share in the crop. Irrigating Partnership (Musaqat) Irrigating partnership is a partnership that depends on one party presenting designated plants/trees that produce edible fruits to another in order to work on their irrigation in consideration for a common defined share in the fruits. 363363 Shariah Standard No. (12): Sharikah (Musharakah), and Modern Corporations Agricultural Partnership (Mugharasah) Agricultural partnership is a partnership in which one party presents a treeless piece of land to another to plant trees on it on the condition that they share the trees and fruits in accordance with a defined percentage. Distribution of Proceeds and Profits Distribution of proceeds and profits is a process of termination an undi- vided ownership in the company by the final distribution of the assets where- by rights of each partner are defined and common shares are partitioned into identified sets for each partner. This is why distribution is defined as identification of undefined shares or proceeds of a particular person. 364364 Shariah Standard No. (13) Mudarabah (Revised Standard) Contents Subject PagePage ................................................................................................... Preface ................................................................................................... Preface ..................................................................... Statement of the Standard ..................................................................... Statement of the Standard ..............................................................................
Scope of the Standard ..............................................................................
Scope of the Standard .........................................................................
Definition of Mudarabah .........................................................................
Definition of Mudarabah ....................................................
Agreement of Mudarabah Financing ....................................................
Agreement of Mudarabah Financing ................................................................................
Mudarabah Contract ................................................................................
Mudarabah Contract .................................................................................
Types of Mudarabah .................................................................................
Types of Mudarabah ...................................................
Guarantees in a Mudarabah Contract ...................................................
Guarantees in a Mudarabah Contract ....................................................
Requirements Relating to the Capital ....................................................
Requirements Relating to the Capital .......................................
Rulings and Requirements Relating to Profit .......................................
Rulings and Requirements Relating to Profit
Duties and Powers of the Mudarib........................................................ ...................................................
Liquidation of a Mudarabah Contract ...................................................
Liquidation of a Mudarabah Contract .............................................................
Date of Issuance of the Standard .............................................................
Date of Issuance of the Standard ...................................................................... Adoption of the Standard ...................................................................... Adoption of the Standard Appendices Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (b): TheThe Shariah Basis for the Standard.................................... Appendix (b): Shariah Basis for the Standard.................................... Appendix (c): Definitions............................................................................. Appendix (c): Definitions............................................................................. 369369 370370 371371 372372 373373 375375 378378 379379 380380 382382 389389 367367 IN THE NAME OF ALLAH, THE ALL-MERCIFUL, THE MOST MERCIFUL All praise be to Allah, the Lord of all the worlds, and blessings and peace be upon our master, Muhammad, and his household and all his companions Preface The aim of this standard is to explain the Shariah rulings for restricted and unrestricted Mudarabah, whether the Islamic financial Institution (Institution/ Institutions)(1)(1) is acting in the capacity of a Mudarib (entrepreneur) or in the is acting in the capacity of a Mudarib (entrepreneur) or in the Institutions) capacity of an investor. The word (Institution/Institutions) is used here to refer, in short, to Islamic financial (1)(1) The word (Institution/Institutions) is used here to refer, in short, to Islamic financial institutions including Islamic Banks. 369369 Shariah Standard No. (13): Mudarabah Statement of the Standard
Scope of the Standard This standard covers Mudarabah contracts between the Institution and the other entities or individuals. It also covers joint investment accounts and special purpose investment accounts if these accounts are administered on the basis of Mudarabah. The standard does not cover Sukuk of Mudarabah (Mudarabah Certifi- cates) or other types of partnership contracts, as these are covered by sep- arate standards.
Definition of Mudarabah Mudarabah is a partnership in profit whereby one party provides capital (Rab al-Mal) and the other party provides labour (Mudarib).
Agreement of Mudarabah Financing 3/1 It is permissible, on the basis of a general framework or a memo- randum of understanding, to conclude Mudarabah financing con- tracts for a particular sum of money and within a particular defined duration provided that the memorandum of understanding will be later implemented in line with specific or successive Mudarabah transactions. 3/2 The memorandum of understanding should define the general con- tractual framework, indicating the intention of the parties to use either unrestricted or restricted Mudarabah financing instrument, either through revolving transactions or separate transactions. Also, the memorandum of understanding should indicate the profit ratio, and type of guarantees that shall be presented by the Mudarib to cover situations of negligence, misconduct or breach of contract and other relevant issues in this regard. 370370 Shariah Standard No. (13): Mudarabah 3/3 If the Mudarabah contract is actually concluded on the basis of the memorandum of understanding, the contents of the memorandum become an integral part of any future contract, unless the parties had originally agreed to exempt themselves from some of the obligations mentioned therein.
Mudarabah Contract 4/1 The Mudarabah contract may be concluded using terms such as Mudarabah, Qirad or Muamalah. 4/2 Both parties should possess the legal capacity to appoint agents and accept agency. Therefore, a Mudarabah contract may not be concluded in the absence of two contracting parties with absolute legal capacity or of their agents who enjoy legal capacity similar to that of the contracting parties. 4/3 The general principle is that a Mudarabah contract is not binding, i.e. each of the contracting parties may terminate it unilaterally except in two cases: 4/3/1 When the Mudarib has already commenced the business, in which case the Mudarabah contract becomes binding up to the date of actual or constructive liquidation. 4/3/2 When the contracting parties agree to determine a duration for which the contract will remain in operation. In this case, the contract cannot be terminated prior to the end of the desig- nated duration, except by mutual agreement of the contracting parties. 4/4 A Mudarabah contract is one of the trust-based contracts. Therefore, the Mudarib is investing Mudarabah capital on a trust basis in which case the Mudarib is not liable for losses except in case of breach of the requirements of trust, such as misconduct in respect to the Mudarabah fund, negligence and breach of the terms of Mudarabah contract. In committing any of these, the Mudarib becomes liable for the amount of the Mudarabah capital. 371371 Shariah Standard No. (13): Mudarabah
Types of Mudarabah Mudarabah contracts are divided into unrestricted and restricted Muda- rabah. 5/1 An unrestricted Mudarabah contract is a contract in which the capital provider permits the Mudarib to administer a Mudarabah fund without any restrictions. In this case, the Mudarib has a wide range of trade or business freedom on the basis of trust and the business expertise he has acquired. An example of unrestricted Mudarabah is when the capital provider says, Do business according to your expertise. However, such unrestricted business freedom in an unrestricted Mudarabah must be exercised only in accordance with the interests of the parties and the objectives of the Mudarabah contract, which is making profit. Therefore, the actions of the Mudarib must be in accordance with the business customs relating to the Mudarabah operations: the subject matter of the contract. 5/2 A restricted Mudarabah contract is a contract in which the capital provider restricts the actions of the Mudarib to a particular location or to a particular type of investment as the capital provider considers appropriate, but not in a manner that would unduly constrain the Mudarib in his operations.
Guarantees in a Mudarabah Contract The capital provider is permitted to obtain guarantees from the Mudarib that are adequate and enforceable. This is circumscribed by a condition that the capital provider will not enforce these guarantees except in cases of misconduct, negligence or breach of contract on the part of Mudarib.
Requirements Relating to the Capital 7/1 In principle, the capital of Mudarabah must be provided in the form of cash. However, it may be presented in the form of tangible assets, in which case the value of the assets is the contribution to the Mudarabah capital. The valuation of the assets may be conducted by experts or as agreed upon by the contracting parties. 372372 Shariah Standard No. (13): Mudarabah 7/2 The capital of Mudarabah should be clearly known to the contracting parties and defined in terms of quality and quantity in a manner that eliminates any possibility of uncertainty or ambiguity. 7/3 It is not permissible to use a debt owed by the Mudarib or another party to the capital provider as capital in a Mudarabah contract. 7/4 For a Mudarabah contract to be valid and for the Mudarib to be considered as having control over the capital, the capital must be, wholly or partially, put at the disposal of the Mudarib, or the Mudarib must have free access to the capital.
Rulings And Requirements Relating to Profit 8/1 It is a requirement that the mechanism for distributing profit must be clearly known in a manner that eliminates uncertainty and any possibility of dispute. The distribution of profit must be on the basis of an agreed percentage of the profit and not on the basis of a lump sum or a percentage of the capital. 8/2 In principle, it is not permissible to earn a share of profit in addi- tion to a fee in a Mudarabah contract. However, it is permissible for the two parties to construct a separate agreement independent of the Mudarabah contract assigning one party to perform, for a fee, a business activity that is not by custom part of Mudarabah operations. The independence of this separate agreement means that if the contract of providing this activity is terminated, this will not affect the contract of Mudarabah. 8/3 The parties shall agree on the ratio of profit distribution when the contract is concluded. It is also permissible for the parties to change the ratio of distribution of profit at any time and to define the duration for which the agreement will remain valid. 8/4 If the parties did not stipulate the ratio of profit distribution, then they shall refer to customary practice, if any, to determine the shares of profit. If the customary practice is that the profit is distributed equally, then this will be applied as such. If there is no customary practice in this regard, the Mudarabah contract is regarded void 373373 Shariah Standard No. (13): Mudarabah ab initio, and the party who acts as the Mudarib should receive a common market price for the kind and amount of services that he provided as Mudarib. 8/5 If one of the parties stipulates that he should receive a lump sum of money, the Mudarabah contract shall be void. This rule does not apply to a situation where the parties agree that if the profit is over a particular ceiling then one of the parties will take the additional profit and if the profit is below or equal to the amount of the ceiling the distribution of profit will be in accordance with their agreement. 8/6 It is not permissible for the capital provider to give the Mudarib two amounts of capitals on condition that the profit earned on one of the two amounts would be taken by the Mudarib while the capital provider would take the profit earned on the other amount. It is not also permissible for the capital provider to state that the profit of one financial period would be taken by the Mudarib and the capital provider would take the profit of the following financial period. Similarly, it is not permissible to assign the profit from a particular transaction to the Mudarib and the profit from another transaction to the capital provider. 8/7 No profit can be recognised or claimed unless the capital of the Mudarabah is maintained intact. Whenever a Mudarabah operation incurs losses, such losses stand to be compensated by the profits of future operations of the Mudarabah. The losses brought forward should be set against the future profits. All in all, the distribution of profit depends on the final result of the operations at the time of liquidation of the Mudarabah contract. If losses are greater than profits at the time of liquidation, the balance (net loss) must be deducted from the capital. In this case, as he is a trustee the Mudarib is not liable for the amount of this loss, unless there is negligence or misconduct on his part. If the total Mudarabah expenses are equal to the total Mudarabah revenues, the capital provider will receive his capital back without either profit or loss, and there will be no profit in which the Mudarib is entitled to a share. If profit is realised, it must be distributed between the parties as per the agreement. 374374 Shariah Standard No. (13): Mudarabah 8/8 The Mudarib is entitled to a share of profit as soon as it is clear that the operations of the Mudarabah have led to the realisation of a profit. However, this entitlement is not absolute, as it is subject to the retention However, this entitlement is not absolute, as it is subject to the retention of interim profits for the protection of the capital. It will be an absolute right only after distribution, i.e. when actual or constructive valuations take place. It is permissible to distribute the realised profit among the parties on account, in which case the distribution will be revised when actual or constructive valuation takes place. The final distribution of profit should be made based on the selling price of the Mudarabah assets, which is known as actual valuation. It is also permissible that the profit be distributed on the basis of constructive valuation, which is valuation of the assets on the basis of fair value. Receivables shall be measured at the cash equivalent, or net realisable value, i.e. after the deduction of a provision for doubtful debts. In measuring receivables, neither time value (interest rate) nor discount on current value for extension of period of payment shall be taken into consideration. 8/9 If the Mudarib has commingled his own funds with the Mudarabah funds, the Mudarib becomes a partner in respect of his funds and a Mudarib in respect of the funds of the capital provider. The profit earned on the two commingled funds will be divided proportionately to the amounts of the two funds, in which case the Mudarib takes the profit attributable to his own funds, while the remaining profit is to be distributed between the Mudarib and the capital provider according to the provisions of the Mudarabah contract.
Duties and Powers of the Mudarib The Mudarib should employ his best efforts to accomplish the objectives of the Mudarabah contract. The Mudarib should assure the capital provider that his money is in good hands that will act to find the best ways of investing it in a permissible manner. 9/1 If a Mudarabah contract is concluded on an unrestricted basis, the Mudarib is permitted, in general, to do what entrepreneurs do in his field of activity, including the following: 375375 Shariah Standard No. (13): Mudarabah 9/1/1 Attending to all permissible investment or trading fields that are feasible, given the amount of the capital at his disposal, and in which he believes that his expertise, and technical and professional qualifications are likely to give him the ability to compete effectively. 9/1/2 Carrying out the work himself or appointing another person to carry out some work if necessary, such as buying a commodity or marketing it for him. 9/1/3 Choosing as far as possible appropriate places and markets that are seemingly free of risks. 9/1/4 Safeguarding the Mudarabah funds or depositing them in the custody of a trustworthy person whenever appropriate. 9/1/5 Selling and buying on a deferred payment basis. 9/1/6 The Mudarib may do, either by permission or appointment of the capital provider, the following: a) The Mudarib may, at any time, combine a Mudarabah contract and a partnership (Sharikah) contract, irrespective contract and a partnership (Sharikah) contract, irrespective of whether this takes place at the outset of the contract or after the commencement of Mudarabah operations, and of whether the partnership contribution is from the Mudarib himself or from a third party. The mixture of unrestricted investment deposits with the Institutions funds is an exa- mple of this kind of combination. b) The Mudarib may accept funds from a third party on a Mudarabah basis if this new contract will not affect his investment and management responsibility in respect of the first Mudarabah contract. 9/2 It is permissible for the capital provider, on the basis of his interests, to place restrictions on the actions of the Mudarib. Thus, Mudarabah operations may be restricted to a specified time and place, so that the Mudarib may only invest the Mudarabah funds during a particular time period or in a specified country or in a market of a particular 376376 Shariah Standard No. (13): Mudarabah country. In addition, the Mudarabah operations may be restricted to investment in certain sectors such as services or trade sectors or a single commodity or a group of commodities. However, restricting the Mudarabah operations to certain commodities is circumscribed with a condition that such commodities must be commonly available so that, other things being equal, the restriction will not prevent the objectives of the Mudarabah contract from being achieved. For example, the commodities to which the Mudarabah is restricted must not be scarce, seasonal (and out of season) or in very limited supply with the consequence that the objectives of the Mudarabah contract cannot be achieved. 9/3 The capital provider is not permitted to stipulate that he has a right to work with the entrepreneur (Mudarib) and to be involved in selling and buying activities, or supplying and ordering. However, the Mudarib should refer to him in performing any action and should not act without consulting him. Also, the capital provider is not entitled to lay down conditions that will restrict movements or actions of the Mudarib, such as a stipulation that the Mudarib must enter into a partnership with others or a stipulation that the Mudarib must mix his personal funds with the Mudarabah funds. 9/4 The Mudarib must carry out all the work that any similar asset or fund manager would be liable, by custom, to do. In this case, the Mudarib is not entitled to a fee for this work as this is part of his responsibilities. If the Mudarib appoints another party on an Ijarah (hiring contract) basis to carry out such work, the wages for the worker must be paid from the personal funds of the Mudarib and not from the Mudarabah funds. The Mudarib may hire against the account of Mudarabah funds another party, at the prevailing rate, to execute work that is not by custom the responsibility of the Mudarib. 9/5 The Mudarib is not entitled to sell items for the Mudarabah operation at less than the common or market price, or to buy items for the Mudarabah operation at a price higher than common prices, unless if such action in either case is intended to achieve an objective that is obviously in the interest of the Mudarabah. 377377 Shariah Standard No. (13): Mudarabah 9/6 9/6 It is not permissible for the Mudarib to make a loan or a gift or It is not permissible for the Mudarib to make a loan or a gift or a charitable donation out of the Mudarabah funds. Likewise, the Mudarib is not entitled to waive a right associated with the Mu- darabah operation unless the capital provider has consented to his doing so. doing so 9/7 If the Mudarib has a right to receive living expenses from the Mudarabah funds that has been approved by the capital provider, then he is entitled to the amount so approved for him. If there is no agreement on this, then the Mudarib should take living expenses in accordance with custom and reason. The Mudarib is also entitled to travelling expenses in accordance with custom and reason.
Liquidation of a Mudarabah Contract 10/1 A Mudarabah contract can be liquidated in the following manner: 10/1/1 Being a non-binding contract, it can be liquidated by uni- lateral termination of the contract by one of the parties. [see item 4/3] 10/1/2 With the agreement of both parties. 10/1/3 On the date of maturity if the two parties had earlier agreed to set a time limit for it. [see item 3/4] 10/1/4 When the funds of Mudarabah contract have been exhausted or have suffered losses. 10/1/5 The death of the Mudarib or the liquidation of the institution that acts as Mudarib. 10/2 On the maturity of a Mudarabah operation, the assets should be liquidated in the manner explained in item 8/8.
Date of Issuance of the Standard This Standard was issued on 4 Rabi I, 1424 A.H., corresponding to 16 May 2002 A.D. 378378 Shariah Standard No. (13): Mudarabah Adoption of the Standard The Shariah Standard on Mudarabah was adopted by the Shariah Board in its meeting No. (8) held in Al-Madinah Al-Munawwarah during the period of 28 Safar to 4 Rabi I, 1423 A.H., corresponding to 11-16 May 2002 A.D. 379379 Shariah Standard No. (13): Mudarabah Appendix (A) Brief History of the Preparation of the Standard In its meeting No. (5) held in Makkah Al-Mukarramah during the period of 8-12 Ramadan 1421 A.H., corresponding to 4-8 December 2001 A.D., the Shariah Board decided to give priority to the preparation of a Shariah Standard on Mudarabah. On Saturday 15 Dhul-Hajjah 1421 A.H., corresponding to 10 March 2001 A.D., the Fatwa and Arbitration Committee recommended to the Shariah Board the commissioning of a Shariah consultant to prepare a juristic study and an exposure draft on the Shariah Standard for Mudarabah. In its meeting held on 18 Muharram 1422 A.H., corresponding to 12 April 2001 A.D., the Fatwa and Arbitration Committee discussed the exposure draft of the Shariah Rules for Mudarabah and asked the consultant to make amendments in light of the comments made by the members. The Committee also held a meeting on 20 Jumada II, 1422 A.H., corresponding to 8 December 2001 A.D., and made some amendments in light of the comments made by the members. The revised exposure draft of the Standard was presented to the Shariah Board in its 7th meeting held in Makkah Al-Mukarramah during the period of 9-13 Ramadan 1422 A.H., corresponding to 24-28 November 2001 A.D. The Shariah Board made further amendments to the exposure draft of the Standard and decided that it should be distributed to specialists and interested parties in order to obtain their comments with the objective of discussing them in a public hearing. A public hearing was held in Bahrain during the period of 29-20 Dhul- Hajjah 1422 A.H., corresponding to 2-3 February 2002 A.D. The public 380380 Shariah Standard No. (13): Mudarabah hearing was attended by more than thirty participants representing central Institutions, Institutions, accounting firms, Shariah scholars, academics and others who are interested in this field. Some of the members of the Shariah Board responded to the written comments that were sent prior to the public hearing as well as to the oral comments that were expressed in the public hearing. The Shariah Standards Committee in its meeting held during the period of 21-22 Dhul-Hajjah 1422 A.H., corresponding to 6-7 March 2002 A.D., in the Kingdom of Bahrain discussed the comments made on the exposure draft. The Committee made the amendments which it considered necessary in light of both the discussions that had taken place in the public hearing and the written comments that had been received. The Shariah Board in its 8th meeting held on 28 Safar - 4 Rabi I, 1423 A.H., corresponding to 11-16 May 2002 A.D., in Al-Madinah Al-Munawwarah discussed the amendments made by the Shariah Standards Committee, and made the necessary amendments, which it deemed necessary. Some paragraphs of the standard were adopted by the unanimous vote of the members of the Shariah Board, while the other paragraphs were adopted by the majority vote of the members, as recorded in the minutes of the Shariah Board. The Shariah Standards Review Committee reviewed the Standard in its meeting held on Rabi II, 1433 A.H., corresponding to March 2012 A.D., in the State of Qatar, and proposed after deliberation a set of amendments (additions, deletions, and rephrasing) as deemed necessary, and then submitted the proposed amendments to the Shariah Board for approval as it deemed necessary. In its 41st meeting held in Al-Madinah Al-Munawwarah, Kingdom of Saudi Arabia during the period of 27-29 Shaban 1436 A.H., corresponding to 14-16 June 2015 A.D., the Shariah Board discussed the proposed amendments submitted by the Shariah Standards Review Committee. After deliberation, the Shariah Board approved necessary amendments, and the Standard was adopted in its current amended version. 381381 Shariah Standard No. (13): Mudarabah Appendix (B) The Shariah Basis for the Standard Permissibility of Mudarabah and Its Rationale Mudarabah, known also as Qirad, is a contract that arranges cooperation Mudarabah, known also as Qirad, is a contract that arranges cooperation in business investment between capital on one hand and entrepreneurship on the other, whereby the contracting parties jointly and commonly own the realised profit as per the agreement. The party providing the capital is known Rab al-Mal and the investor is known as Mudarib or Amil (literally. worker) or Muqarid.(2)(2) (literally. worker) or Muqarid. Mudarabah contract derives its permissibility from the following:(3)(3) Mudarabah contract derives its permissibility from the following: a) From the Quran is the Saying of Allah, the Almighty: (Others (Others a) From the Quran is the Saying of Allah, the Almighty: travelling through the land, seeking of Allahs bounty).(4)(4) This verse travelling through the land, seeking of Allahs bounty) This verse is interpreted to mean those who travel for the purpose of trading and seeking permissible income in order to provide for themselves and their family. b) From the Sunnah is the Hadith that says, Al-Abbas Ibn Abdul- Muttalib used to pay money for Mudarabah and to stipulate to the Mudarib that he should not travel by sea, pass by valleys or trade in livestock, and that the Mudarib would be liable for any losses if he did so. These conditions were brought before the Prophet (peace be upon him) and he approved them.(5)(5) Among the Hadiths regarding upon him) and he approved them. Among the Hadiths regarding of Mudarabah is the case that states that Umar Ibn permissibility of Mudarabah is the case that states that Umar Ibn the permissibility the Al-Hidayah Sharh Bidayat Al-Mubtadi [3: 202]; Al-Kasani, [3: 202]; Al-Kasani, Badai Badai [2: 236]; and Ibn Bidayat Al-Mujtahid [2: 236]; and Ibn Al-Marghinani, Al-Hidayah Sharh Bidayat Al-Mubtadi (2)(2) Al-Marghinani, Al-Sanai [6: 56 and 57]; Ibn Rushd, Al-Sanai [6: 56 and 57]; Ibn Rushd, Bidayat Al-Mujtahid [3: 26]. Al-Mughni [3: 26]. Qudamah, Al-Mughni Qudamah, (3)(3) Takmilat Al-Majmu Takmilat Al-Majmu [14: 357-360]; [2: 236]; [2: 236]; Al-Hidayah withwith Al-Majmu [Al-Muzzammil (The One Wrapped in Garments): 20]. (4)(4) [Al-Muzzammil (The One Wrapped in Garments): 20]. The Hadith has been related by Al-Bayhaqi [6: 111]. (5)(5) The Hadith has been related by Al-Bayhaqi [6: 111]. [14: 357-360]; Subul Al-Salam [2: 202]; Al-Mughni Subul Al-Salam [3: 76]; Al-Mughni [5: 26]; and [14: 357]. Al-Majmu [14: 357]. Al-Hidayah [2: 202]; [5: 26]; and Al-Muhadhdhab [3: 76]; Bidayat Al-Mujtahid Bidayat Al-Mujtahid Printed Al-Muhadhdhab Printed 382382 Shariah Standard No. (13): Mudarabah Al-Khattab gave one man the funds belonging to an orphan for the purpose of Mudarabah and the man was trading with these funds in Iraq.(6)(6) Iraq. c) Ibn Al-Mundhir mentioned that there is generally consensus among of a Mudarabah contract.(7)(7) the scholars in respect to the permissibility the scholars in respect to the permissibility of a Mudarabah contract. The rationale for making this contract permissible includes the The rationale for making this contract permissible includes the following: a) Money cannot increase unless it is associated with work. It is also not permissible to provide money in return for a periodic pre-agreed payment (rent) to a person who is willing to invest it as this will constitute a debt with Riba. b) The Mudarabah contract is made permissible to facilitate investment cooperation between capital providers who are not prepared to invest and manage their money themselves, and competent business or investment experts who lack adequate capital. In other words, there are some individuals who are rich but lack business or investment know-how and others who have business or investment expertise but lack money. This situation thus calls for the permissibility of the Mudarabah contract so as to combine the interests of the two parties.(8)(8) parties. Moreover, a Mudarabah contract is an instrument that was commonly used in trade and which usage expanded in modern times to include busi- ness, services, and agricultural or horticultural and industrial activities. a) The business philosophy of conventional banks depends on the concept of renting out money and making profit in doing so, while Shariah prohibits this philosophy because of its being Riba. The Mudarabah financing instrument has been an essential instrument to develop Islamic financial Institutions (Institution/Institutions). This instrument is used by these institutions to attract unrestricted or restricted investment accounts and to reinvest these funds in various activities. (6)(6) The Hadith has been related by Al-Bayhaqi in The Hadith has been related by Al-Bayhaqi in Al-Marifah Rayah Rayah).). [7: 133-134]. Al-Mughni [7: 133-134]. (7)(7) Al-Mughni [14: 371]. Takmilat Al-Majmu [14: 371]. (8)(8) Takmilat Al-Majmu Al-Marifah (see: Al-Zaylai, Nasb Al- (see: Al-Zaylai, Nasb Al- 383383 Shariah Standard No. (13): Mudarabah Contract of Mudarabah The basis for the rule that both parties to a Mudarabah contract must The basis for the rule that both parties to a Mudarabah contract must be legally capable to appoint, or act as, an agent is because each party acts as an agent of the other party and appoints the other party to act on his behalf. The entitlement to appoint or act as an agent entitles one to conclude a Mudarabah contract. The basis for regarding a Mudarabah contract initially as a non-bin- The basis for regarding a Mudarabah contract initially as a non-bin- ding contract is that the Mudarib is using the capital providers funds with his consent in a contractual relationship in which the Mudarib is just an agent, and an agency contract is not binding. The basis for making a Mudarabah contract binding once the work has The basis for making a Mudarabah contract binding once the work has commenced is that a unilateral termination of the contract at this stage might frustrate the objective of the parties to make profit and might cause damage to the Mudarib since he might not receive any compen- sation for his work. The basis for allowing a time limit for the operation of a Mudarabah The basis for allowing a time limit for the operation of a Mudarabah contract is that a Mudarabah contract is, in essence, an agency contract, which is subject to a designated duration.(9)(9) The International Fiqh The International Fiqh which is subject to a designated duration. (10) Academy has issued a resolution in this respect.(10) Academy has issued a resolution in this respect. The basis for considering the Mudarib as a trustee with respect to the The basis for considering the Mudarib as a trustee with respect to the Mudarabah funds is that the Mudarib is using another persons money with his consent, and the Mudarib and the owner of the funds share the benefits from the use of the funds. In principle, a trustee should not be held liable for losses sustained by the funds. Rather, the risks of such losses must be borne by the Mudarabah funds. Guarantees in a Mudarabah Contract The basis for allowing guarantees in a Mudarabah that would be used The basis for allowing guarantees in a Mudarabah that would be used in case of misconduct and negligence of the Mudarib is that in such a case the Mudarib then becomes liable for losses and must bear the (11) consequences of these actions.(11) consequences of these actions. Al-Mughni [7: 133-134]. (9)(9) Al-Mughni [7: 133-134]. Resolution No. 122 [5: 13]. (10) (10) Resolution No. 122 [5: 13]. Al-Mudhakkirah This is the opinion of the Shariah Board of Al Rajhi Company, see Al-Mudhakkirah (11) This is the opinion of the Shariah Board of Al Rajhi Company, see (11) . It is also endorsed in the First Al Baraka Forum. Al-Tafsiriyyah. It is also endorsed in the First Al Baraka Forum. Al-Tafsiriyyah 384384 Shariah Standard No. (13): Mudarabah Requirements Relating to the Capital The basis for it being permissible that the capital of Mudarabah may The basis for it being permissible that the capital of Mudarabah may be constituted by the value of tangible assets contributed is that the objective of Mudarabah is to make profit. This objective can be realised whether the capital is contributed in the form of tangible assets or cash. (12) This rule is based on the view of the Maliki and the Hanbali jurists.(12) This rule is based on the view of the Maliki and the Hanbali jurists. The basis for the requirement that the capital of Mudarabah should be The basis for the requirement that the capital of Mudarabah should be clearly known and should be defined in terms of quality and quantity in a manner that eliminates any possibility of uncertainty or ambiguity is because recognition of profit is dependent on the recovery of the capital on the date of liquidation. However, recovery of the capital can- not be ascertained if its amount was not known earlier, and this lack of knowledge may potentially lead to a dispute. The basis for not allowing a debt owed by the Mudarib to the capital The basis for not allowing a debt owed by the Mudarib to the capital provider be contributed as capital in a Mudarabah contract is because, as a principle, Mudarabah capital must be (at the conclusion of a Mudarabah contract) an asset that is available and cannot be used on the spot for the Mudarabah operations. A debt fails to meet this requirement, as it is a receivable that is not available for use when the contract is concluded. Moreover, considering a debt as capital of Mudarabah involves potential Riba. This is because the creditor may be suspected of having extended the debt tenure in order to get additional consideration (for the extension) from the debtor under the name of Mudarabah. The basis for the requirement that the Mudarabah operation is valid The basis for the requirement that the Mudarabah operation is valid only if the capital is presented to the Mudarib is because the Mudarib is the manager of the Mudarabah operation, and the trustworthy trustee for the Mudarabah capital and income. Therefore, it is necessary that the capital be fully released to the Mudarib so that he will be able to protect and invest the capital and achieve the objective of the Mudarabah (13) contract.(13) contract. (12) Hashiyat Al-Dusuqi (12) (13) Al-Hidayah (13) Hashiyat Al-Dusuqi [3: 517]; and Al-Hidayah [3: 203]; and [3: 517]; and Al-Mughni [3: 203]; and Hashiyat Al-Dusuqi [5: 17]. Al-Mughni [5: 17]. [3: 517]. Hashiyat Al-Dusuqi [3: 517]. 385385 Shariah Standard No. (13): Mudarabah Rules and Requirements Relating to Profit The basis for the requirement that the profit ratio is known is because The basis for the requirement that the profit ratio is known is because profit is the subject matter of a Mudarabah contract and a lack of knowledge as to the subject matter renders a contract void. The basis for the requirement that the profit share of each party be The basis for the requirement that the profit share of each party be a percentage of the profit and not a lump sum is because a Mudarabah contract is a form of partnership for sharing profit. Any condition that allocates a lump sum to one party would not be consistent with the sharing of profit. This is because the Mudarabah operation may not realise a profit other than the lump sum which goes to one party, thus excluding the other party from partnership in profit. The basis for the impermissibility of simultaneously receiving a share The basis for the impermissibility of simultaneously receiving a share of profit and a fee for managing a Mudarabah is likewise that the fee is provided in the form of a lump sum and the Mudarabah operation may not realise a profit other than the lump sum, thus precluding the sharing of profit. The basis for the permissibility of an agreement to change the ratio of The basis for the permissibility of an agreement to change the ratio of profit distribution at any time is that the profit is a right belonging to the parties and an agreement in the manner described does not lead to a prohibited act, such as preclusion of sharing in profit. Rather, the (14) agreement makes the parties partners in profit.(14) agreement makes the parties partners in profit. The basis for nullifying a Mudarabah contract when the contract The basis for nullifying a Mudarabah contract when the contract is silent on the ratio of profit distribution and there is no customary practice according to which the profit is to be distributed to each party is that the subject matter of a Mudarabah contract is profit. The lack of knowledge as to the subject matter nullifies contracts. The basis for nullifying a Mudarabah contract when one party sti- The basis for nullifying a Mudarabah contract when one party sti- pulates entitlement to a lump sum is because a Mudarabah is about sharing profit and this form of condition precludes sharing of profit and may potentially lead to one party being wrongfully deprived of his rights. (14) See: Al Barakas 11 (14) See: Al Barakas 11thth Forum, Fatwa No. (8); Al Barakas 4 Forum, Fatwa No. (8); Al Barakas 4thth Forum, Fatwa No. (5). This Forum, Fatwa No. (5). This is also seconded by the Fatwa of the Shariah Board of Faisal Islamic Bank, Sudan Dalil Al-Fatawa Al-Shariyyah Fi Al-Amal Al- (P. 107), which was published in Dalil Al-Fatawa Al-Shariyyah Fi Al-Amal Al- (P. 107), which was published in , Islamic Economic Centre, International Islamic Bank, (P. 53). Masrafiyyah, Islamic Economic Centre, International Islamic Bank, (P. 53). Masrafiyyah 386386 Shariah Standard No. (13): Mudarabah The basis for not allowing an agreement that the Mudarib be entitled The basis for not allowing an agreement that the Mudarib be entitled to the profit earned on one of two capital funds, while the profit earned on the other capital fund belongs to the capital provider, is that such an agreement may preclude the sharing of profit and may potentially lead to one party being wrongfully deprived of his rights. The basis for stating that profit is not realised unless the capital is The basis for stating that profit is not realised unless the capital is recovered or maintained intact is the Hadith in which the Prophet (peace be upon him) said: The instance of a Musali (a person who performs be upon him) said: The instance of a Musali (a person who performs prayer) is that of a businessperson who will not secure profit unless the capital is secured. Likewise, a supererogatory prayer is not acceptable (15) This Hadith shows that unless the obligatory prayer is performed.(15) unless the obligatory prayer is performed This Hadith shows that distribution of profit prior to recovery of the capital, or unless the capital is maintained intact, is invalid. Moreover, profit is an addition to the capital and such an addition cannot be recognised or realised unless the capital that is the source of the profit is maintained. The basis for the requirement that the Mudarib is preliminarily entit- The basis for the requirement that the Mudarib is preliminarily entit- led to a profit when realised, i.e. prior to distribution (an encumbrance right), and that the net profit earned will be known absolutely only after allocation through actual or constructive valuation, is analogous to the contract of sharecropping. The Mecca based Islamic Fiqh Academy has (16) issued a resolution in support of constructive valuation.(16) issued a resolution in support of constructive valuation. Duties and Powers of the Mudarib The basis for allowing the Mudarib freedom of action in an unrestricted The basis for allowing the Mudarib freedom of action in an unrestricted Mudarabah is that the Mudarib has the aim of achieving the objective of the capital provider, which is making profit, and this is not possible unless the capital is vigorously put into operation. The basis for not allowing the capital provider to stipulate a right to The basis for not allowing the capital provider to stipulate a right to work with the entrepreneur (Mudarib) or to be involved in acts relating to Mudarabah operations is because such a stipulation would curtail (15) The Hadith has been related by Al-Bayhaqi in his (15) , and was narrated by Ali Ibn Sunan, and was narrated by Ali Ibn The Hadith has been related by Al-Bayhaqi in his Sunan Abu Talib. Al-Bayhaqi stated that there is a weak narrator in the chain of transmission of this Hadith, of this Hadith, Al-Mawsuah Al-Fiqhiyyah (16) Resolution No. (4) of the Islamic Fiqh Academy under the auspices of Muslim World Resolution No. (4) of the Islamic Fiqh Academy under the auspices of Muslim World (16) League issued in the sixth session that was held in Mecca. This is also the view that was endorsed by Al Barakas 8thth Forum, Fatwa No. (2). Forum, Fatwa No. (2). endorsed by Al Barakas 8 [38: 74]. Al-Mawsuah Al-Fiqhiyyah [38: 74]. 387387 Shariah Standard No. (13): Mudarabah the freedom of the Mudarib, limit the investment scope and hinder the Mudarib in achieving the objective of the Mudarabah contract, i.e. making profit. The basis for not allowing the Mudarib to make a loan, gift or charitable The basis for not allowing the Mudarib to make a loan, gift or charitable donation from the Mudarabah fund is because these actions do not benefit the Mudarabah operation, rather, they involve potential loss to the capital provider. The basis for allowing the Mudarib, when acting in the interest of the The basis for allowing the Mudarib, when acting in the interest of the Mudarabah and in the event that the parties did not specify an amount of money for expenses, to obtain personal expenses from the Mudarabah funds as per customary practice is because what is known by custom is deemed to apply as a condition even if the parties did not clearly stipulate it. Again, the permission for the Mudarib to obtain common personal expenses in these cases is granted by custom. Liquidation of Mudarabah Contract The basis for allowing liquidation of a Mudarabah contract unilate- The basis for allowing liquidation of a Mudarabah contract unilate- rally or by agreement of the parties or at the maturity date is because a Mudarabah contract is non-binding if the parties did not stipulate a term for its maturity. The basis for allowing constructive valuation is because Shariah has The basis for allowing constructive valuation is because Shariah has endorsed the concept of valuation. In addition, this is allowed because it is a valid tool that passes rights to owners appropriately. The actual valuation of assets for distribution is based on a common sense because this is the principle. The basis for allowing a Mudarabah contract be terminated on the The basis for allowing a Mudarabah contract be terminated on the grounds of loss of capital is that when the capital has been lost, the Mudarib is not able to put it to work in a business, and that the fund that was assigned for the Mudarabah is no longer in existence, thus entailing the termination of the Mudarabah contract. The basis for allowing termination of a Mudarabah contract due to the The basis for allowing termination of a Mudarabah contract due to the death of the Mudarib is that a Mudarabah contract is similar to contract of agency or, at least, it includes agency and an agency contract is ter- minable by the death of the agent. 388388 Shariah Standard No. (13): Mudarabah Appendix (C) Definitions Sharikah Sharikah is an agreement between two or more parties to merge their assets or to combine their services, obligations and liabilities with the aim of making profit. A Mudarabah contract is distinguished from a Sharikah (Musharakah) contract in the following respects: a) The basis for earning a share of profit in Sharikah is the required capital contribution of all parties, whether in the form of cash, commodities, services or liability in the case of reputation partnership and that the subject of the contract is based on a single element, i.e. capital. The basis for earning a profit in a Mudarabah, on the other hand, comes from two elements: the first element is the existence of capital that is subject to, and similar to, the conditions of Sharikah capital; the second element is the work done by the Mudarib that is different from the capital of the venture. b) In Sharikah, the work, as a general rule, is to be done jointly by the parties, whereas in Mudarabah it is the Mudarib who works. 389389 Standard No. (14) Shariah Standard No. (14) Shariah Documentary Credit (Revised Standard) Contents Subject ................................................................................................... Preface ................................................................................................... Preface ..................................................................... Statement of the Standard ..................................................................... Statement of the Standard ..............................................................................
Scope of the Standard ..............................................................................
Scope of the Standard .........
Definition, Types and Characteristics of Documentary Credit .........
Definition, Types and Characteristics of Documentary Credit ..............................................
Shariah Ruling on Documentary Credit ..............................................
Shariah Ruling on Documentary Credit ............................................................
Date of Issuance of the Standard ............................................................
Date of Issuance of the Standard ...................................................................... Adoption of the Standard ...................................................................... Adoption of the Standard Appendices Appendix (a): Brief History of the Preparation of the Standard............... Appendix (a): Brief History of the Preparation of the Standard............... Appendix (b): TheThe Shariah Basis for the Standard.................................... Appendix (b): Shariah Basis for the Standard.................................... Appendix (c): Definitions............................................................................. Appendix (c): Definitions............................................................................. PagePage 395395 396396 399399 405405 406406 407407 410410 415415 393393 IN THE NAME OF ALLAH, THE ALL-MERCIFUL, THE MOST MERCIFUL All praise be to Allah, the Lord of all the worlds, and blessings and peace be upon our master, Muhammad, and his household and all his companions Preface The purpose of this standard is to define documentary credits, their characteristics, Shariah rules and regulations so as to facilitate transactions in them by the Islamic financial Institutions (Institution/Institutions).(1)(1) in them by the Islamic financial Institutions (Institution/Institutions). The word (Institution/Institutions) is used here to refer, in short, to Islamic financial (1)(1) The word (Institution/Institutions) is used here to refer, in short, to Islamic financial institutions including Islamic Banks. 395395 Shariah Standard No. (14): Documentary Credit Statement of the Standard
1. Scope of the Standard Scope of the Standard This standard covers documentary credit extended by an Institution, either on the basis of client orders or for the use of the institution itself, including all types and forms of documentary credit, the various stages of their execution and the relationships created between the parties to the transaction.
1. Definition, Types and Characteristics of Documentary Credit Definition, Types and Characteristics of Documentary Credit 2/1 Definition of documentary credit A documentary credit is a written undertaking by a bank (known as the issuer) given to the seller (the beneficiary) as per the buyers (applicants or orderers) instruction or is issued by the bank for its own use, undertaking to pay up to a specified amount (in cash or through acceptance or discounting of a bill of exchange), within a certain period of time, on condition that the seller presents docu- ments for the goods conforming to the instructions. In brief, a documentary credit is an undertaking by a bank to pay sub- ject to conformity of the documents to the contractual instructions. 2/2 Procedural stages of documentary credit 2/2/1 The stage of concluding a credit contract: This stage precedes credit, and the contract concluded is usually a sale contract in which the seller stipulates that the price be paid through documentary credit, however, the contract may be a lease contract, agency with commission or any other contract. 2/2/2 The stage of requesting the opening of credit: At this stage the buyer requests the bank to open the credit so that the seller can be notified. 396396 Shariah Standard No. (14): Documentary Credit 2/2/3 The stage of issuing credit and notifying the seller: At this stage, the bank issues and sends the letter of documentary credit to the buyer, either directly or through an intermediary bank. 2/2/4 The stage of executing the credit: At this stage, the beneficiary presents the documents stipulated in the letter of credit to the bank. The bank examines them in accordance with the credit conditions. If the documents conform to instructions, the bank accepts them, executes the credit and delivers the documents to the buyer, in case it is not the institution itself, after the receipt of partial or full payment of the value or receives a deed of commitment to pay on the date of maturity so that the buyer is able to receive the goods represented by the documents. If the documents do not conform to instructions, the bank reserves the right to accept, reject or seek amendment of the documents. 2/2/5 Coverage by correspondents: If more than one bank participate in the execution of credit, the accounts are settled in accordance with the terms of coverage agreed upon between the banks. 2/3 Types of documentary credit 2/3/1 Basic classification Documentary credit is classified, according to the strength of the undertaking into two types; namely (I) revocable cred- it, which can be amended or cancelled without consulting the beneficiary, and (II) irrevocable credit, which cannot be amended or cancelled without the consent of the parties. 2/3/3 Other classifications There are other classifications of documentary credit. These include the following: Transferable documentary credit: This credit entitles the benefi- Transferable documentary credit: This credit entitles the benefi- ciary to request the executing bank to make the credit available, partially or totally, to another beneficiary or beneficiaries. Back-to-back credit, which means the credit issued is guaranteed Back-to-back credit, which means the credit issued is guaranteed by another credit. 397397 Shariah Standard No. (14): Documentary Credit Revolving or renewable credit, which means the beneficiary can Revolving or renewable credit, which means the beneficiary can repeatedly submit new documents for new operations within the limits of the credit amount and during its permissibility. limits of the credit amount and during its permissibility Red clause or advance payment credit whereby the bank is allowed Red clause or advance payment credit whereby the bank is allowed to pay a certain percentage of the credit before submission of the documents, against an undertaking by the beneficiary to repay that amount if the goods are not shipped or the beneficiary fails to . Such payment permissibility. Such payment use the credit during the period of its permissibility use the credit during the period of its may be made against a letter of guarantee from the beneficiary. Import and export credit (depending on the issuing bank). Import and export credit (depending on the issuing bank). Local and foreign credit. Local and foreign credit. Confirmed and non-confirmed credits. Confirmed and non-confirmed credits. Partial shipment and a non-partial shipment credit. Partial shipment and a non-partial shipment credit. On sight or immediate payment credit, deferred payment cred- On sight or immediate payment credit, deferred payment cred- it, acceptance credit and negotiable credit. Syndicated credit (partnership credit), which describes the Syndicated credit (partnership credit), which describes the state of participation by more than one bank due to the huge amount of credit granted with each bank providing a letter of guarantee, to the extent of its participation, to the leading bank. Standby credit (guarantee credit). This credit resembles letters Standby credit (guarantee credit). This credit resembles letters of guarantee with a clause that payment is conditional upon beneficiarys (in this case the contractors) failure to perform. 2/4 Characteristics of documentary credit 2/4/1 Dealing in documentary credit takes place on the basis of the documents alone and is executed without reference to the goods. Documentary credit, in essence, makes it binding for the bank to execute the credit whenever the beneficiary presents, within the duration of the validity of the contract, the documents required by the credit and conforming to the instructions. 2/4/2 Opening of credit by the buyer (orderer), though it may be acted upon with certainty, is not considered a final payment of the price of the goods. The buyer remains liable for the payment however, the until the bank pays the value of the documents, however, the until the bank pays the value of the documents, 398398 Shariah Standard No. (14): Documentary Credit seller (beneficiary) does not have a right to request payment from the buyer as long as the credit subsists and is valid. If the credit expires before the submission of the documents, the seller has the right to claim payment directly from the buyer, because expiry of the credit in itself does not amount to revocation of the sale contract. 2/4/3 The bank is obliged to pay the value of the credit to the ben- eficiary when the latter presents the documents that conform to instructions, except upon proof of fraud or forgery of the documents, or in the case of a court decision declaring the sale contract null and void. 2/4/4 Interpretation of the duties and obligations of the parties to documentary credit are subject to International Commercial Terms (INCOTERMS 2000) and the Uniform Customs and Practices for Documentary Credit (UCP 500) when reference is made to INCOTERMS in the sale contract and to UCP in documentary credit.
Shariah Ruling on Documentary Credit 3/1 Permissibility of documentary credit 3/1/1 Dealing in documentary credit includes agency for providing procedural services, the most important of which is the exam- ination of documents, and the provision of institutional guaran- tee to the importer. As both agency and guarantee contracts are permissible, documentary credit becomes permissible subject to the conditions stipulated in this standard. 3/1/2 Opening of all types of documentary credit, its issuance and confirmation, on the basis of the clients order or for the institution itself, are permitted to an Institution. It is also permissible to an institution to participate, or play an intermediary role, in such dealings and to notify, amend or execute in any way such credit, either for its own use or on behalf of another institution or bank, according to the available forms of executing documentary credit, subject to item (3/1/3) below. 399399 Shariah Standard No. (14): Documentary Credit 3/1/3 It is not permissible for the institution to undertake transactions in documentary credit, in accordance with what is stated in item (3/1/2), either for itself or on behalf of another as a client or institution or by way of collaboration, when such credit pertains to goods that are prohibited by the Shariah, or is based on a contract that is void or irregular (according to the Shariah) due to vitiating conditions or includes interest, either charged or paid, whether explicitly as in the case of loan upon payment by the beneficiary of amounts not fully or partially covered in similar credit, or impliedly, as in the case of discounts or trading (payment) on bills of exchange with deferred and delayed payments. It is stipulated for the permissibility of the subject of docu- mentary credit that the contract upon which reliance is placed be a contract that is valid in the Shariah insofar as its ele- ments, conditions and type of transaction, whether currency exchange, ordinary sale or another, are concerned, and also with respect to its specific additional conditions. 3/1/4 The bank is obliged to execute the credit when it conforms to instructions, except upon proof of fraud or forgery of the documents, in which case it is under no obligation to execute it. Provided that if the contract concluded prior to opening of documentary credit is nullified by a court decision, the execution of the credit is subject to a new agreement. 3/2 The contract preceding the opening of credit 3/2/1 It is permissible for the seller to stipulate in the sale contract that payment be made through documentary credit. Such a condi- tion is valid and its performance is binding upon the buyer. 3/2/2 It is permissible to secure international transactions using documentary credit provided that the secured transactions do not violate the rules of the Shariah. 400400 Shariah Standard No. (14): Documentary Credit 3/2/3 When the contract stipulates that its interpretation is subject to INCOTERMS (issue 2000) or the United Nations Convention in respect of the International sale of goods or any other reference, then such potential interpretation is circumscribed with a condition that it must not violate the rules of the Shariah. [see item 3/2/2] 3/3 Commissions and expenses in documentary credit 3/3/1 It is permissible for the institution to charge actual expenses incurred in issuing documentary credit. It is also permissible for the institution to charge a fee for providing the required services, whether such a fee is in the form of a lump sum or a certain percentage of the credit amount, provided that the duration of the credit is not considered in determining the commission. This rule applies to services rendered for both import and export credit, except where the amendment in- volves a rescheduling of the duration of the credit facility. It is, therefore, permissible for the institution to charge only the actual expenses incurred, in which case it will be a definite sum and not a percentage. The Institution must abide by the following conditions: a) The aspect of guarantee per se must not be taken into account when estimating fees for documentary credit. Accordingly, it is not permissible for an institution to charge an amount in addition to the actual expenses incurred if it endorses a credit facility issued by another bank, because endorsing a credit facility is an addition over guarantee. The rule for endorsement applies to participation in the issuance and endorsement of credit as well as issuance of standby credit (guarantee credit), as long as services or obligations are not required. b) The issuance of a credit facility should not involve Riba bear- ing profits or become a means for such profits. 401401 Shariah Standard No. (14): Documentary Credit c) It is not permissible to use a combination of contracts in c) It is not permissible to use a combination of contracts in documentary credit as an excuse for involvement in the prohibited transactions, such as taking a commission for providing a guarantee or extending a loan. 3/3/2 The rule of item 3/3/1 above equally applies to receiving or payment of commissions and expenses and in a situation where the institution acts as an intermediary in these respects, irrespective of whether the transaction is between the institu- tion and its client (the orderer or beneficiary) or between the institution and other institutions and banks. 3/3/3 The ruling of commission for providing letters of guarantee that was stated in the Shariah Standard No. (5) on Guarantees must be applied when determining commissions for the letters of guarantee that accompany documentary credits, such as letters of guarantee provided in the case of advance payment of a portion of the amount or the shipping guarantee that is issued for releasing the goods before the arrival of documents. 3/4 Guarantees in documentary credits 3/4/1 It is permissible for the institution to secure the obligations arising out of documentary credit, or to provide documentary credit as security for payment in favour of institutions and banks dealing with it. The institution may act as an intermediary for facilitating documentary credit using other permissible and acceptable forms of guarantee. It is, therefore permissible to use a number of means as a cover for documentary credit including cash, freezing of permissible accounts and negotiable instruments valid according to the Shariah, certificates of shares in real estate and withholding the documents of the credit that stand for the goods. The cover of a documentary credit may be also one of the following: a transferable letter of credit; a back-to-back letter of credit; a letter of guarantee issued by the bank of the beneficiary 402402 Shariah Standard No. (14): Documentary Credit against the advance payment in case of advanced payment credits; a letter of guarantee issued by a bank participating in the issuance or confirmation of the credit; relinquishment receivables and commercial papers, such as bill of exchange and promissory notes. This item must be read together with item 3/4/2 below. 3/4/2 It is not permissible for the institution to accept the following types of guarantees: interest-based bonds, shares of companies that deal in prohibited activities, and interest-based receivables. It is also not permissible for the institution to provide any of these guarantees as security for its obligation to other institutions or banks or to act as an intermediary to facilitate such guarantees. 3/4/3 It is permissible for the institution and the applicant for documentary credit to agree on investing the cash cover of the credit in accordance with Mudarabah partnership. 3/5 Murabahah transactions in documentary credit When a client intends to purchase imported goods from the institu- tion through Murabahah financing of the documentary credit, the following must be observed: 3/5/1 Opening of documentary credit should not precede the conclusion of the sale contract between the orderer and the beneficiary (the seller) irrespective of the orderer having taken possession of the goods that are the subject-matter of the contract. 3/5/2 Institution should be the party who purchases from the supplier, and then sells to the client through Murabahah as per the rulings stated in Shariah Standard No. (8) on Murabahah, while taking into account item 2/2/2 in respect to cancellation of contract and item 3/1/3 in respect to agency in Murabahah. 403403 Shariah Standard No. (14): Documentary Credit 3/6 Musharakah contract with the client to finance documentary credit for imported goods 3/6/1 In case the institution signs a partnership contract with the client to purchase goods prior to the opening of credit and before the client concludes a sale contract with the supplier, it is permissible to open the credit in the name of either partner. It is permissible for the institution, after receipt of the goods, to sell its share to a third party or to its partner through a spot or deferred payment Murabahah on the condition that the sale to the partner is not based on an earlier exchange of binding promises or stipulated in the Musharakah contract. 3/6/2 It is permissible for the institution to sign a partnership contract with the client in respect of goods purchased by the client on the condition that the institution does not sell its share to the client on a deferred payment basis. 3/7 General rules 3/7/1 If the credit transaction includes a provision that it is subject to the prevalent principles and practices that unify documentary credit, it is necessary to qualify such a statement with the stipulation that it will not violate Shariah rules and principles. It is preferable that the institution presents alternatives that could be agreed upon between the institution and the correspondent banks. It is a requirement to explicitly state that a provision stipulating interest will not be acted upon, and also for trading activities that contravene the provisions of the Shariah. For valid substitutes. [see Shariah Standard No. (17) on Commercial Papers, items 5/2 and 5/3] 3/7/2 It is not permissible for the institution to discount accepted bills of exchange, i.e. to purchase these bills before maturity at less than their nominal value. 404404 Shariah Standard No. (14): Documentary Credit 3/7/3 It is not permissible for the institution to trade in deferred pay- ment documents or accepted bills of exchange, i.e. to purchase these instruments at less than their nominal value. It is also not permissible for the institution to act as an intermediary, whether by payment or notification, between the beneficiary and the issuing or confirming bank to facilitate such dealings. 3/7/4 It is not permissible for the institution to negotiate, for less than their nominal value, documents payable on sight or payable bills of exchange. 3/7/5 It is not permissible for the institution, as far as possible, to present bills of exchange that it undertakes to pay to clients whose debts to the institution are represented by these bills, so as to get them discounted by other banks that may accept them. 3/7/6 The institution should arrange its relationships with other institutions and correspondent banks on the basis of non- payment of interest and avoidance of prohibited transactions with respect to covering operations between the correspondent banks when such relationships involve settlement of inter- bank obligations resulting from documentary credit and other banking operations.
Date of Issuance of the Standard This Standard was issued on 7 Rabi I, 1424 A.H., corresponding to 8 May 2003 A.D. 405405 Shariah Standard No. (14): Documentary Credit Adoption of the Standard The Shariah Standard on Documentary Credits was adopted by the Shariah Board in its meeting No. (10) held in Al-Madinah Al-Munawwarah during the period of 2-7 Rabi I, 1424 A.H., corresponding to 3-8 May 2003 A.D. 406406 Shariah Standard No. (14): Documentary Credit Appendix (A) Brief History of the Preparation of the Standard In its meeting No. (5) held in Makkah Al-Mukarramah during the period of 8-12 Ramadan 1421 A.H., corresponding to 4-8 December 2000 A.D., the Shariah Board resolved to give priority to the preparation of a Shariah Standard on Documentary Credit. On Monday 29 Ramadan 1421 A.H., corresponding to 25 December 2000 A.D., a Shariah consultant was commissioned to prepare a Shariah study and an exposure draft. In its meeting held in the Kingdom of Bahrain on 15 and 16 Safar 1422 A.H., corresponding to 9 and 10 May 2001 A.D., the Shariah Studies Committee discussed the juristic study of the standard and requested the consultant to incorporate the necessary amendments in the light of the conclusions of the Committee and the observations of members. The Committee also discussed the exposure draft in its 10th meeting held in the Kingdom of Bahrain on 14 Rabi I, 1422 A.H., corresponding to 6 June 2001 A.D., and made some amendments to the exposure draft. In its meeting No. (11) held in Jordan on 18 and 19 Jumada II, 1422 A.H., corresponding to 6-7 September 2001 A.D., the committee further discussed the exposure draft of the standard and made amendments that were deemed necessary in preparation of the submission to Shariah Board. The revised exposure draft of the standard was presented to the Shariah Board in its 8th meeting held in Al-Madinah Al-Munawwarah from 28 Safar to 4 Rabi I, 1423 A.H., corresponding to 1116 May 2002 A.D. The Shariah Board made further amendments to the exposure draft and decided to defer its discussion in the public hearing until views crystallize 407407 Shariah Standard No. (14): Documentary Credit on the issue of the contract that is relied upon for documentary credit in Tajil al- the context of the deferment of its two counter-values, known as Tajil al- the context of the deferment of its two counter-values, known as Badalayn. Badalayn The revised exposure draft of the standard was also presented to the Shariah Board in its 9th meeting held in Makkah Al-Mukrramah during the period of 11-16 Ramadan 1423 A.H., corresponding to 16-21 November 2002 A.D. The Shariah Board made further amendments to the exposure draft and decided that it should be distributed to specialists and interested parties in order to obtain their comments in preparation of its discussion public hearing. in a public hearing in a A A public hearing in Bahrain on 18 Dhul-Hajjah 1423 A.H., correspond- public hearing in Bahrain on 18 Dhul-Hajjah 1423 A.H., correspond- ing to 19 February 2003 A.D. The was attended by more public hearing was attended by more ing to 19 February 2003 A.D. The public hearing than thirty participants representing central banks, institutions, accounting firms, Shariah scholars, academics and others interested in the field. The members of the Shariah Standards Committees (1) and (2), responded to the written comments that were sent prior to the as well as to public hearing as well as to the written comments that were sent prior to the public hearing public hearing. the oral comments that were expressed in the public hearing the oral comments that were expressed in the The Shariah Standards Committees (1) and (2) held a joint meeting on 2 Muharram 1424 A.H., corresponding to 5 March 2003 A.D., to discuss as well as the public hearing as well as the the comments that were made during the public hearing the comments that were made during the observations received in writing. The two committees made amendments that were deemed suitable. The Shariah Board in its meeting No. (10) held in Al-Madinah Al- Munawwarah during the period of 2-7 Rabi I, 1424 A.H., corresponding to 3-8 May 2003 A.D., discussed the amendments made by the Shariah Standards Committee, and incorporated the amendments deemed suitable. The Shariah Board unanimously adopted some of the items of the standard and some items were adopted by the majority vote of the members of the Shariah Board, as recorded in the minutes of the meetings of the Shariah Board. The Shariah Standards Review Committee reviewed the standard in its meeting held on Rabi II, 1433 A.H., corresponding to March 2012 A.D., in the State of Qatar, and proposed after deliberation a set of amendments 408408 Shariah Standard No. (14): Documentary Credit (additions, deletions, and rephrasing) as deemed necessary, and then submitted the proposed amendments to the Shariah Board for approval as it deemed necessary. In its meeting No. (41) held in Al-Madinah Al-Munawwarah, Kingdom of Saudi Arabia during the period of 27-29 Shaban 1436 A.H., corresponding to 14-16 June 2015 A.D., the Shariah Board discussed the proposed amendments submitted by the Shariah Standards Review Committee. After deliberation, the Shariah Board approved necessary amendments, and the standard was adopted in its current amended version. 409409 Shariah Standard No. (14): Documentary Credit Appendix (B) The Shariah Basis for the Standard Permissibility of Documentary Credit The permissibility of documentary credit is based on the principle that it relies upon contracts that are valid according to the Shariah, such as Kafalah (personal guarantee), Wakalah (agency contract) and Qard (loan). Shariah Categorization of Documentary Credit The basis for the permissibility of irrevocable documentary credit is The basis for the permissibility of irrevocable documentary credit is a combination of a contract of guarantee and agency. To these two permissibility the Qard (loan) transaction is to be added. It derives permissibility the Qard (loan) transaction is to be added. It derives from the contract of mortgage (Rahn) as well, because it secures payment. The contract of guarantee creates a liability for payment, while agency determines the performance of acts relating to oper- ations such as communication of the credit notification and initia- tion of operations pertaining to follow-up and examination of doc- ument. The loan element comes into operation when the institution pays on behalf of the client in case of documentary credit that is totally or partially uncovered.(2)(2) totally or partially uncovered. The basis for the permissibility of a revocable documentary credit is that The basis for the permissibility of a revocable documentary credit is that it is a form of agency contract that is permitted by the Shariah. When a third partys right is attached to it, it becomes binding, and this occurs when it leads to acceptance or payment. A revocable documentary credit cannot be classified under the contract of guarantee for two reasons; namely (I) it conflicts with the requirements of guarantee; and (II) an option is not permissible in guarantee contracts.(3)(3) (II) an option is not permissible in guarantee contracts. The basis for the permissibility of the undertaking of the confirming The basis for the permissibility of the undertaking of the confirming bank and other similar undertakings of the banks that participate in Resolution No. (419) of the Shariah Board of the Al Rajhi Banking Corporation and (2)(2) Resolution No. (419) of the Shariah Board of the Al Rajhi Banking Corporation and Investment and Answer No. (71) of the Shariah advisor of Dallah Al Baraka. Ibn Qudamah, Al-Sharh Al-Kabir , [3: 59-60], 1951 A.D. Al-Sharh Al-Kabir, [3: 59-60], 1951 A.D. (3)(3) Ibn Qudamah, 410410 Shariah Standard No. (14): Documentary Credit issuance or confirmation of the credit is that it is an act of back up guar- antee, which is permissible in the Shariah.(4)(4) antee, which is permissible in the Shariah. The basis of permissibility of guarantee in irrevocable credit being The basis of permissibility of guarantee in irrevocable credit being qualified from the perspective of execution with the condition that documents presented conform to the conditions stipulated, is the ruling of the jurists that Kafalah (guarantee) accepts qualification through a stipulated condition.(5)(5) a stipulated condition. The basis for the ruling that documentary credit terminates with The basis for the ruling that documentary credit terminates with implementation or expiry is that the guarantee for documentary credit is limited in time by a period, and this is the period of validity of the credit. It is permitted to place a time frame on guarantee.(6)(6) credit. It is permitted to place a time frame on guarantee. The basis for the permissibility of the contract relied upon for doc- The basis for the permissibility of the contract relied upon for doc- umentary credit, as well as its conditions, is that it is a sale for which security is provided through guarantee, and this is compatible with the objectives of the contract. Contract That Precedes the Opening of Credit The basis for the permissibility of making opening of documentary The basis for the permissibility of making opening of documentary credit a condition in the sale contract preceding documentary credit is that such a condition is similar to a stipulation to provide a specific guarantor for payment, which is a valid condition acknowledged as an interest for the contract.(7)(7) an interest for the contract. The basis for the permissibility of undertaking international sale The basis for the permissibility of undertaking international sale contracts and their security through documentary credit is that upon examination, the international sale contracts that are secured through documentary credit pose a difficulty: Do they involve delay of the two counter-values that is prohibited by the Shariah? , [3: 407]. Tuhfat Al-Fuqaha, [3: 407]. Al-Sharh Al-Kabir, [13: 25-26]; Al-Samarqandi, , [4: 265], Beirut: Dar Ihya Radd Al-Muhtar Ala Al-Durr Al-Mukhtar, [4: 265], Beirut: Dar Ihya (4)(4) Ibid., [13: 25-26]; Ala Al-Din Al-Samarqandi, (5)(5) Ibn Abidin, Ibid., [13: 25-26]; Ala Al-Din Al-Samarqandi, Tuhfat Al-Fuqaha Ibn Abidin, Radd Al-Muhtar Ala Al-Durr Al-Mukhtar Al-Turath Al-Arabi, n.d. , [13: 25-26]; Al-Samarqandi, Tuhfat Tuhfat Ibid. (P. 265). Ibn Qudamah, Al-Sharh Al-Kabir (6)(6) Ibid. (P. 265). Ibn Qudamah, , [3: 402, 404 and 405]; Muhammad Al-Hajjar, Fath Al-Allam Bi-Sharh Al-Fuqaha Fath Al-Allam Bi-Sharh Al-Fuqaha, [3: 402, 404 and 405]; Muhammad Al-Hajjar, , [5: 43], Beirut: Murshid Al-Anam Fi Al-Fiqh Ala Madhhab Al-Sadah Al-Shafiiyyah, [5: 43], Beirut: Murshid Al-Anam Fi Al-Fiqh Ala Madhhab Al-Sadah Al-Shafiiyyah Dar Ibn Hazm, 1418 A.H. See: Wizarat Al-Awqaf Al-Kuwaytiyyah, Al-Mawsuah Al-Fiqhiyyah, Bay Wa Shart , Para (28); Al-Samarqandi, Tuhfat Al-Fuqaha Bay Wa Shart, Para (28); Al-Samarqandi, Ahmad Al-Zarqa, Al-Madkhal Al-Fiqhi Al-Amm Ahmad Al-Zarqa, Al-Hajjar, Fath Al-Allam Al-Hajjar, Al-Mawsuah Al-Fiqhiyyah, letter Ba, Bay, letter Ba, Bay, Tuhfat Al-Fuqaha, [2: 70]. Mustafa , [2: 70]. Mustafa , 1986, (pp. 477-478); Muhammad Al-Madkhal Al-Fiqhi Al-Amm, 1986, (pp. 477-478); Muhammad (7)(7) See: Wizarat Al-Awqaf Al-Kuwaytiyyah, , [5: 19]. Fath Al-Allam, [5: 19]. 411411 Shariah Standard No. (14): Documentary Credit The members of the Board differed on this into those who prohibit them due to the cause indicated, and those who permit them -being in a majority with those permitting them disagreeing on the following points: a) That these contracts -prior to the ascertainment of the goods- do not involve delay in the two counter-values rather they amount to bilateral promises, which are agreements to sell and do not amount to sale itself. b) That they merely amount to extension of the session of the contract ), with respect to the agreement, up to the time of Majlis al-Aqd), with respect to the agreement, up to the time of (Majlis al-Aqd ascertainment of the goods. c) That they do not amount to a delay in the two counter-values, but they are permitted on the basis of general need. d) That they are, ab initio d) That they are, , an exchange of a debt for a debt and this is ab initio, an exchange of a debt for a debt and this is permitted under the Shariah. e) That the contract preceding the opening of documentary credit amounts to a sale contingent upon the opening of credit. f) That these contracts do not involve delay in counter-values, because that is attained through a stipulation for delay, while there is no stipulation of delay in this case. Commissions and Expenses in Documentary Credit The basis for the impermissibility of receiving compensation for The basis for the impermissibility of receiving compensation for guarantee for the aspect related to documentary credit is that a guarantee is preparatory to extending a loan, and this is not to be compensated. The four Fiqh schools are unanimous on the impermissibility of taking compensation for guarantee. This rule is endorsed by a resolution of the International Islamic Fiqh Academy,(8)(8) a ruling of the Shariah of the International Islamic Fiqh Academy, a ruling of the Shariah Supervisory Board of the Faysal Islamic Bank of Sudan,(9)(9) the the Supervisory Board of the Faysal Islamic Bank of Sudan, (10) Shariah Board of Al Rajhi Banking Corporation for Investment(10) Shariah Board of Al Rajhi Banking Corporation for Investment and a resolution of the Shariah Fatwa and Supervisory Board of the Kuwait Finance House. International Islamic Fiqh Academy Resolution No. 12 (12/2). (8)(8) International Islamic Fiqh Academy Resolution No. 12 (12/2). Fatwa No. (14) of the Shariah Supervisory (9)(9) Fatwa No. (14) of the Shariah Resolution No. (297) of the Fatwas of the Shariah Supervisory Board of Kuwait Finance (10) Resolution No. (297) of the Fatwas of the Shariah Supervisory Board of Kuwait Finance (10) House. Board of the Faisal Islamic Bank, Sudan. Supervisory Board of the Faisal Islamic Bank, Sudan. 412412 Shariah Standard No. (14): Documentary Credit The basis for the permissibility of receiving compensation for The basis for the permissibility of receiving compensation for an agency-related service in documentary credit, whether in a lump sum or as a percentage of a known amount, is that the amount is in lieu of services rendered by the institution, in its capacity as an agent of the client. The majority of the Fuqaha upheld the permissibility of charging (11) The Shariah Supervisory Board of Al Rajhi Banking wages for agency.(11) The Shariah Supervisory Board of Al Rajhi Banking wages for agency. Corporation for Investment has passed a resolution permitting receipt of payment including the services involved in documentary credit with- (12) out referring to the aspect of guarantee.(12) out referring to the aspect of guarantee. The basis for the impermissibility of charging commissions in consid- The basis for the impermissibility of charging commissions in consid- eration for providing long or short term loans, discounting and trading (payment of the value) in documents and deferred payment bills of exchange or for providing facility, are the texts of the Quran and the (13) Sunnah laying down the prohibition of Riba.(13) Sunnah laying down the prohibition of Riba. Guarantees in Documentary Credit The basis for the permissibility of seeking guarantees explained in The basis for the permissibility of seeking guarantees explained in this Standard (item 3/4) is that collateral (Rahn) may be money, debt or tangible asset insofar as they might be lawfully owned or created according to the Shariah and because the debt to be secured may be (14) a current or future obligation.(14) a current or future obligation. , [13: 577]. Al-Insaf, [13: 577]. Board of Al Rajhi Banking Supervisory Board of Al Rajhi Banking Ala Al-Din Al-Mardawi, Al-Insaf (11) Ala Al-Din Al-Mardawi, (11) Resolution No. (419) of the Shariah Supervisory (12) Resolution No. (419) of the Shariah (12) Corporation for Investment. (13) In its Resolution No. (372), the Shariah Supervisory Board of Al Rajhi Banking In its Resolution No. (372), the Shariah Supervisory Board of Al Rajhi Banking (13) Corporation for Investment stipulated: It is prohibited in documentary credit to collect from the client any interest at any stage of the credit (for discounting and trading in commercial papers, see item 2/8 where the resolution provides the Shariah basis for this ruling). As regards commission for providing the facility, the facility is preparatory to extending a loan, and hence if commission is prohibited for giving the loan itself it would be obviously correct to prohibit commission for a mere readiness to do so. This conclusion has been adopted in the Al Baraka 8thth Forum in its Fatwa to do so. This conclusion has been adopted in the Al Baraka 8 Forum in its Fatwa No. (13) and the response of the Shariah advisor to Dallah Albaraka Group No. (1). , [13: Al-Insaf , [13: See: Al-Samarqadi, Tuhfat Al-Fuqaha (14) See: Al-Samarqadi, (14) 359]; Al-Hajjar, , [6: 444-445]; Al-Mughni, [6: 444-445]; 359]; Al-Hajjar, Fath Al-Allam Abu Abdullah Muhammad Ibn Muhammad, Mawahib Al-Jalil Sharh Mukhtasar Abu Abdullah Muhammad Ibn Muhammad, Mawahib Al-Jalil Sharh Mukhtasar Khalil, 2, 2ndnd edition., [5: 5], Beirut: Dar Al-Fikr, 1978 A.D.; See also Islamic Fiqh Khalil edition., [5: 5], Beirut: Dar Al-Fikr, 1978 A.D.; See also Islamic Fiqh Academy Resolution No. (86) 3/9, Jeddah; Fatwa No. (5) of Al Barakas 5thth Forum Forum Academy Resolution No. (86) 3/9, Jeddah; Fatwa No. (5) of Al Barakas 5 and Resolutions No. (19 and 283) of Al Rajhi Banking Corporation for Investment. Tuhfat Al-Fuqaha`, [3: 53-54]; Al-Mardawi, Fath Al-Allam, [5: 44]; Ibn Qudamah, , [5: 44]; Ibn Qudamah, Al-Mughni , [3: 53-54]; Al-Mardawi, Al-Insaf 413413 Shariah Standard No. (14): Documentary Credit The basis for not allowing the Institution to sell its share of partnership, The basis for not allowing the Institution to sell its share of partnership, in goods purchased by the client, for a delayed payment to the client is that this amounts to a sale-buy back arrangement ( ), which Bay al-Inah), which that this amounts to a sale-buy back arrangement (Bay al-Inah is prohibited by the Shariah. The basis for not allowing negotiability of documents payable on sight The basis for not allowing negotiability of documents payable on sight including bills of exchange for an amount lesser than their nominal value is that this adopts the form of the sale of debt, which is prohibited. 414414 Shariah Standard No. (14): Documentary Credit Appendix (C) Definitions Credit Documents These are the documents relating to goods detailed in the credit. The documents are divided into two types: basic and additional documents. Basic documents include: Shipping documents, commercial invoice, ma- rine insurance policy, certificate of origin, consulate invoice and prom- issory note. Additional documents include: Weights certificate, analysis certificate, review and inspection certificate, warehouse receipts, delivery orders, packing review/supervision certificate, test certificate, medical certificate and non-infection certificate. Such certificates are requested to verify certain attributes and characteristics of the commodity and to make sure that it is free of defects and infection. The certificates are required by the authorities of the importing or exporting country. Bill of Lading A bill of lading is the traditional source of shipping documents. It It A bill of lading is the traditional source of shipping documents. indicates the party authorized to receive the goods, whether it is the original beneficiary, a party in whose name the bill is backed as a collateral original beneficiary, a party in whose name the bill is backed as a collateral arrangement or an agent assigned to receive the goods. A bill of lading constitutes the practical execution of the shipping contract signed between the shipper and the marine carrier. Shipping is the responsibility of either the buyer or of the seller according to the type of International Sale Contract (Commercial Terms) adopted. A bill of lading is the only shipping document that can be backed. Examination of Documents It is the process of ensuring that the documents comply with the spec- ifications indicated in the letter of credit. The general conditions for the integrity of documents are detailed through the following four conditions: 415415 Shariah Standard No. (14): Documentary Credit That the documents are submitted during the validity of the credit. That the documents are submitted during the validity of the credit. That they are complete in number. That they are complete in number. That they are complimentary and one document does not contradict That they are complimentary and one document does not contradict another and that each contains the required information or each serves its function. That they conform to the conditions of the letter of credit. That they conform to the conditions of the letter of credit. In case any of these conditions is missing, for any one of these documents, it is obligatory upon the bank to reject the documents as a whole, even those that are not defective. At Sight Credit It is credit that has to be paid promptly at sight according to the value of the documents, by the issuing bank, the confirming bank or the paying bank, if the documents conform to the conditions of the credit. Deferred Payment Credit It is an undertaking given by the issuing, or confirming bank to pay at a future date, being the date fixed in the credit, the value of the documents if they conform to the conditions of the credit. It differs from acceptance credit insofar as the beneficiary does not present a promissory note with the documents. Acceptance Credit It is the acceptance of the bill of exchange attached to the documents or is signed on behalf of the bank; that is, the bank accepts the obligation of paying the nominal value on the date of maturity. Negotiation of Documents It is the payment of the value of the documents, or the purchase of the bill of exchange attached to them; that is, its discounting, whether it is to be paid at sight or after a known specified period. Acceptance of Documents Under Reserve It occurs when the bank chooses to accept the documents at its own risk despite their non-conformance with the conditions of the credit, paying their value or accepting the bill of exchange attached to them, on the condition that 416416 Shariah Standard No. (14): Documentary Credit it reserves the right of recourse to the beneficiary if the issuing bank does not accept the discrepancies in the documents. The paying bank usually reserves this right by way of obtaining a letter of guarantee, covering the value of the documents, from the bank of the beneficiary. Marine Letter of Guarantee It is an undertaking given by the issuing bank to place the original bill of lading, when received, at the disposal of the carrier in lieu of receiving back a letter from him. The carrier in this case is relieved from all responsibility that may arise from the delivery of the goods to the importer, who gives an undertaking to the issuing bank for the acceptance of the documents regardless of any discrepancies in them. This type of letter is usually issued upon arrival of the goods when the documents are to follow or are delayed. Correspondent Bank It is the bank assigned by the issuing bank to notify the beneficiary of the credit. As a rule, the correspondent bank is under no obligation to pay the value of the credit; its role is confined to that of an intermediary. Correspondent banks are banks with which the institution makes certain arrangements for accepting or covering the value of the credits that it issues or confirms. In case the beneficiary requests notification through a non-correspondent bank, the issuing bank sends its instructions to one of its correspondent banks asking it to process the notification through the bank nominated by the beneficiary. Confirmation of Credit It is the merging of the liability of the confirming bank with the liability of the issuing bank making both banks liable for fulfilling the conditions of payment of credit, when the beneficiary presents documents that meet the terms of the credit. The beneficiary has the right to claim payment severally from either bank or jointly from both banks. The Paying Bank It is a correspondent bank of the issuing bank in the currency of the It is a correspondent bank of the issuing bank in the currency of the credit to whom the issuing bank entrusts the payment of the value of the 417417 Shariah Standard No. (14): Documentary Credit credit on its behalf, but the paying bank is under no obligation for executing this trust. The Covering Bank Covering banks are types of correspondent banks with which the bank maintains an account and to whom it delegates the authority to cover disbursement and negotiation payments upon the first presentation. Transferable Credit It is irrevocable credit by means of which the beneficiary (first benefi- ciary) requests the bank assigned, or any other licensed institution, to make payment or to undertake to pay in the future or to accept or to negotiate so as to make the credit available, in whole or in part, to the beneficiary or beneficiaries. Back to Back Credit It is irrevocable credit issued for the same purpose as that of transferable credit whenever a credit is not transferable. Revolving Credit It is credit that is opened for a fixed value and duration, except that its value is renewed automatically when it is executed or utilised so as to enable the beneficiary to present documents for a new operation within the value of the credit, during the period of its validity, and for the number of times fixed for the credit. Advance Credit or Red Clause Credit It is credit bearing a paragraph written in red ink to invite attention to its instructions. In this credit, the authorised bank is assigned to pay certain amount according to percentage of the value of the credit to the beneficiary in advance before the goods are shipped and before the documents that necessitate payment are presented. Credit Available for Negotiation This is credit by which the issuing bank grants to the correspondent bank the legal authority to buy bills of exchange drawn on the basis of documentary 418418 Shariah Standard No. (14): Documentary Credit credit upon presentation of bills of exchange that are payable at sight by the issuing bank or are payable in the future to the issuer of documentary credit. Accordingly, the seller is able to receive the value of the credit (bills of exchange) upon presentation of required complete documents that obligate payment of the value of the credit. 419419 Shariah Standard No. (15) Jualah (Revised Standard) Contents Subject ................................................................................................... Preface ................................................................................................... Preface ..................................................................... Statement of the Standard ..................................................................... Statement of the Standard ..............................................................................
Scope of the Standard ..............................................................................
Scope of the Standard ..................................................................................
Definition of Jualah ..................................................................................
Definition of Jualah ....................................................................
Permissibility of the Jualah ....................................................................
Permissibility of the Jualah ..........................................................................
Shariah Status of Jualah ..........................................................................
Shariah Status of Jualah ..................................................
Elements of Jualah and Its Conditions ..................................................
Elements of Jualah and Its Conditions ................................................................................
Revocation of Jualah ................................................................................
Revocation of Jualah ..................................................
Distinction between Jualah and Ijarah ..................................................
Distinction between Jualah and Ijarah ..............................................................................
Applications of Jualah ..............................................................................
Applications of Jualah
Role of Institutions in Jualah.................................................................. .............................................................
Date of Issuance of the Standard .............................................................
Date of Issuance of the Standard ...................................................................... Adoption of the Standard ...................................................................... Adoption of the Standard Appendices Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (b): TheThe Shariah Basis for the Standard.................................... Appendix (b): Shariah Basis for the Standard.................................... PagePage 425425 426426 427427 429429 430430 431431 432432 433433 435435 423423 IN THE NAME OF ALLAH, THE ALL-MERCIFUL, THE MOST MERCIFUL All praise be to Allah, the Lord of all the worlds, and blessings and peace be upon our master, Muhammad, and his household and all his companions Preface The purpose of this standard is to elaborate the definition of Jualah, to distinguish it from Ijarah, to describe its elements, conditions, legal status in the Shariah, fundamental rules, and applications in the transactions of Islamic financial Institutions (Institution/Institutions),(1)(1) irrespective of the Islamic financial Institutions (Institution/Institutions), irrespective of the institution acting as the general offeror (demanding performance) or as the worker (under an obligation to perform), even when this is through another, parallel Jualah. The word (Institution/Institutions) is used here to refer, in short, to Islamic financial (1)(1) The word (Institution/Institutions) is used here to refer, in short, to Islamic financial institutions including Islamic Banks. 425425 Shariah Standard No. (15): Jualah Statement of the Standard
Scope of the Standard This standard sets out fundamental rules of the Shariah on Jualah and its application in activities for which the extent of the work required cannot be precisely determined for it continues throughout the determined period. It is for this reason that it does not cover the contract of Ijarah for employment/service or leasing, just as it does not cover maintenance contracts or stipulations of maintenance in relation to other contracts, such as the requirement of maintenance in a sale contract or an Istisnaa contract (construction contract).
1. Definition of Jualah Definition of Jualah Jualah is a contract in which one of the parties (the Jail) offers spec- ified compensation (the Jul) to anyone (the Amil) who will achieve a determined result in a known or unknown period.
1. Permissibility of Jualah Permissibility of Jualah Jualah is permissible deeming the determination of the end result to be realised through it as sufficient, and it is not affected by the uncertainty that prevails with respect to the subject-matter of the contract, that is, the work to be done. It is for this reason that Jualah is suitable for activities for which Ijarah, which requires that the desired work be clearly specified, is not.
Shariah Status of Jualah 4/1 With due consideration to item (6) below in respect to the revocation of Jualah, Jualah, in principle, is not a binding contract. The general offeror (Jail) or the worker (Amil) are entitled to revoke it unilaterally, however, it becomes binding for the Jail when the worker commences work. If the worker undertakes not to revoke the contract during a specified period, it is binding on him to abide by the undertaking. 426426 Shariah Standard No. (15): Jualah 4/2 The possession of the worker exercised over the property of the offeror is that of a trustee. He is, therefore, not liable except in the case of negligence, misconduct or violation of the conditions stipulated by the offeror.
Elements of Jualah and Its Conditions The elements of Jualah are: The two parties (the offeror and the worker), the form of the contract and the subject-matter of the contract (the compensation and the work). 5/1 The two parties to the contract (the offeror and the worker) The existence of legal capacity is a condition for both parties to the contract. It is not a condition that the worker be specified, therefore, Jualah is concluded by the issuance of an offer directed at the general public. Any person whom the offer reaches may undertake the work himself or with the help of another. If, however, the worker is specified, it is obligatory for him to undertake the work himself or with the express consent of the offeror through someone under his supervision and control. 5/2 Form of the contract The Jualah contract is concluded by an offer directed towards a specified worker or towards the general public, irrespective of such an offer being made verbally, in writing or through any other means that indicate an invitation to work and an obligation to pay the compensation. Acceptance of the offer is not stipulated as a condition. 5/3 The subject matter of the contract (compensation and work) The subject matter of the contract is the work that is agreed upon through Jualah as well as the compensation for the work. 5/3/1 Work that produces the desired result 5/3/1/1 Among the forms of activity that may be agreed upon on the basis of the Jualah contract are the following: a) An activity that is intended, through the agreement, to produce a result such as the extraction of minerals. 427427 Shariah Standard No. (15): Jualah b) Any information in which the offeror has an interest such as presenting a report or study or the completion of scientific works that realise a result, but in which the extent of the work cannot be determined. c) An activity that is intended, through the agreement, to return lost property to its seeker. 5/3/1/2 It is permissible to stipulate that the job is done within a specified period so that the worker will not be entitled to compensation after this period, except when the period is over and the result is close to realisation, in which case the period will be automatically extended. 5/3/1/3 When the period is over and the worker has done (part of) the work that will benefit the offeror, the worker is entitled to reasonable wages (Ujrat al-Mithl entitled to reasonable wages ( Ujrat al-Mithl).). 5/3/1/4 The Jualah contract is valid despite uncertainty as to the nature of the work, provided that the required result realised by the work is determined. 5/3/1/5 It is a condition that the work involves some type of effort. 5/3/1/6 It is a condition that the work not be obligatory for the worker. 5/3/2 The compensation 5/3/2/1 The compensation should be known, valuable in the eyes of the Shariah, and deliverable. If the compensation is unknown, unlawful or not deliverable, payment of reasonable compensation becomes binding. 5/3/2/2 The compensation may be a portion of the object of work in Jualah, for instance, a percentage of a debt agreed upon for collection or the right to utilise, for a determined period, a project whose implementation is agreed upon. 428428 Shariah Standard No. (15): Jualah 5/3/2/3 As a rule, entitlement to compensation is not estab- lished until the work is completed and delivered to the offeror. The following are the exceptions to the rule: a) Where it is evident that the work undertaken by the worker belongs to someone other than the offeror and has been decreed as such, the worker is entitled to the compensation. b) Where an accident occurs during work undertaken by the worker causing loss that was not due to the tort or negligence of the worker, the worker is entitled to full compensation. 5/3/2/4 It is permissible to stipulate that all or part of the compensation be paid in advance at the conclusion of the contract or thereafter, even though this is before the completion of the entire work, however, it is con- sidered subject to accounts and the worker is not entitled to it without the realisation of the result, the offeror having the right to reclaim it if the work is not realised.
Revocation of Jualah 6/1 If the offeror, or the worker, revokes the contract prior to the com- mencement of work, the worker is not entitled to compensation. 6/2 If the offeror prevents the worker from working after commencement of the work, the offeror is bound to pay reasonable wages. 6/3 If Jualah contract is terminated by the worker after the work is commenced; the worker is not entitled to a reward, except when the parties agree to otherwise. 6/4 If the worker revokes the contract after commencing the work, he has no claim against the offeror, unless they had agreed to the con- trary. 429429 Shariah Standard No. (15): Jualah
Distinction between Jualah and Ijarah Jualah is distinguished from Ijarah on the following grounds: 7/1 Jualah is valid despite uncertainty of work deeming the determination of the required result by the offeror as sufficient. 7/2 Jualah does not require acceptance. 7/3 Entitlement to compensation depends on completion of work and delivery of result. 7/4 Jualah is valid even if the other party is not known. 7/5 As a rule, Jualah is terminable, while Ijarah is binding.
1. Applications of Jualah Applications of Jualah Among the applications of Jualah in activities where the extent of work is undetermined and in which uncertainty is overlooked are: 8/1 Exploration for minerals and extraction of water Jualah contract may be used for the exploration for minerals and the extraction of water in situations where entitlement to wages is contingent upon the finding of minerals or water without reference to the amount of time or the extent of the period. 8/2 Collection of debts Jualah is used for collecting debts in cases where the entitlement to compensation is contingent upon the collection of all of the debt, in which case entitlement to the entire compensation is established, or part of the debt so that compensation proportionate to the amount of debt collected is due. 8/3 Securing permissible financing facilities 8/3/1 Securing permissible financing facilities means that the worker undertakes some work that leads the institution to agree to the granting of financing facilities to the offeror or to arrange syndicated financing. 8/3/2 Jualah contract may be used for securing facilities provided that the condition of the permissibility of Jualah is met, that is, 430430 Shariah Standard No. (15): Jualah the subject-matter of Jualah must be valid such as the creation of debt through Murabahah on deferred payment, Ijarah with deferred rental, raising of loans without interest, issuance of deferred rental, raising of loans without interest, issuance of letters of guarantee or the opening of documentary credit with the condition that the transactions are not employed for raising interest bearing loans through stipulations, customary practice or dealings among institutions. 8/4 Brokerage Jualah is used in brokerage activities in cases where the entitlement to compensation is contingent upon the conclusion of the contract for which intermediation is undertaken. 8/5 Discoveries, inventions and designs Jualah is used for the realisation of scientific discoveries, innovative inventions and designs, such as symbols and trade marks, where entitlement to compensation is contingent upon the realisation of the discoveries, the registration of patents or the creation of designs conforming to the conditions elaborated by the offeror.
Role of Institutions in Jualah 9/1 It is permissible for an institution to have the status of a worker in Jualah by contract, for work benefiting others irrespective of the institution undertaking the work itself or by contracting out the work through another Jualah that is in the nature of a parallel, unless it is stipulated that the institution will carry out the work itself. It is obligatory that the two Jualahs are not linked. 9/2 It is permissible for an institution to have the status of the offeror whether the work benefits the institution or is for the fulfilment of its obligation in a Jualah for the benefit of another (parallel Jualah) ensuring that the two Jualahs are not linked.
Date of Issuance of the Standard This Shariah Standard was issued on 7 Rabi I, 1424 A.H., corresponding to 8 May 2004 A.D. 431431 Shariah Standard No. (15): Jualah Adoption of the Standard The Shariah Standard on Jualah was adopted by the Shariah Board in held during the period of 11-16 Ramadan 1423 A.H., No. (9) held during the period of 11-16 Ramadan 1423 A.H., its meeting its meeting No. (9) corresponding to 16-21 November 2002 A.D. 432432 Shariah Standard No. (15): Jualah Appendix (A) Brief History of the Preparation of the Standard In its meeting No. (7) held in Makkah Al-Mukarramah during the period of 9-13 Ramadan 1422 A.H., corresponding to 24-28 November 2002 A.D., the Shariah Board resolved to give priority to the preparation of the Shariah Standard for Jualah. On Saturday 14 Shawwal 1422 A.H., corresponding to 29 December 2001 A.D., a Shariah consultant was commissioned to prepare a juristic study and an exposure draft on the Shariah Standards for Jualah. In its meeting No. (1) held on 9 Safar 1423 A.H., corresponding to 20 April 2002 A.D., in the Kingdom of Bahrain, the Shariah Standards Committee discussed the exposure draft of the standard and made some amendments. In its meeting No. (2) held on 20 and 21 Rabi I, 1423 A.H., corresponding to 1 and 2 June 2002 A.D., in the Kingdom of Bahrain, the Committee also discussed the exposure draft of the standard and asked the consultant to make the necessary amendments in light of comments and discussions of the members. In its meeting No. (3) held on 20 Rabi II, 1423 A.H., corresponding to 1 July 2002 A.D., in the Kingdom of Bahrain, the Committee further discussed the exposure draft and made amendments that it deemed suitable in preparation of the submission of the exposure draft to the Shariah Board. The revised exposure draft of the Shariah standard was presented to the Shariah Board in its 9th meeting held in Makkah Al-Mukarramah during the period of 11-16 Ramadan 1423 A.H., corresponding to 16-21 November 2002 A.D. The Shariah Board made further amendments to the exposure draft of the standard and resolved that it be distributed to specialists and interested 433433 Shariah Standard No. (15): Jualah parties for soliciting their comments in preparation of their discussion in a public hearing. A public hearing was held in Bahrain on 18 Dhul-Hajjah 1423 A.H., corresponding to 19 February 2003 A.D. The public hearing was attended by more than thirty participants representing central banks, institutions, accounting firms, Shariah scholars, academics and others having interested public hearing was based on the observations made in this field. The was based on the observations made in this field. The public hearing whether these transmitted prior to the hearing or were raised during public hearing or were raised during whether these transmitted prior to the public . The members of the Shariah Standards Committees (1) hearing. The members of the Shariah Standards Committees (1) the public hearing the public and (2) responded to the observations and comments. The Shariah Standards Committees (1) and (2) held a joint meeting on 2 Muharram 1424 A.H., corresponding to 5 March 2003 A.D., in the Kingdom of Bahrain to discuss the comments made during the public Kingdom of Bahrain to discuss the comments made during the public hearing as well as those sent received in writing, inserting amendments hearing as well as those sent received in writing, inserting amendments deemed suitable. The Shariah Board in its 10thth meeting held in Al-Madinah Al-Munawwarah meeting held in Al-Madinah Al-Munawwarah The Shariah Board in its 10 during the period of 2-7 Rabi I, 1424 A.H., corresponding to 3-8 May 2003 A.D., discussed the amendments suggested by the Shariah Standards Committee, and incorporated the amendments that it found suitable. The Shariah Board unanimously adopted some of the items of the standard and some items were adopted by the majority vote of the members of the Shariah Board, as recorded in the minutes of the meetings of the Shariah Board. The Shariah Standards Review Committee reviewed the standard in its meeting held on Rabi II, 1433 A.H., corresponding to March 2012 A.D., in the State of Qatar, and proposed after deliberation a set of amendments (additions, deletions, and rephrasing) as deemed necessary, and then submitted the proposed amendments to the Shariah Board for approval as it deemed necessary. In its meeting No. (41) In its meeting held in Al-Madinah Al Munawwarah, Kingdom of No. (41) held in Al-Madinah Al Munawwarah, Kingdom of Saudi Arabia during the period of 27-29 Shaban 1436 A.H., corresponding to 14-16 June 2015 A.D., the Shariah Board discussed the proposed amendments submitted by the Shariah Standards Review Committee. After deliberation, he standard was the Shariah Board approved necessary amendments, and the standard was the Shariah Board approved necessary amendments, and t adopted in its current amended version. 434434 Shariah Standard No. (15): Jualah Appendix (B) The Shariah Basis for the Standard Permissibility of Jualah Jualah contract is permissible according to the majority of the Fuqaha on the basis of the Quran, the Sunnah, Ijma (consensus of Fuqaha) and Ijtihad (reasoning). As for the Quran, the evidence is in the story of Yusuf (Joseph) and his As for the Qur`an, the evidence is in the story of Yusuf (Joseph) and his brother after the announcement of the loss of the Kings great beaker, (For him who brings it is the (reward of) a camel load; I will stand surety for it).(2)(2) surety for it). As for the Sunnah, the evidence is in the report from Abu Said Al-Khu- As for the Sunnah, the evidence is in the report from Abu Said Al-Khu- dridri(3)(3) about the stipulation of Jul (compensation) if the chief of the tribe about the stipulation of Jul (compensation) if the chief of the tribe was cured through him and the tacit approval of the Prophet (peace be upon him) of this. There is Ijma (consensus of Fuqaha ) about the contract of Jualah in es- consensus of Fuqaha) about the contract of Jualah in es- sence with some disagreement about its scope insofar as some Fuqaha restricted it to reward for the return of a runaway slave, as is recorded in the Sunnah. As for Ijtihad (reasoning), there is a general need for Jualah in the case As for Ijtihad (reasoning), there is a general need for Jualah in the case of acts that cannot be performed by a person himself nor can he find someone who will volunteer for him. Further, it is suitable for cases for which the contract of Ijarah is not suitable, like the return of lost prop- erty from an unknown location. There is Ijma ( Shariah Status of Jualah The basis for the principle that Jualah is not binding for the offeror is The basis for the principle that Jualah is not binding for the offeror is that accrual of the compensation is contingent upon a condition, thus, [Yusuf (The Prophet Joseph): 72]. (2)(2) [Yusuf (The Prophet Joseph): 72]. [5: 2166]. Sahih Al-Bukhari [5: 2166]. (3)(3) Sahih Al-Bukhari 435435 Shariah Standard No. (15): Jualah it resembles bequest, which is not binding. The basis for Jualah being non-binding for the worker is that the work to be done is uncertain, thus, it resembles Mudarabah, which is not binding. The basis for regarding Jualah as binding when the worker has commenced The basis for regarding Jualah as binding when the worker has commenced work is that at this stage Jualah is similar to Mudarabah in which the Mudarib has commenced work. Like Mudarabah, Jualah is considered binding by the Maliki scholars in such a case. The basis for considering it binding when the two parties undertake not to terminate the contract during the period of the contract is that unilateral revocation leads to the loss of the effort put in by the worker or the likelihood of injury for the offeror. The basis for the entitlement of the worker to receive reasonable wages, The basis for the entitlement of the worker to receive reasonable wages, when the contract is revoked after commencement of work, is that the work done by the worker is legally valid and loss is not to be caused to him. He, therefore, has recourse to reasonable compensation as is the case in Ijarah when it is revoked due to a defect. Elements of Jualah and Its Conditions The basis for the rule that it is obligatory in Jualah that all its elements The basis for the rule that it is obligatory in Jualah that all its elements (two parties, form, work and compensation) be found is that it is a contract and must have these elements. Further, Jualah is a commutative contract that must have a form to indicate the task required as well as the amount of compensation. The basis for permitting the worker to seek assistance from others, when The basis for permitting the worker to seek assistance from others, when there is no stipulation for his personal services, is that Jualah is similar to agency in which seeking help from others is valid. The basis for not stipulating the identification of the worker and The basis for not stipulating the identification of the worker and directing the offer towards the general public is that the offeror does not know of a person who is able to achieve what is required. The basis for not stipulating acceptance on the part of the worker, when The basis for not stipulating acceptance on the part of the worker, when he is unknown, is that it is not possible to obtain his acceptance. The basis for allowing the work to be uncertain is the general need along The basis for allowing the work to be uncertain is the general need along with the impossibility of determining the extent of work. The basis for stipulating that compensation be known is that compen- The basis for stipulating that compensation be known is that compen- sation is like wages and that there is no need to validate Jualah when 436436 Shariah Standard No. (15): Jualah the compensation is unknown as against the uncertainty about the work and the worker. The basis for recourse to reasonable compensation upon the vitiation The basis for recourse to reasonable compensation upon the vitiation of the named compensation is analogy constructed upon Ijarah with recourse to reasonable wages upon the vitiation of the named wages. The basis for the permissibility of compensation being a portion of the The basis for the permissibility of compensation being a portion of the subject-matter of Jualah, even though it is uncertain and does not ex- ist, is that it is a type of uncertainty that does not prevent delivery and involves no Gharar (uncertainty) since entitlement to compensation is not established until the task is accomplished. The basis for the rule that entitlement to compensation is not established The basis for the rule that entitlement to compensation is not established until the work is completed and delivered, is that work in Jualah is not determined or certain, therefore, stipulating payment as compensation would amount to compensating something that has not compensation because the work has not been completed. Applications of Jualah The basis for permitting an institution to undertake Jualah, as a worker The basis for permitting an institution to undertake Jualah, as a worker or as an offeror, is the permissibility of Jualah for which natural persons and juristic persons have the same legal capacity. The basis for the permissibility of Jualah for debt collection, and other The basis for the permissibility of Jualah for debt collection, and other similar acts stated in the standard, is that these are acts whose precise determination is difficult and Ijarah is not suitable for them, while Jualah is legally valid despite the uncertainty with respect to work. 437437 Shariah Standard No. (16) Commercial Papers (Revised Standard) Contents Subject ................................................................................................... Preface ................................................................................................... Preface ..................................................................... Statement of the Standard ..................................................................... Statement of the Standard
Scope of the Standard ..............................................................................
Scope of the Standard ..............................................................................
1. Definition and Shariah Characterisation of Commercial Papers. Definition and Shariah Characterisation of Commercial Papers. Rules for Dealing in Commercial Papers ........................................
1. Rules for Dealing in Commercial Papers ........................................ Endorsement ...........................................................................................
1. Endorsement ........................................................................................... ................................
Collection of the Amount of Commercial Papers ................................
Collection of the Amount of Commercial Papers .......................................................
Discounting of Commercial Papers .......................................................
Discounting of Commercial Papers .............................................
Taking Possession of Commercial Papers .............................................
Taking Possession of Commercial Papers ............
Acceptance for Payment of the Value of Commercial Papers ............
Acceptance for Payment of the Value of Commercial Papers ............................................................
Date of Issuance of the Standard ............................................................
Date of Issuance of the Standard ...................................................................... Adoption of the Standard ...................................................................... Adoption of the Standard Appendices Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (b): TheThe Shariah Basis for the Standard..................................... Appendix (b): Shariah Basis for the Standard..................................... Appendix (c): Definitions.............................................................................. Appendix (c): Definitions.............................................................................. PagePage 443443 444444 445445 446446 447447 448448 449449 450450 452452 459459 441441 IN THE NAME OF ALLAH, THE ALL-MERCIFUL, THE MOST MERCIFUL All praise be to Allah, the Lord of all the worlds, and blessings and peace be upon our master, Muhammad, and his household and all his companions Preface The purpose of this standard is to elaborate the rules pertaining to commercial paper, the types permitted and those not permitted, the rules for dealing in commercial paper, its collection, discounting, possession and the acceptance of the obligation to pay, as well as the elaboration of the Shariah regulations for Islamic financial Institutions (Institution/Institutions)(1)(1) for regulations for Islamic financial Institutions (Institution/Institutions) for dealing in commercial paper. The word (Institution/Institutions) is used here to refer, in short, to Islamic financial (1)(1) The word (Institution/Institutions) is used here to refer, in short, to Islamic financial institutions including Islamic Banks. 443443 Shariah Standard No. (16): Commercial Papers Statement of the Standard
Scope of the Standard This standard covers commercial papers to which the Geneva Uniform Convention on the Law of Commercial Papers,(2)(2) confined itself. These confined itself. These Convention on the Law of Commercial Papers, are bill of exchange, promissory note and cheque. This standard covers dealings in such commercial papers insofar as they conform to the rules and principles of the Shariah. The standard does not cover anything that may possess the attributes of commercial paper other than the three types named above.
Definition and Shariah Characterisation of Commercial Papers 2/1 Bill of exchange: A written, signed, and unconditional order from a person to another person to pay a certain sum of money at sight or at a particular or determinable date to a third person or to the order of that third person or to the bearer of that order. 2/2 Promissory note: A certificate whereby by the issuer (a debtor) promises to pay a certain amount of money at sight or at a particular or determinable date to another person (a beneficiary/creditor). In Shariah characterisation, it is considered a certificate of debt. 2/3 Cheque: A certificate that is issued to a particular person, contain- ing an order issued by a person (the drawer) to another person (the drawee) to pay a certain sum of money to a third person (the beneficiary) at sight. In Shariah characterisation, it is considered a restricted Hawalah if the drawer is a debtor to the drawee. Oth- erwise, it is considered an unrestricted Hawalah with respect to the drawer. Issued on 1349/1350 A.H., corresponding to 1930/1931 A.D., and adopted by a large (2)(2) Issued on 1349/1350 A.H., corresponding to 1930/1931 A.D., and adopted by a large number of countries. 444444 Shariah Standard No. (16): Commercial Papers
Rules for Dealing in Commercial Papers 3/1 It is permissible to undertake transactions in commercial paper of the three types (bill of exchange, promissory note and cheque) on the condition that it does not amount to the contravention of the Shariah, like Riba or delay that is legally prohibited in accordance with the details provided in the following paragraphs. 3/2 It is not permissible to use a bill of exchange or promissory note in transactions that require possession (of the counter-values), like deeming the two types of commercial paper as counter-values in the contract of (currency exchange) or as the counter-value for the contract of SarfSarf (currency exchange) or as the counter-value for the capital (Ras al-Mal capital ( ) in the contract of Salam. Ras al-Mal) in the contract of Salam. 3/3 It is permitted to use a cheque in the following types of transactions and situations: a) A cheque, where the owner has a balance, when drawn by the client against the bank or by the bank against another bank or against itself or against one of its branches. b) A cheque, where the owner has no balance, when drawn by the b) A cheque, where the owner has no balance, when drawn by the client against a bank or is drawn by the bank against another bank or against itself or against one of its branches (the so-called overdraft). From Shariah perspective, it is a loan (Qard) which is permissible if it is void of Riba. c) A crossed cheque that binds the payee bank to fulfil its conditions. d) An account payee cheque that binds payee bank to fulfil its conditions by crediting the amount of the cheque to the beneficiarys account. e) Travellers cheques. It is permissible for the institution issuing it to take commission in lieu of intermediation in such issuance or at the time of its payment provided this does not include Riba.
Endorsement All forms of endorsements are binding with respect to their legal effects provided that the endorsements fulfil the legal conditions and regulations determined for them. 445445 Shariah Standard No. (16): Commercial Papers
Collection of the Amount of Commercial Papers The collection of the amount of commercial papers is considered an agency with the client appointing the institution as an agent to collect the value of the paper on his behalf. The institution is entitled to commission that is agreed upon between the client and the institution. In the absence of an agreement between them, the practice prevalent among institutions is to be acted upon.
Discounting of Commercial Papers 6/1 It is not permissible to discount commercial papers, but it is permitted permitted 6/1 It is not permissible to discount commercial papers, but it is to pay an amount that is less than the value of the paper to the first beneficiary prior to the date of maturity. 6/2 It is not permissible to sell commercial paper that has not become due ) nor for an amount Riba al-Nasiah) nor for an amount plus Riba al-Fadl for an amount similar to its value (Riba al-Nasiah for an amount similar to its value ( that is more than its value (Riba al-Nasiah that is more than its value ( Riba al-Nasiah plus Riba al-Fadl).). 6/3 It is permissible to the beneficiary to treat commercial paper that is not yet due as price for ascertained goods or usufruct, but not those that are sold by description as a liability with the condition of actual or legal delivery of goods or usufructuary asset (commodity-based discounting of debts). 6/4 The holder of commercial paper is permitted to purchase goods to be delivered later (on the date of maturity of the paper), and after the debt is established as a liability. The holder of the paper transfers the claim of his creditor to his debtor through this paper. In such a case, the transaction amounts to Hawalah.
Taking Possession of Commercial Papers 7/1 The receipt of a cheque requiring prompt payment, if it is a bankers cheque or a certified cheque or one that is legally deemed a certified cheques whereby a certain amount is mandatorily maintained in the drawers account, being drawn among banks or among banks and their branches, constitutes constructive possession of the amount written on it, and it is on this basis that it is permissible to use the 446446 Shariah Standard No. (16): Commercial Papers cheque in transactions that stipulate possession such as the exchange of currencies, the purchase of gold or silver with the cheque as well as treating the cheque as capital (Ras al-Mal as treating the cheque as capital ( ) of Salam. Ras al-Mal) of Salam. 7/2 The receipt of a cheque that is to be paid promptly, if it is not a bankers cheque or a certified cheque or one that is legally deemed a certified cheque, cannot be considered constructive possession of its amount, and in such a case, it is not permitted to use it for transactions for which possession is stipulated. 7/3 It is permitted to use cheques of bank transfers for transactions when the amount intended to be transferred is in the same currency in which payment is to be made, however, where the currency is different from that in which payment is to be made, it is necessary to first apply the process of conversion between the two currencies, deeming constructive possession to be sufficient, and then undertake the transfer. It is a form combining currency exchange ( ) and the transfer. It is a form combining currency exchange (SarfSarf) and Hawalah.
Acceptance for Payment of the Value of Commercial Papers 8/1 Acceptance for paying the value of commercial paper on the part of the drawee is considered an undertaking and an obligation to pay the debt represented by the commercial paper to the holder on the date of maturity. This undertaking and obligation must be fulfilled according to the Shariah. 8/2 All parties whose signatures appear on the commercial paper including the drawer, the endorser and the guarantor are jointly responsible to pay to the holder the value of the paper in accordance with rules of liability, thus, the holder is entitled to have recourse to them severally or jointly after the refusal of the drawer (or the issuer in case of a promissory note) to pay. 8/3 Tangible security stipulated by the holder of commercial paper to ensure the securing of his right will be deemed a Mortgage (Rahn) and will be governed by the rules of Mortgage (Rahn). 447447 Shariah Standard No. (16): Commercial Papers
Date of Issuance of the Standard This Shariah Standard was issued on 7 Rabi I, 1424 A.H., corresponding to 8 May 2003 A.D. 448448 Shariah Standard No. (16): Commercial Papers Adoption of the Standard The Shariah Standard on Commercial Papers was adopted by the Shariah Board in its meeting No. (10) held during the period of 2-7 Rabi I, 1424 A.H., corresponding to 3-8 May 2003 A.D. 449449 Shariah Standard No. (16): Commercial Papers Appendix (A) Brief History of the Preparation of the Standard In its meeting No. (7) held in Makkah Al-Mukarramah during the period of 9-13 Ramadan 1422 A.H., corresponding to 24-28 November 2001 A.D., the Shariah Board decided to issue the Shariah standard for Commercial Papers and to appoint a Shariah consultant for the preparation of the exposure draft of the Shariah standard for commercial papers. On Saturday 14 Shawwal 1422 A.H., corresponding to 29 December 2001 A.D., a Shariah consultant was commissioned to prepare a juristic study and an exposure draft on the Shariah standards for commercial papers. In its meeting held in the Kingdom of Bahrain on 4-5 Safar 1423 A.H., corresponding to 17-18 April 2002 A.D., the Shariah Standard Committee discussed the exposure draft of the Shariah standard on commercial papers and asked the consultant to make necessary amendments to reflect the comments and observations made by the members of the Committee. The Committee discussed the exposure draft of the standard in its meeting held in the Kingdom of Bahrain on 6-7 Rabi II, 1423 A.H., corresponding to 17-18 June 2002 A.D., and introduced necessary amendments as per observations and comments of the members. The exposure draft of the standard was also discussed by the Committee in its meeting held in Amman, the Hashemite Kingdom of Jordan on 17 Rabi II, 1423 A.H., corresponding to 28 June 2002 A.D., and further amendments were incorporated in the standard. The revised exposure draft of the Shariah standard was presented to the Shariah Board in its 9th meeting held in Makkah Al-Mukarramah during the period of 11-16 Ramadan 1423 A.H., corresponding to 16-21 November 2002 AD. The Shariah Board made further amendments to the 450450 Shariah Standard No. (16): Commercial Papers exposure draft of the standard and decided that it be sent to specialists and interested parties in order to obtain their comments in preparation for its discussion in a listenig session. A public hearing was held in Bahrain on 18 Dhul-Hajjah 1423 A.H., corresponding to 19 February 2003 A.D. The public hearing was attended by more than thirty participants representing central banks, institutions, accounting firms, Shariah scholars, academics and others interested in the field. The members of the Shariah Standards Committees (1) and (2) responded to the written comments that were sent prior to the public hearing as well as to the oral comments that were expressed in the public hearing. The Shariah Standards Committees (1) and (2) held a joint meeting on 2 Muharram 1424 A.H., corresponding to 5 March 2003 A.D., to discuss the comments made during the public hearing as well as comments received in writing. The two Committees made the amendments considered necessary. The Shariah Board in its meeting No. (10) held in Al-Madinah Al- Munawwarah during the period of 2-7 Rabi I, 1424 A.H., corresponding to 3-8 May 2003 A.D., discussed the amendments made by the Shariah Standards Committee and made amendments considered suitable. The Shariah Board unanimously adopted some of the items, while other items were adopted by a predominant majority vote, as recorded in the minutes of the meetings of the Shariah Board. The Shariah Standards Review Committee reviewed the standard in its meeting held on Rabi II, 1433 A.H., corresponding to March 2012 A.D., in the State of Qatar, and proposed after deliberation a set of amendments (additions, deletions, and rephrasing) as deemed necessary, and then submitted the proposed amendments to the Shariah Board for approval as it deemed necessary. In its meeting No. (41) held in Al-Madinah Al-Munwwarah, Kingdom of Saudi Arabia during the period of 27-29 Shaban 1436 A.H., corresponding to 14-16 June 2015 A.D., the Shariah Board discussed the proposed amendments submitted by the Shariah Standards Review Committee. After deliberation, the Shariah Board approved necessary amendments, and the standard was adopted in its current amended version. 451451 Shariah Standard No. (16): Commercial Papers Appendix (B) The Shariah Basis for the Standard Dealings in Commercial Papers The basis for the permissibility of dealing in a bill of exchange is The basis for the permissibility of dealing in a bill of exchange is that it is in the meaning of Hawalah or Qard (loan) contract, which are agreed upon by Ijma (consensus of Fuqaha), or in the mea- (demand note), which is valid according to the Suftajah (demand note), which is valid according to the ning of Suftajah ning of preponderant opinion. The evidence for this is the report from a number of Companions (may Allah be pleased with them) who dealt in these instruments. It is reported from Abdullah Ibn Abbas (may Allah be pleased with him) that he used to take silver from tra- ders at Mecca and write down a demand note for them to be paid at Kufa. It is related from Abdullah Ibn Al-Zubayr that he used to take dirhams from traders at Mecca and then write a note drawn upon his brother Musab in Iraq. When Ibn Abbas was asked about this, he Al-Muwaffaq Ibn Qudamah,(4)(4) may saw no harm in the transaction.(3)(3) Al-Muwaffaq Ibn Qudamah, may saw no harm in the transaction. Allah confer mercy upon him, has related from Ali (may Allah be pleased with him) that he was asked about a similar transaction and he saw no harm in it. Further, in the the is the interest of both the Suftajah is the interest of both he saw no harm in it. Further, in the Suftajah lender and the borrower without harm being caused to either one lender and the borrower without harm being caused to either one of of them. The lender is secure against the danger of the highway in trans- porting his dirhams to the destined town, while the borrower benefits from the loan and is also secure against the dangers of the highway being under an obligation to pay in the said town. The Shariah does not lay down a prohibition for interests that do no invoke harm. (3)(3) This has been related by Al-Bayhaqi in This has been related by Al-Bayhaqi in Al-Sunan Al-Kubra Nasir Al-Albani, Irwa Al-Ghalil Fi Takhrij Ahadith Manar Al-Sabil Nasir Al-Albani, [6: 436]. Al-Mughni [6: 436]. [5: 352]; and see Muhammad Al-Sunan Al-Kubra [5: 352]; and see Muhammad [5: 328]. Irwa Al-Ghalil Fi Takhrij Ahadith Manar Al-Sabil [5: 328]. (4)(4) Al-Mughni 452452 Shariah Standard No. (16): Commercial Papers Shaykh Al-Islam Ibn Taymiyyah Shaykh Al-Islam Ibn Taymiyyah(5)(5) (may Allah confer mercy upon him) (may Allah confer mercy upon him) has said: The correct view is that of permissibility, because both the lender and the borrower benefit from such raising of a loan, and the Shariah does not proscribe what benefits them and is in their interest; it it Shariah does not proscribe what benefits them and is in their interest; proscribes what is harmful for them. In addition to this, there is no text nor is such meaning implied by the texts. It is, Suftajah nor is such meaning implied by the texts. It is, that prohibits a Suftajah that prohibits a therefore, necessary to maintain its permissibility, especially when there is a general need for it.(6)(6) a general need for it. The basis for the permissibility of a promissory note is that it is The basis for the permissibility of a promissory note is that it is considered a document acknowledging a debt, and Allah, the Al- Mighty, has commanded the securing of debts, as He, the Al-Mighty, (O you who believe! When you contract a debt for a fixed says: (O you who believe! When you contract a debt for a fixed says: period, write it down. Let a scribe write it down in justice between you...)(7)(7) you...) The permissibility of a cheque drawn by the client upon a bank, with The permissibility of a cheque drawn by the client upon a bank, with which he has a balance is that it is in the nature of Hawalah. The MuhilMuhil which he has a balance is that it is in the nature of Hawalah. The is the beneficiary and the (transferor) is the accountholder, the MuhalMuhal is the beneficiary and the (transferor) is the accountholder, the (transferee) is the drawee bank. Muhal Alayh (transferee) is the drawee bank. Muhal Alayh The permissibility of a cheque drawn by the client upon a bank with The permissibility of a cheque drawn by the client upon a bank with which he does not have a balance is that it is Hawalah. This view is held by those who do not stipulate for the of Hawalah permissibility of Hawalah held by those who do not stipulate for the permissibility (transferor) with Hawalah that the transferee be indebted to the MuhalMuhal (transferor) with Hawalah that the transferee be indebted to the (transfer) being valid for a person who does not owe a prior debt. Some jurists call this absolute Hawalah or Hawalah upon one with no liability. The second view is that it is an agency for borrowing, and both are (independently) valid. This rule, however, is contingent upon the cheque no invoking Riba by way of an overdraft, for banks usually do not lend without interest. Banks will not accept cheques drawn upon them by clients with no balance except by charging Riba-bearing profits that are due from the client along with the value of the cheque. Consequently, bank, where he does not if the cheque drawn by the client upon the bank, where he does not if the cheque drawn by the client upon the Majmu Al-Fatawa [29: 531]. [29: 531]. Al-Mughni [6: 437]; (5) (5) Majmu Al-Fatawa (6) See: Al-Mughni (6) See: Al-Jawziyyah, Tahdhib Sunan Abu Dawud Al-Jawziyyah, [6: 437]; Majmu Al-Fatawa [5: 152]. Tahdhib Sunan Abu Dawud [5: 152]. [20: 515] and [29: 531]; and Ibn Qayyim Majmu Al-Fatawa [20: 515] and [29: 531]; and Ibn Qayyim (7) [Al-Baqarah (The Cow): 282]. 453453 Shariah Standard No. (16): Commercial Papers have a balance, includes Riba-bearing profits it is prohibited; it is not permissible to write such a cheque nor to undertake transactions in it. The basis for the permissibility of dealing in crossed and account payee The basis for the permissibility of dealing in crossed and account payee cheques, and the obligation of the payee bank to abide by the conditions stipulated by the accountholder for the two types of cheque, is the Muslims abide by the conditions they generality of the Hadith stating: Muslims abide by the conditions they generality of the Hadith stating: stipulate.(8)(8) The reason is that such a condition promotes the inherent stipulate. The reason is that such a condition promotes the inherent interest of the contract. Further, the primary principle for conditions and contracts is that of permissibility. Endorsement The basis for the permissibility of endorsement is that it does not go The basis for the permissibility of endorsement is that it does not go beyond the meaning of either Hawalah (transfer) or Wakalah (agency), and both are permissible. Discounting of Commercial Papers The basis for not permitting discounting of commercial paper is that The basis for not permitting discounting of commercial paper is that in reality the discounting of commercial paper amounts to a loan with interest. What affirms this is that the interest charged through discounting varies according to the value of the commercial paper and its date of maturity, and loan with interest is prohibited by agreement. The permissibility of paying less than the value of the paper, when the The permissibility of paying less than the value of the paper, when the transaction is between the holder and the first beneficiary, is that it belongs to the category of the issue known as negotiating a deferred debt for part of it paid promptly. This is what is known as Da Wa debt for part of it paid promptly. This is what is known as Da Wa Taajjal (reduce the amount for hastening payment), and according Taajjal (reduce the amount for hastening payment), and according to one opinion it is permissible to undertake such a transaction. The evidence that supports permissibility is the Hadith of Ibn Abbas (may Allah be pleased with him), stating: When the Prophet (peace be upon Allah be pleased with him), stating: When the Prophet (peace be upon him) decided to expell Banu Al-Nadir, they said, O Messenger of Allah, [4: 584]; Al-Hakim, Al-Mustadrak (8)(8) This Hadith has been related by a number of reporters of Hadith. See: This Hadith has been related by a number of reporters of Hadith. See: Sunan Al- Sunan Al- Tirmidhi [3: 27]. SunanAl-Daraqutni [3: 27]. Al-Mustadrak [4: 101]; and Tirmidhi [4: 584]; Al-Hakim, The Hadith has been narrated by Amr Ibn Awf and is connected to the Prophet (peace be upon him). It has a number of different Isnad (chains of transmission) to the Prophet. This is why Al-Bukhari related it in his (Suspended) Hadith. Muallaq (Suspended) Hadith. This is why Al-Bukhari related it in his Sahih Muhammad Nasir Al-Albani has investigated the chains of transmission of this Hadith [5: 142-146] and concluded that the Hadith is generally authentic in Irwa Al-Ghalil [5: 142-146] and concluded that the Hadith is generally authentic in Irwa Al-Ghalil view of the number of its Isnads. [4: 101]; and SunanAl-Daraqutni [4: 451] as a Muallaq Sahih [4: 451] as a 454454 Shariah Standard No. (16): Commercial Papers you have ordered our expulsion when we have against people debt claims that are not yet due. The Prophet (peace be upon him) said, Reduce the amounts to hasten payments.(9)(9) Ibn Abbas (may Allah be pleased with amounts to hasten payments. Ibn Abbas (may Allah be pleased with him), was asked about the issue of a person who has a deferred claim against another, and he says to the debtor, Hasten the payment and I will reduce the amount for you, so Ibn Abbas responded saying, There is no harm in it. Ibn Abbas (may Allah be pleased with him), was the narrator of the previous Hadith. Further, this issue is the opposite of the issue of RibaRiba. That is, Riba involves an excess in both the period and the amount, . That is, Riba involves an excess in both the period and the amount, which is entirely harmful for the debtor, whereas this issue involves the absolving of the liability of the debtor with respect to the debt with a benefit coming to the creditor through prompt payment. Each one of them benefits without being subjected to harm. This is different from , the prohibition of which is agreed upon and that causes injury to RibaRiba, the prohibition of which is agreed upon and that causes injury to the debtor. The benefit in Riba is exclusively for the creditor (owner of capital). Thus, this case differs from Riba in both form and meaning. The reason is that the excess in Riba as a counter-value for the period leads to a grave hardship, for a single dirham is doubled and multiplied keeping the Dhimmah (liability) engaged without any corresponding benefit. In the case of reduction of the amount and hastening of payment, the liability of the debtor is removed and the prompt payment benefits the creditor. The Law-giver encourages the discharging of debt liabilities. The debtor has been called a person imprisoned by difficulties, and thus in the discharging his liability is a release from these shackles. This is (10) different from his remaining patiently burdened with an excess.(10) different from his remaining patiently burdened with an excess. [3: 46]; and Al-Hakim, Al-Mustadrak [11: 56]; Al-Bayhaqi, Al-Sunan Al-Kubra This Hadith has been related by a number of Hadith reporters. See: Al-Tahawi, (9)(9) This Hadith has been related by a number of Hadith reporters. See: Al-Tahawi, Sharh Mushkil Al-Athar Sunan [6: 28]; Sunan Sharh Mushkil Al-Athar [11: 56]; Al-Bayhaqi, Al-Sunan Al-Kubra [6: 28]; Al-Daraqutni [2: 52]. Ibn Al-Qayyim said in Al-Mustadrak [2: 52]. Ibn Al-Qayyim said in Al-Daraqutni [3: 46]; and Al-Hakim, Ighathat Al-Lahfan [2: 11]: This Hadith has been related as per relation conditions Ighathat Al-Lahfan [2: 11]: This Hadith has been related as per relation conditions . Al-Bayhaqi has classified the Hadith as weak but the men Al-Sunan Al-Kubra. Al-Bayhaqi has classified the Hadith as weak but the men of of Al-Sunan Al-Kubra in the chain of transmission of the Hadith are trustworthy. However, the Hadith has been classified as weak due to Muslim Ibn Khalid who is a narrator in the chain of transmission of the Hadith. Nevertheless, he is a trustworthy and reliable jurist as Imam Shafii has related Hadiths through him and regard his view as authoritative. (10) Ighathat Al-Lahfan (10) [2: 11]; and Ilam Al-Muwaqqiin [3: 313]. Ighathat Al-Lahfan [2: 11]; and Ilam Al-Muwaqqiin [3: 313]. 455455 Shariah Standard No. (16): Commercial Papers The basis for treating commercial paper as a price for ascertained goods The basis for treating commercial paper as a price for ascertained goods is that it amounts to the sale of a debt, to a person other than the one who owes it, for ascertained goods. This is permitted according to the Maliki school if it takes place after possession so that it does not turn into the delaying of the two counter-values. A resolution pertaining to this has been issued by the Islamic Fiqh Academy of the Organization (11) of Islamic Conference.(11) of Islamic Conference. Taking Possession of Commercial Papers The basis for considering a cheque, whether certified or one of the same The basis for considering a cheque, whether certified or one of the same type, as possession of the amount mentioned in it, is that a cheque is secured by a large number of guarantees that make the possessor the owner of its contents. The beneficiary in this case is able to undertake transactions in it by selling, buying or by making a gift. Further, there is a strong protection provided by state governments to support confidence in cheques. In addition to this, relying upon a cheque means the existence of sufficient funds to cover its amount with the certifier undertaking to retain the funds until the end of the period fixed for payment. It is for this reason that people in general prefer certified cheques over cash for large transactions. The basis for not considering an uncertified cheque, or one that is The basis for not considering an uncertified cheque, or one that is similar to it as far as the possession of its amount is concerned, is the probability that there is no balance to cover it or there is an insufficient balance. The basis for possession is customary practice, and a resolution has been passed by the Islamic Fiqh Academy deeming the receipt of a certified cheque as possession. The basis for the permissibility of dealing in cheques for bank transfers, The basis for the permissibility of dealing in cheques for bank transfers, when the intention is to transfer the same currency in which payment is to be made, is that it belongs to the category of , which is Suftajah, which is is to be made, is that it belongs to the category of Suftajah permissible according to one out of two opinions of the jurists. Payment Guarantees for the Value of Commercial Paper The basis for considering a guarantee for acceptance as an undertaking The basis for considering a guarantee for acceptance as an undertaking and an obligation on the part of the drawee to pay to the legal holder, on (11) In its 16 (11) In its 16thth session held in Mecca on 21-26 Shawwal 1422 A.H. session held in Mecca on 21-26 Shawwal 1422 A.H. 456456 Shariah Standard No. (16): Commercial Papers The conditions a person stipulates for himself, and by which he (13) Muslims abide by the conditions they stipulate.(13) the date of maturity, the amount of debt stated on the bill of exchange, is that this undertaking and obligation is to be fulfilled according to the Shariah. This requirement is due to the generality of the words of Allah, (12) (O you who believe! Fulfil (your) obligations),(12) the Exalted, saying: (O you who believe! Fulfil (your) obligations), the Exalted, saying: as well as due to the generality of the saying of the Prophet (peace be upon him): upon him): Muslims abide by the conditions they stipulate. The conditions a person stipulates for himself, and by which he is is bound, are included in this meaning. There is also the Hadith of Jabir Ibn Abdullah (may Allah be pleased with him), who said: The Messenger of Allah (peace be upon him) did not pray over (the funeral of) a person who died while owing a debt A dead person was brought a person who died while owing a debt. A dead person was brought The people , Does he owe a debt? The people to him (for prayers) and he said, Does he owe a debt? to him (for prayers) and he said replied, Yes, he owes two dinars. At this Abu Qatadah Al-Ansari said, The two dinars are on me, O Messenger of Allah. The Messenger of (14) Allah (peace be upon him) then offered the funeral prayers for him.(14) Allah (peace be upon him) then offered the funeral prayers for him In this Hadith, we notice that Abu Qatadah Al-Ansari (may Allah be pleased with him) offers an undertaking and accepts the obligation to pay the debt owed by the deceased, and this is accepted by the Prophet (peace be upon him). In fact, this undertaking and obligation given by Abu Qatadah were deemed sufficient to absolve the deceased from all liability for the debt. In some different texts of the Hadith, it has been reported that after the statement of Abu Qatadah (The two dinars are on me), The Prophet (peace be upon him) said, The right dinars are on me), The Prophet (peace be upon him) said, The right Abu Qatadah of the creditor is due and the deceased is absolved of it. Abu Qatadah of the creditor is due and the deceased is absolved of it. responded in the affirmative, so the Prophet (peace be upon him) (15) The removal of all liability for the debt from the prayed over him.(15) prayed over him. The removal of all liability for the debt from the deceased was due to the undertaking and obligation given by Abu Qatadah (may Allah be pleased with him), to pay the debt due form this person and because of which he became indebted to the extent (12) [Al-Ma`idah (The Table): 1]. (13) The source of the Hadith is stated earlier. (14) This text of the Hadith has been related by Abu Dawud in his Sunan (14) This text of the Hadith has been related by Abu Dawud in his Sunan [9: 193]. [9: 193]. However, the Hadith has origin in the two authentic books of Hadith. See: Sahih However, the Hadith has origin in the two authentic books of Hadith. See: Sahih Al-Bukhari [2: 467]; and Al-Bukhari This narration has been related by Imam Ahmad in his Musnad (15) This narration has been related by Imam Ahmad in his (15) [3: 1237] (H: 1619). Sahih Muslim [3: 1237] (H: 1619). [2: 467]; and Sahih Muslim [3: 330]. Musnad [3: 330]. 457457 Shariah Standard No. (16): Commercial Papers of two dinars. Al-Muwaffaq Ibn Qudamah (may Allah confer mercy of two dinars. Al-Muwaffaq Ibn Qudamah (may Allah confer mercy The upon him) said: The words of the Prophet (peace be upon him): The upon him) said: The words of the Prophet (peace be upon him): deceased is absolved of it mean that you have now become subject to deceased is absolved of it mean that you have now become subject to the claim for two dinars. This is by way of emphasis for establishing (16) the claim against him as well as the obligation to pay.(16) the claim against him as well as the obligation to pay. The basis for permitting the holder of commercial paper to have The basis for permitting the holder of commercial paper to have recourse to all persons who have signed the paper is that by doing so they bind themselves to the extent of the value of the paper in case of non-payment. The Ulama arrived at a consensus on the permissibility of guarantees on the whole. The basis for the permissibility of guarantees through tangible assets The basis for the permissibility of guarantees through tangible assets is that these are treated as Rahn (mortgage) and are governed by the same rules that apply to Rahn. The Ulema arrived at a consensus for the permissibility of Rahn (Mortgage). (16) Al-Mughni (16) [7: 85]. Al-Mughni [7: 85]. 458458 Shariah Standard No. (16): Commercial Papers Appendix (C) Definitions Commercial Papers Tradable certificates that represent pecuniary rights payable at sight or after a short period. Customary practice regards them as instruments of payment and they act as substitutes for cash in transactions. Bill of Exchange A certificate issued in a particular legal form. It consists of an order from a person (known as the drawer) to another person (known as the drawee) to pay a certain sum of money at sight, or at a particular or determinable date, to a third person (called the beneficiary). Promissory Note A certificate whereby the issuer promises to pay a certain sum of money at a particular or determinable date, or at sight, to another person (called the beneficiary). Cheque A certificate that is issued in a particular form containing an order is- sued by a person (known as the payer) to another person (known as the payee) to pay a certain sum of money to a third person (known as the beneficiary) when the cheque is presented. Crossed Cheque A cheque written in the form of an ordinary cheque except that it is distinguished by two parallel lines on the face of the cheque. The cross- ing places an obligation upon the payee bank not to pay the value of the cheque to a person other than a client of the payee bank or to another bank. 459459 Shariah Standard No. (16): Commercial Papers Certified Cheque A cheque written in the form of an ordinary cheque and distinguished by the word certified or accepted or whatever gives this meaning, on the face of the cheque along with the date and the address of the payee bank with the signatures of the certifying official whereby the payee bank certifies the authenticity of the signature of the payer and the existence of sufficient funds in his account for payment of the value of the cheque to the beneficiary. Bankers Cheque (Bank Draft) A cheque issued by the payee bank (to its client) guaranteeing payment of the value of the cheque to a third party. Account Payee Cheque A cheque written in the form of an ordinary cheque to which the issuer adds a statement indicating that its value should not be paid in cash, but upon conditions stated, like a statement written on the face of the cheque saying Account Payee or any other statement bearing the same meaning. Travellers Cheque Cheques drawn in varying values by institutions upon their foreign branches or correspondent institutions in the interest of a traveller who will receive their value by merely presenting them for payment to a party that will accept them. Cheques for Bank Transfers A cheque written by an institution, upon the request of a person, who intends to remit his cash through the institution, by way of cheques, to another location, so that he, his agent, or any other person may receive it. Endorsement A legal act by means of which ownership in the commercial paper is transferred from one person (known as endorser) to another person (known as the endorsee), or it has the effect, through a statement, of creating an agency for collection or a mortgage. 460460 Shariah Standard No. (16): Commercial Papers Discounting of Commercial Papers A process by means of which the holder of commercial paper, through an endorsement, transfers ownership in it to a third party prior to the date of maturity with the institution discounting the value by a determined amount in lieu of early payment. Acceptance to Pay The undertaking by the drawee to pay the value of the bill of exchange to the lawful holder at the date of its maturity. Guarantee or Guarantor The bank as guarantor provides a guarantee to the holder for paying the value of the commercial paper by way of a guarantor along with other signatories if the primary debtor refuses to pay. Tangible Guarantees These are guarantees stipulated by the holder of commercial paper through the creation of a mortgage on real estate, or a mortgage of movables, like commercial paper or negotiable instruments that the debtor endorses over to the holder by way of mortgage or goods that the debtor delivers to the holder as a security for payment. 461461 Shariah Standard No. (17) Investment Sukuk Contents Subject ................................................................................................... Preface ................................................................................................... Preface ..................................................................... Statement of the Standard ..................................................................... Statement of the Standard ..............................................................................
Scope of the Standard ..............................................................................
Scope of the Standard .............................................................
Definition of Investment Sukuk .............................................................
Definition of Investment Sukuk .....................................................................
Types of Investment Sukuk .....................................................................
Types of Investment Sukuk .....................................................
Characteristics of Investment Sukuk .....................................................
Characteristics of Investment Sukuk ...........................................................
Shariah Rulings and Regulations ...........................................................
Shariah Rulings and Regulations ............................................................
Date of Issuance of the Standard ............................................................
Date of Issuance of the Standard ...................................................................... Adoption of the Standard ...................................................................... Adoption of the Standard Appendices Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (b): TheThe Shariah Basis for the Standard Appendix (b): ..................................... Shariah Basis for the Standard ..................................... Appendix (c): Definitions Appendix (c): .............................................................................. Definitions .............................................................................. PagePage 467467 468468 471471 472472 481481 482482 483483 485485 487487 465465 IN THE NAME OF ALLAH, THE ALL-MERCIFUL, THE MOST MERCIFUL All praise be to Allah, the Lord of all the worlds, and blessings and peace be upon our master, Muhammad, and his household and all his companions Preface The aim of this standard is to elaborate the Shariah rules for the issuance and trading of investment Sukuk (certificates) as well as the elaboration of their types, characteristics, Shariah regulations and the conditions for the issuance of Sukuk and dealings in them for trading by Islamic financial insti- tutions (institution/institutions).(1)(1) tutions (institution/institutions). The word (Institution/Institutions) is used here to refer, in short, to Islamic financial (1)(1) The word (Institution/Institutions) is used here to refer, in short, to Islamic financial institutions including Islamic Banks. 467467 Shariah Standard No. (17): Investment Sukuk Statement of the Standard
Scope of the Standard This standard covers investment Sukuk. These Sukuk include Sukuk of ownership of leased assets, ownership of usufructs, ownership of ser- vices, Murabahah, Salam, Istisnaa, Mudarabah, Musharakah, investment agency and sharecropping (Muzaraah), irrigation (Musaqat) and agricul- tural (Mugharasah) partnerships. The standard does not cover shares of joint stock companies, certificates of funds and investment portfolios.
Definition of Investment Sukuk Investment Sukuk are certificates of equal value representing undivided shares in ownership of tangible assets, usufruct and services or (in the ownership of) the assets of particular projects or special investment activity, however, this is true after receipt of the value of the Sukuk, the closing of subscription and the employment of funds received for the purpose for which the Sukuk were issued. In this standard, Sukuk have been designated as Investment Sukuk in order to distinguish them from shares and bonds.
Types of Investment Sukuk Investment Sukuk are of different types, and among these are: 3/1 Certificates of ownership in leased assets These are certificates of equal value issued either by the owner of a leased asset or a tangible asset to be leased by promise, or they are issued by a financial intermediary acting on behalf of the owner with the aim of selling the asset and recovering its value through subscription so that the holders of the certificates become owners of the assets. 468468 Shariah Standard No. (17): Investment Sukuk 3/2 Certificates of ownership of usufructs 3/2/1 Certificates of ownership of usufructs of existing assets These are two types: 3/2/1/1 Certificates of equal value issued by the owner of an existing asset either on his own or through a finan- cial intermediary, with the aim of leasing the asset and receiving the rental from the revenue of subscription so that the usufruct of the assets passes into the own- ership of the holders of the certificates. 3/2/1/2 Certificates of equal value issued by the owner of the usufruct of an existing asset (lessee), either on his own or through a financial intermediary, with the aim of subleasing the usufruct and receiving the rental from the revenue of the subscription so that the holders of the certificates become owners of the usufruct of the asset. 3/2/2 Certificates of ownership of usufructs of described future assets These are certificates of equal value issued for the purpose of leasing out tangible future assets and for collecting the rental from the subscription revenue so that the usufruct of the described future asset passes into the ownership of the holders of the certificates. 3/2/3 Certificates of ownership of services of a specified party These are certificates of equal value issued for the purpose of providing services through a specified provider (such as educational benefits in a nominated university) and obtaining the service charges in the form of subscription income so that the holders of the certificates become owners of these services. 3/2/4 Certificates of ownership of described future services These are certificates of equal value issued for the purpose of providing future services through described provider (such as educational benefits from a university without naming the educational institution) and obtaining the fee in the form of 469469 Shariah Standard No. (17): Investment Sukuk subscription income so that the holders of the certificates become owners of the services. 3/3 Salam certificates (Salam Sukuk) These are certificates of equal value issued for the purpose of mobilising Salam capital so that the goods to be delivered on the basis of Salam come to be owned by the certificate holders. 3/4 Istisnaa certificates (Istisnaa Sukuk) These are certificates of equal value issued with the aim of mobilising funds to be employed for the production of goods so that the goods produced come to be owned by the certificate holders. 3/5 Murabahah certificates (Murabahah Sukuk) These are certificates of equal value issued for the purpose of financing the purchase of goods through Murabahah so that the certificate holders become the owners of the Murabahah commodity. 3/6 Musharakah certificates (Musharakah Sukuk) These are certificates of equal value issued with the aim of using the mobilised funds for establishing a new project, developing an existing project or financing a business activity on the basis of an existing project or financing a business activity on the basis of any of partnership contracts so that the certificate holders become the owners of the project or the assets of the activity as per their respective shares, with the Musharakah certificates being managed on the basis of participation or Mudarabah or an investment agency. 3/6/1 Participation certificates These are certificates representing projects or activities managed on the basis of Musharakah by appointing one of the partners or another person to manage the operation. 3/6/2 Mudarabah Sukuk These are certificates that represent projects or activities man- aged on the basis of Mudarabah by appointing one of the part- ners or another person as the Mudarib for the management of the operation. 470470 Shariah Standard No. (17): Investment Sukuk 3/6/2 Investment agency Sukuk These are certificates that represent projects or activities managed on the basis of an investment agency by appointing an agent to manage the operation on behalf of the certificate holders. 3/7 Sharecropping certificates (Muzaraah Sukuk) These are certificates of equal value issued for the purpose of using the funds mobilised through subscription for financing a project on the basis of Muzaraah so that the certificate holders become entitled to a share in the crop according to the terms of the agreement. 3/8 Irrigation certificates (Musaqat Sukuk) These are certificates of equal value issued for the purpose of employing the funds mobilised through subscription for the irrigation of fruit bearing trees, spending on them and caring for them on the basis of a Musaqat contract so that the certificate holders become entitled to a share in the crop as per agreement. 3/9 Agricultural certificates (Mugharasah Sukuk) These are certificates of equal value issued on the basis of a Mugharasah contract for the purpose of employing the funds for planting trees and undertaking the work and expenses required by such plantation so that the certificate holders become entitled to a share in the land and the plantation.
Characteristics of Investment Sukuk 4/1 Investment Sukuk are certificates of equal value issued in the name of the owner or bearer in order to establish the claim of the certificate owner over the financial rights and obligations represented by the certificate. 4/2 Investment Sukuk represent a common share in the ownership of the assets made available for investment, whether these are non- monetary assets, usufructs, services or a mixture of all these plus intangible rights, debts and monetary assets. These Sukuk do not represent a debt owed to the issuer by the certificate holder. 471471 Shariah Standard No. (17): Investment Sukuk 4/3 Investment Sukuk are issued on the basis of a Shariah-nominated contract in accordance with the rules of Shariah that govern their issuance and trading. 4/4 The trading of Investment Sukuk is subject to the terms that govern trading of the rights they represent. 4/5 The owners of these certificates share the return as stated in the subscription prospectus and bear the losses in proportion to the certificates owned (held) by them.
Shariah Rulings and Regulations 5/1 Issuance of investment Sukuk 5/1/1 It is permissible to issue investment certificates by way of sub- scription on the basis of any of Shariah-nominated investment contract. 5/1/2 It is permissible to issue certificates for (to securitize) assets that are tangible assets, usufructs and services by dividing them into equal shares and issuing certificates for their value. As for debts owed as a liability, it is not permissible to securitize them for the purpose of trading. 5/1/3 The issue contract has all the legal effects of the contract upon which the issued certificates are based. This occurs after closing of the subscription and the allotment of the certificates. 5/1/4 The two parties of the issue contract are the issuer and the subscribers. 5/1/5 The relationship between the two parties to the issue contract is determined on the basis of the type of contract and its status in the Shariah as well as the following description: 5/1/5/1 Certificates of ownership of leased assets The issuer of these certificates is seller of a leased asset or an asset to be leased on promise, the subscribers are the buyers of the asset, while the funds mobilised 472472 Shariah Standard No. (17): Investment Sukuk through the subscription are the purchase price of the asset. The certificate holders jointly own the assets through an undivided ownership sharing the profits and losses on the basis of the partnership that exists between them. 5/1/5/2 Certificates of ownership of usufructs a) Certificates of ownership of the usufruct of exis- ting assets The issuer of these certificates is the seller of usufruct The issuer of these certificates is the seller of usufruct of an existing asset, the subscribers are buyers of such usufruct, while the funds mobilised through subscription are the purchase price of the usufruct. The certificate holders become joint owners of the usufruct sharing its benefits and risks. b) Certificates of ownership of described usufruct to be made available in the future The issuer of these certificates is the seller of usufruct of an asset to be made available in the future as per specification. The subscribers are buyers of the usufruct through, the funds mobilised through subscription are the purchase price of the usufruct. The certificate holders become joint owners of the undivided usufruct sharing its benefits and risks. c) Certificates of ownership of services The issuer of these certificates is the seller of ser- vices, the subscribers are buyers of the services, while the funds mobilised through subscription are the purchase price of the services. The certificate holders are entitled to sell the profits of all the types that are listed at (a), (b) and (c) and are entitled to the income from the resale of such usufruct. 473473 Shariah Standard No. (17): Investment Sukuk 5/1/5/3 Salam certificates (Salam Sukuk) The issuer of the certificates is a seller of the goods of Salam, the subscribers are the buyers of the goods, while the funds realised from subscription are the purchase price (Salam capital) of the goods. The holders of Salam certificates are the owners of the Salam goods and are entitled to the sale price of the certificates or the sale price of the Salam goods sold through a Parallel Salam, if any. through a Parallel Salam, if any 5/1/5/4 Istisnaa certificates (Istisnaa Sukuk) The issuer of these certificates is the manufacturer (supplier/seller), the subscribers are the buyers of the (supplier/seller), the subscribers are the buyers of the intended product, while the funds realised from subscription are the cost of the product. The certificate holders own the product and are entitled to the sale price of the certificates or the sale price of the product sold on the basis of a Parallel Istisnaa, if any. 5/1/5/5 Murabahah certificates (Murabahah Sukuk) The issuer of the certificates is the seller of the Muraba- hah commodity, the subscribers are the buyers of that commodity, and the realised funds are the purchasing commodity, and the realised funds are the purchasing cost of the commodity. The certificate holders own the Murabahah commodity and are entitled to its sale price. 5/1/5/6 Musharakah certificates (Musharakah Sukuk) The issuer of the certificates is the inviter to a partner- ship with him in a specific project or determined activ- ity. The subscribers are the partners in the Musharakah contract. The realised funds are the share contribution of the subscribers in the Musharakah capital. The cer- tificate holders own the assets of partnership with the accompanying profits and losses and are entitled to their share in the profits of the partnership, if any. 474474 Shariah Standard No. (17): Investment Sukuk 5/1/5/7 Mudarabah certificates (Mudarabah Sukuk) The issuer of these certificates is the Mudarib, the subscribers are the owners of capital, and the realised funds are the Mudarabah capital. The certificate holders own the assets of Mudarabah and the agreed upon share of the profits belongs to the owners of capital and they bear the loss, if any. 5/1/5/8 Certificates of investment agency (Wakalah Sukuk) The issuer of these certificates is the investment agent, the subscribers are the principals and the realised funds are the entrusted capital of the investment. The certificate holders own the assets represented by the certificates with its benefits and risks, and they are entitled to the profits, if any. 5/1/5/9 Muzaraah certificates (Muzaraah Sukuk) a) The issuer of these certificates is the owner of the land (the principal owner or owner of the usufruct of the land). The subscribers are the cultivators on the basis of a Muzaraah contract (the cultivators or their assignees). The realised funds are the cultivation cost. b) The issuer of these certificate may be the cultivator (the worker), the subscribers are the owners of the land (investors whose subscription amounts are used to buy the land); and the certificate holders are entitled to a share of the produce of the land as per agreement. 5/1/5/10 Musaqat certificates (Musaqat Sukuk) a) The issuer of these certificates is the owner (or owner of usufruct) of the land that consists of trees; the subscribers are those who assume the obligation of irrigation through a Musaqat contract, while the realised funds are the maintaining cost of the trees. 475475 Shariah Standard No. (17): Investment Sukuk b) The issuer of these certificates may be the irrigator (the worker) and the subscribers are the owners of the land (investors whose subscription amounts are used to irrigate the land). The certificate holders are entitled to a share of the produce of the trees as per agreement. 5/1/5/11 Mugharasah certificates (Mugharasah Sukuk) a) The issuer of these certificates is the owner of land suitable for planting (trees), the subscribers are those who assume the obligation of planting on the basis of a Mugharasah contract, while the realised funds are the cost of maintaining the plantation. b) The issuer may be the planter (the owner of the work), the subscribers are the owners of the land (investors whose subscription amounts are used to undertake plantation in the land), and the certificate holders are entitled to a share in both the trees and the land as per agreement. 5/1/6 The relationships between the parties, namely the issuer and the subscriber shall be governed by applicable contracts of issuing Sukuk. The mere conclusion of the contract will give rise to legal effects with respect to rights and obligations of the parties. 5/1/7 The issuance of the prospectus represents the issuers invitation to subscription in which case the act of subscription represents offer. As for acceptance, it is issuers approval of the sub- an an offer. As for acceptance, it is issuers approval of the sub- scription, unless it is expressly stated in the prospectus that it is an offer. In this case, the prospectus will be considered as an offer and the subscription becomes an acceptance. 5/1/8 The following shall be observed in the prospectus of issue: 5/1/8/1 The prospectus must include all contractual conditions, adequate statements about the participants in the issue, 476476 Shariah Standard No. (17): Investment Sukuk their legal position and rights as well as obligations, such as statements about the issue agent, issue manager, originator, investment trustee, the party covering the loss, payment agent as well as others along with the conditions of their appointment and dismissal. 5/1/8/2 The prospectus of Sukuk must include the identification of the contract on the basis of which the certificates are to be issued, such as sale of tangible leased assets, Ijarah, Murabahah, Istisnaa, Salam, Mudarabah, Musharakah, Wakalah, Muzaraah, Mugharasah or Musaqat. 5/1/8/3 The contract that forms the basis of the issue must be complete with respect to its elements and conditions and should not include conditions that conflict with its objectives and rules. 5/1/8/4 The prospectus must explicitly mention the obligation to abide by the rules and principles of the Shariah, and that there is a Shariah Supervisory Board that approves the procedures of the issues and monitors the implementation of the project throughout its duration. 5/1/8/5 The prospectus must state that the investment of the realised funds and the assets into which the funds are converted will be undertaken through Shariah-com- converted will be undertaken through Shariah-com- pliant modes of investment. 5/1/8/6 Taking into account item 3/1/5 of the Shariah Standard No. (12) on Sharikah (Musharakah) and Modern Cor- porations, the prospectus must state that each owner of a certificate participates in the profit and bears a loss in proportion to the financial value represented by his certificates. 5/1/8/7 The prospectus must not include any statement to the effect that the issuer of the certificate accepts the liability to compensate the owner of the certificate up to the nominal value of the certificate in situations 477477 Shariah Standard No. (17): Investment Sukuk other than torts and negligence nor that he guarantees a fixed percentage of profit. It is, however, permitted to an independent third party to provide a guarantee free of charge, while taking into account item 7/6 of Shariah Standard No. (5) on Guarantees. It is also permitted to the issuer of the certificate to offer some tangible or personal guarantees with respect to its wrongful acts or negligence, while taking into account item 3/1/4/3 of Shariah Standard No. (12) on Sharikah (Musharakah) and Modern Corporations as well as the contracts stated in that standard. 5/1/9 It is permissible for the institution to undertake to underwrite the unsubscribed issue, in which case the obligation of the underwriter is based on a binding promise. The underwriter should not receive any commission in lieu of such underwriting taking into account item 4/1/2/4 of Shariah Standard No. (12) on Sharikah (Musharakah) and Modern Corporations. 5/1/10 It is permissible to issue Sukuk on a short-term, medium-term or long-term basis in accordance with the principles of the Shariah. The Sukuk may also be issued without specifying a period depending upon the nature of the contract underly- ing the Sukuk issue. 5/1/11 It is permissible for the issuer or the certificate holders to adopt permissible methods of managing risk, of mitigating fluctua- tion of distributable profits (profit equalisation reserve), such as establishing an Islamic insurance fund with contributions of ) by Takaful) by certificate holders, or by participating in insurance (Takaful certificate holders, or by participating in insurance ( payment of premiums from the income of the shares of Sukuk holders or through donations ( ) made by the Sukuk Tabarruat) made by the Sukuk holders or through donations (Tabarruat holders. 5/2 Trading of Sukuk and their redemption 5/2/1 It is permissible, after closing subscription, allotment of Sukuk and commencement of activity, to trade in and redeem investment 478478 Shariah Standard No. (17): Investment Sukuk Sukuk that represent common ownership of tangible assets, usufructs or services. As for trading or redemption prior to the commencement of activity, it is necessary to observe the rules of the contract of (currency exchange) along with the rules for the contract of SarfSarf (currency exchange) along with the rules for debts (receivables) when liquidation is complete and the assets are receivables or when the assets represented by the Sukuk are sold for a deferred price. 5/2/2 In the case of negotiable Sukuk, it is permissible for the issuer to undertake, through the prospectus of issue, to purchase at market value, after the completion of the process of issue, any certificate that may be offered to him, however, it is not permissible for the issuer to undertake to purchase the Sukuk at their nominal value 5/2/3 The certificates may be traded through any known means, that do not contravene the rules of the Shariah, such as registration, electronic means or actual transmission by the bearer to the purchaser. 5/2/4 It is permissible, immediately upon issue and up to the date of maturity, but after the passing of ownership of the assets to the holders of the Sukuk, to trade in Sukuk that represent ownership of existing leased assets or assets to be leased on promise. 5/2/5 It is permissible for the issuer to redeem, prior to maturity, certificates of ownership of leased assets at the market price or at a rate agreed upon, at the date of redemption, between the certificate holder and the issuer. 5/2/6 It is permissible to trade in securities of ownership of usufructs of tangible assets prior to a contract for sub-leasing the assets. When the assets are sub-leased, the certificate represents rent receivables, which makes it a debt owed by the second lessor subject to the rules and regulations for disposal of debts. 5/2/7 It is permissible for the issuer to redeem Sukuk of ownership of the usufruct of tangible assets from the holder, after allotment 479479 Shariah Standard No. (17): Investment Sukuk and payment of the subscription price, at the market price or at a price agreed upon between the parties at the time of redemption, on the condition that the subscription amount or redemption price is not deferred. [see item 3/4 of Shariah Standard No. (9) on Ijarah and Ijarah Muntahia Bittamleek] 5/2/8 It is not permissible to trade in certificates of ownership of usufructs of a described asset before the asset from which usufruct is to be made available is ascertained, except by observing the rules for disposal of receivables. When the asset is ascertained, trading in Sukuk of usufructs of such asset may take place. 5/2/9 It is permissible to trade in securities of ownership of services to be provided by a specified party prior to sub-leasing such services. When the services are sub-leased, the certificate represents rent receivables to be collected from the second lessee. In this case, the certificate represents a debt and is, therefore, subject to the rules and regulations of disposal of debts. 5/2/10 It not is permissible to trade in securities of ownership of services to be provided by a party to be specified in the future before the source from which the services would be provided is identified, except by observing the rules for dealing in debts. When the source of services is identified, trading in such Sukuk may take place. 5/2/11 It is permissible to set up a parallel Ijarah on tangible assets by employing the same description for the usufruct that was provided to the holders of the Sukuk in cases detailed in items 5/2/8 and 5/2/10 provided the two lease contracts remain independent. 5/2/12 It is permissible for the second buyer of the usufruct of existing and specified assets to resell them. The buyer is also entitled to issue certificates in this respect. 480480 Shariah Standard No. (17): Investment Sukuk 5/2/13 It is permissible to trade in or redeem Istisnaa certificates if the funds have been converted, within the period of the Istisnaa, into assets owned by certificate holders. If the realised funds are immediately paid as a price in a parallel Istisnaa contract or the manufactured item is submitted to the ultimate purchaser, then trading in Istisnaa certificates is subject to rules of disposal of debts. 5/2/14 It is not permissible to trade in Salam certificates. 5/2/15 It is not permissible to trade in Murabahah certificates after delivery of the Murabahah commodity to the buyer. However, trading of Murabahah certificates is permissible after purchas- ing the Murabahah commodity and before selling it to the buyer. 5/2/16 It is permissible to trade in Mudarabah, Musharakah and investment agency certificates after closing of subscription, allotment of the certificates and commencement of activity with respect to the assets and usufructs. 5/2/17 It is permissible to trade in Muzaraah and Musaqat certificates after closing of subscription, allotment of certificates and commencement of activity with respect to the assets and usufructs. This rule applies when the certificate holders own the land. Thus, trading in these certificates is not allowed where the certificate holders act as workers (who undertake to provide agricultural or irrigation works) in which case trading in these certificates is not permissible before the maturity of the fruits and plants. 5/2/18 It is permissible to trade in Mugharasah certificates after closing of subscription, allotment of certificates and commencement of activity irrespective of the certificate holders being owners of the land or workers.
Date of Issuance of the Standard This Standard was issued on 7 Rabi I, 1424 A.H., corresponding to 8 May 2003 A.D. 481481 Shariah Standard No. (17): Investment Sukuk Adoption of the Standard The Shariah Standard on Commercial Papers was adopted by the Shariah Board in its 10thth meeting held on 2-7 Rabi I, 1424 A.H., corresponding to 3-8 Board in its 10 meeting held on 2-7 Rabi I, 1424 A.H., corresponding to 3-8 May 2003 A.D. 482482 Shariah Standard No. (17): Investment Sukuk Appendix (A) Brief History of the Preparation of the Standard In its meeting No. (7) held in Makkah Al-Mukarramah during the period of 9-13 Ramadan 1422 A.H., corresponding to 24-28 November 2002 A.D., the Shariah Board decided to give priority to the preparation of the Shariah Standard for Investment Sukuk. On Saturday 14 Shawwal 1422 A.H., corresponding to 29 December 2002 A.D., a Shariah consultant was commissioned to prepare a juristic study and an exposure draft on the Shariah Standards for Commercial Papers. In its 2ndnd meeting of Committee (1), held in the Kingdom of Bahrain on meeting of Committee (1), held in the Kingdom of Bahrain on In its 2 4-5 Safar 1423 A.H., corresponding to 17-18 April 2002 A.D., the Shariah Standard Committee discussed the exposure draft of the Shariah Standard on Investment Sukuk and asked the consultant to make additional amendments to reflect the comments made by the members of the committee. In its meeting No. (4) held on 16 and 17 Rabi I, 1423 A.H., corresponding to 28-27 June 2002 A.D., the committee discussed the exposure draft and made necessary amendments as per the comments and observations of the members and in the light of the recommendations of AAOIFIs First Fiqh Forum in respect to requirements of trading in investment portfolios held in Amman (The Hashimite Kingdom of Jordan) on 16 Rabi I, 1423 A.H., corresponding to 27 June 2002 A.D. In its meeting No. (5) held on 2 and 3 Rajab 1423 A.H., corresponding to 9-10 September 2002 A.D., and decided to merge the exposure of this Standard with the exposure draft of the Standard on Securitisation. In its meeting No. (6) held on 19 Rajab 1423 A.H., corresponding to 26 September 2002 A.D., in the Kingdom of Bahrain, the Committee further discussed the 483483 Shariah Standard No. (17): Investment Sukuk exposure after the merger, made some amendments and decided to present it to the Shariah Board. The revised exposure draft of the Shariah Standard was presented to the Shariah Board in its 9th meeting held in Makkah Al-Mukarramah during the period of 11-16 Ramadan 1423 A.H., corresponding to 16-21 November 2002 A.D. The Shariah Board made further amendments to the exposure draft of the Standard and decided that it should be distributed to specialists and interested parties in order to obtain their comments in order to discuss them in a public hearing. A public hearing was held in Bahrain on 18 Dhul-Hajjah 1423 A.H., A.H., A public hearing was held in Bahrain on 18 Dhul-Hajjah 1423 corresponding to 19 February 2003 A.D. The public hearing was attended by more than thirty participants representing central banks, institutions, accounting firms, Shariah scholars, academics and others who are interested in this field. Members of the Shariah Standards Committees (1) and (2) responded to the written comments that were sent prior to the public hearing as well as to the oral comments that were expressed in the public hearing. The Shariah Standards Committees (1) and (2) held a joint meeting on 2 Muharram 1424 A.H., corresponding to 5 March 2003 A.D., to discuss the comments made about the exposure draft. The two committees made the necessary amendments in light of both the written comments that were received and oral comments that took place in the public hearing. The Shariah Board in its meeting No. (10) held in Al-Madinah Al-Munaw- warah during the period of 2-7 Rabi I, 1424 A.H., corresponding to 3-8 May 2003 A.D., discussed the amendments made by the Shariah Standards Com- mittee, and made necessary amendments. The Shariah Board unanimously adopted some of the items of the Standard and some items were adopted by the majority vote of the members of the Shariah Board, as recorded in the the majority vote of the members of the Shariah Board, as recorded in the minutes of the meetings of the Shariah Board. 484484 Shariah Standard No. (17): Investment Sukuk Appendix (B) The Shariah Basis for the Standard The basis for the permissibility of issuing investment certificates is that The basis for the permissibility of issuing investment certificates is that such certificates are usually issued on the basis of Shariah-nominated contracts. Hence issuance of Sukuk on the basis of any of these contracts becomes acceptable as well. The basis for considering the issue prospectus as an offer and the fact The basis for considering the issue prospectus as an offer and the fact of subscription as an acceptance is that valid contracts take place on the basis of anything that indicates consent without specifying a particular form of expression. It is thus not objectionable that an offer comes from one person and acceptance from a large number of persons. The basis for the right of certificate holders to management is that they The basis for the right of certificate holders to management is that they own the property that their certificates represent, and management is part of ownership. The basis for permissibility of trading in investment Sukuk when such The basis for permissibility of trading in investment Sukuk when such Sukuk represent shares in tangible assets or usufruct is that the trading is, in fact, on the assets and usufructs. Since these assets may be traded so too the certificates that represent them. The basis for impermissibility of trading in Salam certificates is that the The basis for impermissibility of trading in Salam certificates is that the certificate represents a share in the Salam debt in which case the certifi- cates is subject to rules of debt trading. The basis for permissibility of trading in Istisnaa certificates after The basis for permissibility of trading in Istisnaa certificates after conversion of the realized funds into assets is that such assets represent properties that can be disposed of. The basis for the impermissibility properties that can be disposed of. The basis for the impermissibility of trading in Istisnaa certificates in case of using the realized funds as a price in a parallel Istisnaa and in case of delivering the manufactured asset to the ultimate purchaser is that the certificate represents the price in the liability of the purchaser. The price then is a monetary debt for which trading of the Sukuk at this stage is subject to the rules of debt trading. 485485 Shariah Standard No. (17): Investment Sukuk The basis for the impermissibility of trading in Murabahah certificates The basis for the impermissibility of trading in Murabahah certificates after the commodity is sold and delivered to the buyer is that the certificates represent a monetary debt against the buyer, in which case trading is not permissible except in accordance with the limitations of debt trading. However, if purchase of the commodity has taken place and is yet to be sold, trading in these certificates is permissible because the certificates represent assets that can be traded. 486486 Shariah Standard No. (17): Investment Sukuk Appendix (C) Definitions Securitisation (Tawreeq) Securitisation is known in Arabic terminology as Taskik Securitisation is known in Arabic terminology as (issues) and Taskik (issues) and Tasnid (securities). Securitisation is a process of dividing ownership of tan- Tasnid (securities). Securitisation is a process of dividing ownership of tan- gible assets, usufructs or both into units of equal value and issue securities as per their value. Issue Contract Issue contract is the contract that form basis for issuance of the investment certificates. Issuer of Investment Certificate Issuer of investment certificate is the party who uses the realised funds in a Shariah-compliant investment instrument. The issuer could be a firm, an individual, a government or a financial institution. The issuer may delegate, for a consideration or commission, the process of arranging the operation of the issue to a financial intermediary, which may be stipulated by the issue prospectus. Issue Agent It is an intermediary institution that manages the process of issue and performs all procedural arrangements pertaining to the issue on behalf of the issuer against a specific fee to be agreed upon or to be stated in the prospectus of issue. The relationship between the issuer and the issue agent is governed agency contract with remuneration. Issue Manager Issue manager is the intermediary institution that acts for remuneration on behalf of the subscribers in executing the issue contract. 487487 Shariah Standard No. (17): Investment Sukuk Payment Underwriter Payment underwriter is the intermediary institution that undertakes to pay dues of certificate holders after when realised. Investment Manager Investment manager is the party appointed by the issuer or the issue manager to perform all or part of investment operations as indicated in the issue prospectus. Investment Trustee Investment trustee is the intermediary financial institution charged with protecting the interests of certificate holders, supervising the performance of the issue manager and safe custody of documents and guarantees for consideration stipulated in the issue prospectus on the basis of agency contract Trading of Certificates Trading of certificates refers to disposal of the ownership right contained in the certificate through selling, pledging, gift or any other permissible means of disposal. Muzaraah (Sharecropping) Sharecropping is partnership in crops in which one party presents land to another for cultivation and maintenance in consideration for a common defined share in the crop. Musaqat (Irrigation) Irrigating partnership is a partnership that depends on one party Irrigating partnership is a partnership that depends on one party pre-pre- senting designated plants/trees that produce edible fruits to another in order to work on their irrigation in consideration for a common defined share in the fruits. Mugharasah (Share-Agriculture) Agricultural partnership is a partnership in which one party presents a treeless piece of land to another to plant trees on it on the condition that they share the trees and fruits in accordance with a defined percentage. 488488 Shariah Standard No. (18) Possession (Qabd) Contents Subject ................................................................................................... Preface ................................................................................................... Preface ..................................................................... Statement of the Standard ..................................................................... Statement of the Standard ..............................................................................
Scope of the Standard ..............................................................................
Scope of the Standard ..........................................................................
Definition of Possession ..........................................................................
Definition of Possession ....................................................................
Mode of Taking Possession ....................................................................
Mode of Taking Possession ............................................................................
Expenses of Possession ............................................................................
Expenses of Possession ...............................................
Key Modern Applications of Possession ...............................................
Key Modern Applications of Possession ............................................................
Date of Issuance of the Standard ............................................................
Date of Issuance of the Standard ...................................................................... Adoption of the Standard ...................................................................... Adoption of the Standard Appendices Appendix (a): Appendix (a): Brief History of the Preparation of the Standard Appendix (b): TheThe Shariah Basis for the Standard Appendix (b): Brief History of the Preparation of the Standard .............. .............. ..................................... Shariah Basis for the Standard ..................................... Appendix (c): Definitions Appendix (c): .............................................................................. Definitions .............................................................................. PagePage 493493 494494 496496 497497 498498 499499 500500 502502 510510 491491 IN THE NAME OF ALLAH, THE ALL-MERCIFUL, THE MOST MERCIFUL All praise be to Allah, the Lord of all the worlds, and blessings and peace be upon our master, Muhammad, and his household and all his companions Preface The purpose of this standard is to elaborate actual possession in contracts along with its related Shariah rules as well as the significant applications undertaken by Islamic financial Institutions (Institution/Institutions).(1)(1) undertaken by Islamic financial Institutions (Institution/Institutions). (1) The word (Institution/Institutions) is used here to refer, in short, to Islamic financial institutions including Islamic Banks. 493493 Shariah Standard No. (18): Possession (Qabd) Statement of the Standard
Scope of the Standard This standard covers possession in contracts and what acts as a constructive substitute for it (constructive possession). It elaborates the mode of its realisation in immovable and movable property as well as in things that are ascertained and those established as a liability by description. The standard also identifies the person responsible for its costs (maintenance and expenses) in various types of contracts along with their modern applications. The standard does not cover acts other than contracts, like possession in usurpation ( ) and the like. Further, it does not cover the nature of usurpation (GhasbGhasb) and the like. Further, it does not cover the nature of possession with respect to liability for compensation or otherwise, nor to possession in set-offs, as these have their specific standards.
Definition of Possession Possession is the gathering of a thing or what takes its rule, according to the requirements of customary practice.
Mode of Taking Possession 3/1 The basis for determining the mode of possession in things is custom (Urf). It is for this reason that possession of things has differed in accordance with the nature of things and differences among people with respect to things. 3/2 Actual possession is realised in immovable property through relin- quishment and enabling transactions in it. 3/3 Actual possession takes place in movables through physical corpore- al delivery. Constructive possession, in ascertained movables as well as in those established as a liability by description, takes place -after their ascertainment by means of one of the methods known for their 494494 Shariah Standard No. (18): Possession (Qabd) ascertainment- by relinquishing (releasing) the thing for the person entitled to it enabling him to deliver it without any obstacle even when no transportation or transmission has taken place. This takes place irrespective of the thing being one that is acquired by hand in practice or is one in which delivery (transmission) is stipulated through one of the customary units of measure -cubic measure, weight or linear measure- or it is a commodity to which these mea- sures do not apply due to their inapplicability or with the possibility of their applicability, but the measures are not applied, as in the case of sale by estimate. 3/4 Constructive 3/4 possession includes the registration of a mortgage of Constructive possession includes the registration of a mortgage of immovables and (hypothecation) of mobile movables like cars, trains, steamers and airplanes through registration that is valid under the steamers and airplanes through registration that is valid under the law. Registration stands in place of actual possession with respect to its rules and legal effects. 3/5 The possession of documents, like bills of lading and warehouse receipts, issued in the name of the possessor or acknowledging his interest therein is deemed possession of what the constructive possession of what the his interest therein is deemed constructive documents represent if the ascertainment of commodities, goods and appliances is attained through them along with the ability of the possessor to undertake transactions in them. 3/6 Prior possession of a tangible thing stands in place of subsequent lawful possession due to a cause acknowledged by the Shariah irrespective of the possession of the prior possessor being on the basis of the liability to bear loss (Daman) or one of trust (Amanah) and irrespective of possession entailing liability for loss or constructive possession entailing liability for loss or the subsequent constructive the subsequent a burden of trust (Amanah). (transac- 3/7 Reciprocal possession stipulated in the contract of SarfSarf (transac- 3/7 Reciprocal possession stipulated in the contract of tion in gold, silver and currencies) is delivery and acceptance of delivery within the session of the contract on a spot basis (Yadan delivery within the session of the contract on a spot basis ( Yadan ). [see item 2/6 of Shariah Standard No. (1) on Trading in Bi Yadin). [see item 2/6 of Shariah Standard No. (1) on Trading in Bi Yadin Currencies] 495495 Shariah Standard No. (18): Possession (Qabd)
Expenses of Possession 4/1 Expenses of possession in financial commutative contracts 4/1/1 The expenses of delivering the sold commodity -for presenting it if it is absent, for ascertaining it through one of the customary units where that entails a claim for ascertainment like wages of employing a cubic measure, weight, linear measure and counting- is the responsibility of the seller. As for the expenses of delivering the price, if any, it is the responsibility of the buyer, unless there is a stipulation or customary practice to the contrary, in which case it is binding to follow such stipulation or practice. 4/1/2 The expenses of conveyancing, witnessing, preparation of instru- ments that record a sale and the formalities of registration are borne as stipulated by the parties to the contract. If there is no such stipulation on their part, customary practice is relied upon. 4/1/3 Where it is stipulated by the buyer for the seller that the sold commodity be delivered at a particular place, other than the one where it is present at the time of the contract, and that it be delivered at the expense of the seller, the seller is bound to deliver it at the specified place and the expenses of transporting it to such place will be borne by the seller. 4/1/4 The rules for the expenses of possession explained in items 4/1/1, 4/1/2 and 4/1/3 apply to all financial commutative contracts, like Salam, Istisnaa and others. Accordingly, the expenses of delivering the Salam commodity will be borne by the seller, the expenses of delivering the capital (Ras al-Mal) will be borne by the Rab al-Salam (the buyer); the expenses of will be borne by the Rab al-Salam (the buyer); the expenses of taking possession of the leased property will be borne by the lessor, the expenses for the delivery of possession of the lease value (wages) shall be borne by the lessee; and the expenses for delivering the subject matter of Istisnaa will be borne by the manufacturer, while the expenses for the delivery of the price shall be borne by the orderer. In all these cases, if there is a customary practice or stipulation to the contrary, then, such practice or stipulation shall be observed. 496496 Shariah Standard No. (18): Possession (Qabd) 4/2 Expenses for delivery of possession in a loan (Qard) 4/2/1 The expenses for delivery and recovery in a contract for loan, expenses that pertain to its ascertainment through one of the customary units of measure and the like, shall be borne by the borrower. 4/2/2 The expenses for the drawing up of documents, promissory notes, title deeds and the like that are required for transacting a loan contract; its implementation or documentation shall be borne by the borrower. [see Shariah Standard No. (19) on Loan (Qard), item 8] 4/3 Expenses for delivery of possession in a deposit (Wadiah) The expenses of deposit and withdrawal in a contract of deposit shall be borne by the depositor (the owner of the deposit).
Key Modern Applications of Possession 5/1 Possession by the beneficiary of a bank draft or personal cheque is deemed constructive possession of the amount payable by the drawee bank. This is deemed possession of the payable amount even though there is delay in the payment of the actual amount, keeping in view what is laid down in Shariah Standard No. (1) on Trading in Currencies (item 2/6/5) as well as what is laid down in the Shariah Standard No. (12) on Commercial Papers (items 6/1 and 6/2). 5/2 Payments for a credit card are deemed constructive possession of such payments. [see Shariah Standard No. (2) on Debit Cards and Credit Cards (item 4/4)] 5/3 A deposit by a person of an amount in a bank account maintained for constructive a debtor, upon his demand or with his consent, is deemed constructive a debtor, upon his demand or with his consent, is deemed possession irrespective of the deposit being by way of cash, by endorsement or by cheque drawn upon a bank with which an account is maintained, and the depositor is absolved of liability when he is indebted to the extent of such amount. 497497 Shariah Standard No. (18): Possession (Qabd)
Date of Issuance of the Standard This Standard was issued on 30 Rabi I, 1425 A.H., corresponding to 19 2004 A.D. May May 2004 A.D. 498498 Shariah Standard No. (18): Possession (Qabd) Adoption of the Standard The Shariah Standard on Possession was adopted by the Shariah Board in its 12thth meeting held in Al-Madinah Al-Munawwarah during the period in its 12 meeting held in Al-Madinah Al-Munawwarah during the period of 26-30 Rabi I, 1424 A.H., corresponding to 15-19 May 2004 A.D. 499499 Shariah Standard No. (18): Possession (Qabd) Appendix (A) Brief History of the Preparation of the Standard In its meeting No. (8) held during the period of 28 Safar to 4 Rabi I, 1423 A.H., corresponding to 11-16 May 2002 A.D., in Al-Madinah Al- Munawwarah, the Shariah Board decided to issue the Exposure Draft of Shariah Standard on Possession (Qabd). On 24 Rajab 1423 A.H., corresponding to 1 October 2002 A.D., the Shariah Standards Committee decided to assign to a Shariah consultant the responsibility of preparing the Exposure Draft of the Shariah Standard on Possession (Qabd). The Shariah Standards Committee (1), in its meeting No. (7), which was held in the Kingdom of Bahrain on 16 Muharram 1424 A.H., corresponding to 19 March 2003 A.D., discussed the Shariah study and required the consultant to incorporate certain necessary amendments in the light of the discussion and the comments made by the members. In its meeting No. (8) held on 16-17 April 2003 A.D., in the Kingdom of Bahrain, the Shariah Standards Committee (1) discussed the exposure draft of the Standard on Possession in the light of the discussions and the observations of the members, just as the Committee discussed the exposure draft in its meeting held during the period of 2526 Rabi II, 1424 A.H., corresponding to 25-26 June 2003 A.D., and made necessary amendments to the draft in the light of the discussion and observations of the members. In its meeting No. (9) held in Amman, the Hashimite Kingdom of Jordan, during the period of 23-24 Jumada I, 1424 A.H., corresponding to 23-24 July 2003 A.D., the Committee discussed the exposure draft and made necessary amendments in the light of the discussions and the observations of the members. 500500 Shariah Standard No. (18): Possession (Qabd) The revised exposure draft of the Standard was presented to the Shariah held in Makkah Al-Mukarramah during the No. (11) held in Makkah Al-Mukarramah during the Board in its meeting No. (11) Board in its meeting period of 2-8 Ramadan 1424 A.H., corresponding to 27 October - 2 November 2003 A.D. The Shariah Board incorporated amendments to the exposure draft of the Standard and decided that it be distributed among specialists and interested parties in order to obtain their comments as a preliminary to the discussion in a public hearing. A public hearing was held in the Kingdom of Bahrain on 29 Dhul-Qadah 1424 A.H., corresponding to 21 January 2004 A.D. The public hearing was attended by more than fifteen participants representing central banks, institutions, accounting firms, Shariah scholars, academics and others interested in the field. The members of the Shariah Standards Committees (1) and (2) responded to the written comments that were sent prior to the public hearing as well as to the oral comments that were expressed in the public hearing. The Shariah Standards Committees (1) and (2) in a joint meeting in the Kingdom of Bahrain on 30 Dhul-Qadah 1424 A.H., corresponding to 22 January 2004 A.D., discussed the comments that were made during the public hearing as well as the observations received in writing. The Committees made amendments that were deemed suitable. The amended exposure draft was presented to the Drafting Committee in its meeting held in the Kingdom of Bahrain on 25 Safar 1425 A.D., corresponding to 15 April 2004 A.D. The Shariah Board in its meeting No. (12) held in Al-Madinah Al- Munawwarah during the period of 26-30 Rabi I, 1425 A.H., corresponding Munawwarah during the period of 26-30 Rabi I, 1425 A.H., corresponding to to 15-20 May 2004 A.D., discussed the amendments suggested by the Shariah Standards Committee and the Drafting Committee, and incorporated the amendments deemed suitable. The Shariah Board unanimously adopted some of the items of the Standard and some items were adopted by the majority vote of the members of the Shariah Board, as recorded in the minutes of the meetings of the Shariah Board. 501501 Shariah Standard No. (18): Possession (Qabd) Appendix (B) The Shariah Basis for the Standard The basis for acknowledging custom ( Realisation of Possession in the Shariah The basis for the realisation of actual possession with respect to gold, The basis for the realisation of actual possession with respect to gold, silver and currencies through actual physical possession is the sound tradition reported from Ubadah Ibn Al-Samit (may Allah be pleased Gold with him), that the Messenger of Allah (peace be upon him), said, Gold with him), that the Messenger of Allah (peace be upon him), said, for gold, silver for silver. . . , like for like, equal for equal, from till he said, like for like, equal for equal, from for gold, silver for silver. . . , till he said, hand to hand. If these species differ, then sell as you like as long as it is from hand to hand.(2)(2) hand to hand The basis for acknowledging custom (Urf) as the basis for the realisation Urf) as the basis for the realisation of possession is the consensus (Ijma) of the Jurists (Fuqaha).It is in this of possession is the consensus (Ijma) of the Ju rists (Fuqaha).It is in this son is that the Law- regard that Al-Khatib Al-Shirbini says: The reason is that the Law- regard that Al-Khatib Al-Shirbini says: The rea giver has used the term possession in an unqualified sense and has giver has used the term possession in an unqualified sense and has deemed it the basis of rules. He did not elaborate it, and there is no definition for it in the language. It is for this reason that recourse is to be had to custom (Urf).(3)(3) Ibn Taymiyyah said, As long as there is no Ibn Taymiyyah said, As long as there is no be had to custom (Urf). definition for it in the language or in the Shariah, recourse must be had to the custom of the people, like possession mentioned in the words He who buys food is not to sell it of the Prophet (peace be upon him): He who buys food is not to sell it of the Prophet (peace be upon him): until he takes possession of it.(4)(4) Al-Khattabi says: Forms of possession until he takes possession of it. Al-Khattabi says: Forms of possession differ for things in accordance with a difference in their own forms and in accordance with the varying practices of the people with respect to them.(5)(5) them. The basis for the realisation of possession in immoveable property The basis for the realisation of possession in immoveable property through relinquishment is customary practice. The opinion of the (2) Related by Muslim in his Sahih (2) Related by Muslim in his Sahih. [2: 72]. Mughni Al-Muhtaj [2: 72]. (3) (3) Mughni Al-Muhtaj by Ibn Taymiyyah [3: 272]. Majmu Al-Fatawa by Ibn Taymiyyah [3: 272]. (4) Majmu Al-Fatawa (4) , [3: 136]. Maalim Al-Sunan Li Al-Khattabi, [3: 136]. (5) Maalim Al-Sunan Li Al-Khattabi (5) 502502 Shariah Standard No. (18): Possession (Qabd) majority of the jurists among the Hanafis, Malikis, Shafiis, Hanba- lis and Zahiris, as well as others besides them, is that possession in immoveable property is delivered through relinquishment and the facilitating of transactions in it.(6)(6) Hanafi jurists have stipulated that if facilitating of transactions in it. Hanafi jurists have stipulated that if a lock is placed on the immoveable property, then, it is sufficient for the delivery of possession to deliver the key along with relinquish- ment so as to provide the facility to the possessor to open it without difficulty.(7)(7) difficulty. The basis for considering registration of immoveable property as construc- The basis for considering registration of immoveable property as construc- tive possession in the case of mortgage (Rahn) is custom and its practice (in countries that have adopted the system of registration of property) whereby registration of mortgage of immovable property by entry in a page of the register of mortgages is deemed delivery of possession un- der the law (constructive possession) and it acts as a substitute for actual delivery of possession with respect to its legal effects and results. This applies even if the property has in it the household assets of the tenant or is attached to the rights of the lessor over this property, because in such a case too they are considered possession constructively and in fact.(8)(8) a case too they are considered possession constructively and in fact. Add to this the fact that official mortgage grants to the creditor (mortgagee) Add to this the fact that official mortgage grants to the creditor (mortgagee) a personal right over the mortgaged property, which gives him, as a result of the death of the owner or his insolvency, a right prior to all the credi- tors for the satisfaction of his claim from this property.(9)(9) tors for the satisfaction of his claim from this property. Possession of Ascertained Moveable Property The basis for the realisation of possession in ascertained moveable proper- The basis for the realisation of possession in ascertained moveable proper- ty, as well as liabilities by description, through relinquishment in favour of without any one entitled to it and in a manner that enables him to deliver it without any one entitled to it and in a manner that enables him to deliver it [9: 276]; Mawahib Al-Jalil [3: 16]; Radd Al-Muhtar (6) Al-Fatawa Al-Hindiyyah (6) Radd Al-Muhtar [4: 561], passim; [3: 515]; Al-Majmu Sharh Al-Muhadhdhab [3: 202]; Al-Mughni [4: 561], passim; Rawdat Al- Rawdat Al- [4: 477]; Mawahib Al-Jalil [4: 477]; Al-Muhalla [8: 89]; see article (263) in [8: 89]; see article (263) in ; and article (335) Murshid Al-Hayran; and article (335) Al-Fatawa Al-Hindiyyah [3: 16]; Al-Majmu Sharh Al-Muhadhdhab [9: 276]; Talibin [3: 515]; Talibin [4: 333]; Al-Muhalla Kashshaf Al-Qina Al-Mughni [4: 333]; Kashshaf Al-Qina [3: 202]; Majallat Al-Ahkam Al-Adliyyah ; article (435) in Murshid Al-Hayran Majallat Al-Ahkam Al-Adliyyah; article (435) in in Majallat Al-Ahkam Al-Shariyyah Ala Madhhab Al-Imam Ahmad. in Majallat Al-Ahkam Al-Shariyyah Ala Madhhab Al-Imam Ahmad Radd Al-Muhtar [4: 561]; (271) in (271) in Majallat Al-Ahkam Al-Adliyya Hayran Hayran. Al-Madkhal Al-Fiqhi Al-Amm Lil-Zarqa [1: 278] and [2: 648] marginal note. [1: 278] and [2: 648] marginal note. , (P. 339) as quoted Al-Mudhakkirah Al-Idahiyyah Li Al-Qanun Al-Madani Al-Kuwayti, (P. 339) as quoted by Muhammad Wahid Al-Din Suwar in his book on Islamic Fiqh, (P. 94). [3: 16]; see articles (270) and Al-Fatawa Al-Hindiyyah [3: 16]; see articles (270) and Murshid Al- ; and articles (435) and (436) in Murshid Al- (8) (8) Al-Madkhal Al-Fiqhi Al-Amm Lil-Zarqa (9) Al-Mudhakkirah Al-Idahiyyah Li Al-Qanun Al-Madani Al-Kuwayti (9) Majallat Al-Ahkam Al-Adliyya; and articles (435) and (436) in [4: 561]; Al-Fatawa Al-Hindiyyah (7) Radd Al-Muhtar (7) 503503 Shariah Standard No. (18): Possession (Qabd) restriction, whether or not the moveable property needs to be delivered through one of the customary units of measure, is that delivery of a thing literally means delivering it completely without any impediments, so that no one shares it with the possessor, and this is possible by relinquishment. Further, the person who is under an obligation to deliver must have a way through which he can be discharged of his obligation, and what is in his ability is to relinquish it and remove all obstacles. As for actual physical possession (by hand), it is not within his ability to provide that for it is a voluntary act of taking possession. If the obligation to make such a delivery is imposed on him, it would become difficult for him to meet (10)This rule, as well as its basis, has been supported by such an obligation.(10) This rule, as well as its basis, has been supported by such an obligation. (11) a resolution of the Islamic Fiqh Academy (OIC).(11) a resolution of the Islamic Fiqh Academy (OIC). The basis for considering the registration of pledges (hypothecation) of The basis for considering the registration of pledges (hypothecation) of mobile moveable property like cars, steamers, airplanes and trains in the official register for the beneficiary (in countries where a system of registration has been adopted for such moveable property) is deemed constructive possession for what it represents. It is the governing custom that considers official registration as the delivery of constructive posses- sion to the beneficiary and acts as a substitute for actual possession with respect to its legal effects and consequences. The basis for stipulating the ascertainment (setting aside) of moveable The basis for stipulating the ascertainment (setting aside) of moveable property through customary units of measure for the realisation of pos- He who buys session are the words of the Prophet (peace be upon him): He who buys session are the words of the Prophet (peace be upon him): (12) insofar as they food (wheat) is not to sell it until he has measured it.(12) food (wheat) is not to sell it until he has measured it. insofar as they indicate that possession in this case is not attained except by the use of the cubic measure. Thus, ascertainment in what is estimated by cubic measure is through cubic measure and the remaining types are assigned (10) Badai Al-Sanai (10) Al-Fatawa Al-Hindiyyah [3: 16]; [5: 244]; Al-Fatawa Al-Hindiyyah Badai Al-Sanai [5: 244]; [4: 561]; Sharh Al-Majallah Li Al-Atasi [4: 561]; Al-Ifsah Li-Ibn Hubayrah Al-Ifsah Li-Ibn Hubayrah (P. 224); articles (272) to (275) of Adliyyah; and articles (437) and (438) in Adliyyah [3: 16]; Radd Al-Muhtar Radd Al-Muhtar [4: 111]; Al-Mughni [4: 111]; Majallat Al-Ahkam Al- (P. 224); articles (272) to (275) of Majallat Al-Ahkam Al- Sharh Al-Majallah Li Al-Atasi [2: 200 and after]; Murshid Al-Hayran. ; and articles (437) and (438) in Murshid Al-Hayran (11) Resolution No. 53 (4/6) in its 6thth Session (Shaban 1410 A.H./March 1990 A.D.). Session (Shaban 1410 A.H./March 1990 A.D.). (11) Resolution No. 53 (4/6) in its 6 , [10: 169]; Abu Dawud in his Sunan Sahih, [10: 169]; Abu Dawud in his (12) Related by Muslim in his Sahih (12) Related by Muslim in his [7: 285]. Sunan [7: 285]. Al-Nasai in his Sunan Al-Nasai in his [2: 200 and after]; Al-Mughni [2: 252]; and Sunan [2: 252]; and 504504 Shariah Standard No. (18): Possession (Qabd) (13) This is the view of the majority a similar rule on the basis of analogy.(13) a similar rule on the basis of analogy. This is the view of the majority of the Jurists from among the Malikis, Shafiis and Hanbalis upholding that possession in things that are estimated by cubic measure, weight, linear measure and counting is attained by taking delivery through these measures accompanied by relinquishment. The basis for considering the delivery of documents pertaining to The basis for considering the delivery of documents pertaining to commodities, appliances and goods (like bills of lading and warehouse receipts) as constituting constructive possession of what they represent is the customary practice in this respect seeking support from the view of the Malikis that the mode of possession in moveable property that is (14) Further, the not subjected to estimation is recourse to custom (Urf).(14) not subjected to estimation is recourse to custom (Urf). Further, the basis for stipulating cubic measure for the soundness of possession in food that is estimated by cubic measure in the tradition from the Prophet (peace be upon him) is the custom that was prevalent during the period of the Prophet (peace be upon him) to the effect that possession in things subjected to cubic measure is through cubic measure and for the rest analogy is to be employed. As the determination of the issue of possession in contracts is based on custom, therefore, everything that is taken by custom to be possession in a certain period is to be deemed as possession from the perspective of the Shariah. If the custom of the people changes in this respect, the consideration of that mode as possession ceases. The reason is that where the constructive basis of rules is custom, the (15) except for those things that rules will alter with a change in custom,(15) rules will alter with a change in custom, except for those things that have been specified by the Shariah. As far as the custom prevalent in our times is based upon the consideration of the delivery of documents for moveable commodities and goods -even where these are subjected to estimation- as amounting to possession of these commodities and goods, it will be deemed valid from the perspective of the Shariah. The basic it will be deemed valid from the perspective of the Shariah. The basic principle here is what is stated by Al-Wansharisi, A thing that is acted upon by the people and is preferred by their custom and practice must Kashshaf Al-Qina [3: 201]; and Ibn Qudamah, [3: 201]; and Ibn Qudamah, Al-Al- [2: 173]; Kashshaf Al-Qina Mughni Al-Muhtaj [2: 173]; (13) Mughni Al-Muhtaj (13) Mughni [4: 111]. Mughni [4: 111]. Sharh Al-Khirashi [5: 158]; Al-Dardir, (14) Sharh Al-Khirashi (14) Al-Muntaqa [6: 97]. Al-Muntaqa [6: 97]. Al-Mughni [6: 188]; Al-Furuq [1: 176]; and Al-Qarafi, , (P. 231). Fatawa An Al-Ahkam, (P. 231). Fatawa An Al-Ahkam [5: 158]; Al-Dardir, Al-Sharh Al-Kabir [6: 188]; Al-Furuq (15) Al-Mughni (15) [3: 145]; and Al-Baji, Al-Sharh Al-Kabir [3: 145]; and Al-Baji, Al-Ihkam Fi Tamyiz Al- [1: 176]; and Al-Qarafi, Al-Ihkam Fi Tamyiz Al- 505505 Shariah Standard No. (18): Possession (Qabd) be accommodated through the Shariah even against disagreement and (16) opposition, as far as possible.(16) opposition, as far as possible. The basis for considering prior possession of a certain thing as a substitute The basis for considering prior possession of a certain thing as a substitute for subsequent possession on grounds that are acknowledged by the Shariah, when it represents it, is that the purpose behind the realisation of possession is to establish control over, and the ability to undertake transactions in, the thing possessed. If this state is found possession is found too. This is based on what is upheld by the Malikis and Hanbalis to the effect that if a person sells a thing, or gives it away as gift or pledges it, while the thing is in the possession of a usurper, borrower, bailee, hirer, agent or another, then prior possession represents absolutely subsequent entitled possession through the contract, irrespective of the nature of possession exercised by the possessor being that of liability or trust and irrespective of the entitled possession being in the nature of trust or liability. As for what arises from this with respect to the possessor being liable for the thing possessed or holding it as a trustee, it has (17) no connection with or effect upon the reality of possession.(17) no connection with or effect upon the reality of possession. Expenses of Possession The basis for the view that the expenses of possession of the sold commo- The basis for the view that the expenses of possession of the sold commo- dity are borne by the seller is that the delivery of the sold commodity is obligatory on the seller by virtue of the contract, and the contract is not completed without it; and a thing without which an obligation cannot be fulfilled is also obligatory. Accordingly, this is what was upheld by the ma- jority of the Jurists to the effect that meeting the expenses of the delivery of the sold commodity -by presenting it if it is absent and by ascertaining it if it needs to be ascertained by a customary unit of measure- is the responsi- bility of the seller. The basis for the view that expenses, if any, of taking delivery of the price are the responsibility of the buyer, is that payment of the price to the seller is obligatory upon the buyer, thus, it is binding on him to bear the burden of all that is required by such delivery. The basis for qualifying this rule to impose the expenses on both parties insofar as there (16) Al-Wansharisi, (16) Al-Wansharisi, Al-Miyar (17) Mayyarah Ala Al-Tuhfah (17) [6: 471]. Al-Miyar [6: 471]. Mayyarah Ala Al-Tuhfah [1: 111]; Taymiyyah, Al-Muharrar, [1: 374]; Ibn Taymiyyah, Taymiyyah, Al-Muharrar Kashshaf Al-Qina [3: 249 and 373], [4: 253]; and Al-Qarafi, Kashshaf Al-Qina (P. 456). Fusul (P. 456). Fusul Bidayat Al-Mujtahid [2: 229]; Majd Ibn [2: 229]; Majd Ibn Nazariyyat Al-Aqd, (P. 236); , (P. 236); Sharh Tanqih Al- [3: 249 and 373], [4: 253]; and Al-Qarafi, Sharh Tanqih Al- , [1: 374]; Ibn Taymiyyah, Nazariyyat Al-Aqd [1: 111]; Bidayat Al-Mujtahid 506506 Shariah Standard No. (18): Possession (Qabd) is no condition to the contrary, is extended from the ruling of the majority of the Jurists of upholding conditions. As for the qualification that there is no custom to the contrary, it is based on the view of the Jurists, insofar as it is stated in their texts that if there is a stipulation or custom to the contrary, (18) then, it is binding to follow such stipulation or custom.(18) then, it is binding to follow such stipulation or custom. The basis for the buyer bearing the expenses of constructive possession The basis for the buyer bearing the expenses of constructive possession of what he has purchased, as represented by official registration and attestation for the sale of immoveable property or its mortgage in countries that have adopted a system of registration of transfer of immoveable property, as well as the sale of some mobile moveable property like cars, vehicles, steamers and airplanes or their pledging (hypothecation) in countries that have adopted a system of officially registering such things, and as well as the purchase of shares of corporations -whose trading is permissible according to the Shariah in markets for financial paper- is the customary practice in all these things. Further, such a practice secures the interest of the buyer and is supported by the rule that gain is linked to the bearing of expenses. It is also supported by derivation of the rule from what has been stated by the Hanafi Jurists to the effect that the expenses of the drafting of documents, promissory notes and of witnessing, which confirm the transaction of sale, are to be borne by the buyer as long as there is no custom or stipulation to the contrary. The basis for the seller bearing the expenses for the delivery of the sold The basis for the seller bearing the expenses for the delivery of the sold commodity to the buyer with the stipulation of a known place (other than the place of contract where it is present) is what has been stated by the Hanafis and the Hanabalis affirming that such expenses are borne by (19) the seller in case of a stipulation to this effect.(19) the seller in case of a stipulation to this effect. (18) Al-Zurqani Ala Khalil (18) Sharh Al-Majallah [2: 221]; articles (45-242) in Hashiyat Al-Dusuqi [3: 144]; Mughni Al-Muhtaj [2: 73]; [3: 197]; Al-Mughni Al-Bahjah Ala Al- [3: 144]; Al-Bahjah Ala Al- Al-Mughni [6: 188]; [6: 188]; [2: 73]; Badai Al-Sanai Badai Al-Sanai [2: 221]; articles (45-242) in Majallat Al- Majallat Al- Majallat Al-Ahkam Al- ; articles (288-91) in Majallat Al-Ahkam Al- Al-Sharh Al-Saghir [3: 197]; [2: 192]; Mughni Al-Muhtaj [5: 158); Hashiyat Al-Dusuqi [2: 144]; Al-Dardir, Al-Sharh Al-Saghir Al-Zurqani Ala Khalil [5: 158); Tuhfah Tuhfah [2: 144]; Al-Dardir, Sharh Muntaha Al-Iradat Sharh Muntaha Al-Iradat [2: 192]; [5: 243]; Al-Atasi, [5: 243]; Al-Atasi, Sharh Al-Majallah Ahkam Ala Madhhab Al-Imam Ahmad; articles (288-91) in Ahkam Ala Madhhab Al-Imam Ahmad Adliyyah Adliyyah; and articles (67-466) in Durar Al-Hukkam [3: 230]; [2: 161]; articles (353), (446) in [2: 161]; articles (353), (446) in Murshid Al-Hayran Ahkam Aal-Adliyyah; and article (342) in Ahkam Aal-Adliyyah Madhhab Al-Imam Ahmad. Madhhab Al-Imam Ahmad Murshid Al-Hayran. ; and articles (67-466) in Murshid Al-Hayran Kashshaf Al-Qina [3: 180]; [3: 230]; Kashshaf Al-Qina [3: 180]; Sharh Muntaha Al-Iradat Sharh Muntaha Al-Iradat Majallat Al- ; article (287) in Majallat Al- Majallat Al-Ahkam Al-Shariyyah Ala ; and article (342) in Majallat Al-Ahkam Al-Shariyyah Ala Murshid Al-Hayran; article (287) in (19) Durar Al-Hukkam (19) 507507 Shariah Standard No. (18): Possession (Qabd) Expenses of Possession in Qard (Loan) The basis for the borrower bearing the expenses of delivery and acquisition, The basis for the borrower bearing the expenses of delivery and acquisition, which refer to taking of delivery through customary units of measure in a contract of Qard, is that the lender has undertaken a good act, and costs (20) Linked to these are not to be imposed on one who does a good act.(20) Linked to these are not to be imposed on one who does a good act. with respect to the rule are the expenses of the drawing up of documents, promissory notes and so on, which are matters that are needed for the implementation, execution or verification of the contract of Qard (loan), it is the borrower who bears these costs insofar as these are the requirements or appendages of raising a loan, which is for his interest. The lender is undertaking an act of donation of the benefits of his wealth and the person doing good is not to be made to bear costs over and above his granting of a thing, because No ground (of complaint) can there be against those who (21) If it is made binding on him to bear the costs of lending and do good.(21) do good. If it is made binding on him to bear the costs of lending and recovery as well as attestation, it would run counter to his good act, and it would lead to the preventing to those who own wealth from lending it. Expenses of Possession in Deposit (Bailment) The basis for the depositor bearing the costs of deposit and recovery in The basis for the depositor bearing the costs of deposit and recovery in a contract of (deposit) is that The burden of possession on each Ida (deposit) is that The burden of possession on each a contract of Ida thing is binding upon the one who benefits from its possession, due to (22)22 It is known the principle: Gains are based on the bearing of costs.(22) 22 It is known the principle: Gains are based on the bearing of costs. that the benefit in deposit and its return belong to the depositor alone, thus, the expenses that are incurred on its deposit and recovery are bin- (23) ding upon him.(23) ding upon him. Key Modern Applications of Possession The basis for considering the possession of a bank draft or a personal The basis for considering the possession of a bank draft or a personal cheque, accepted for payment by the drawee, as constructive possession of [3: 197]; and Al-Sharh Al-Saghir [3: 197]; and [5: 158]; Al-Dardir, Al-Sharh Al-Saghir Al-Zarqani Ala Khalil [5: 158]; Al-Dardir, (20) Al-Zarqani Ala Khalil (20) Hashiyat Al-Dusuqi [3: 144]. [3: 144]. Hashiyat Al-Dusuqi (21) [Al-Tawbah (Repentance): 91]. [2: 333]. Durar Al-Hukam [2: 333]. (22) (22) Durar Al-Hukam [7: 276]; Durar Al-Hukkam Al-Bahr Al-Raiq [7: 276]; (23) Al-Bahr Al-Ra`iq (23) Durar Al-Hukkam [2: 272]; Kashshaf Al-Qina [4: 203]; Asna Al-Matalib Kashshaf Al-Qina [4: 203]; Asna Al-Matalib [3: 84]; Al-Muhalla [8: 278]; articles (793) in Al-Muhalla [8: 278]; articles (793) in Majallat Al-Ahkam Al-Adliyyah Majallat Al-Ahkam Al-Shariyyah Ala Madhhab Al-Imam Ahmad. (1340) in Majallat Al-Ahkam Al-Shariyyah Ala Madhhab Al-Imam Ahmad (1340) in Al-Mughni [9: 269]; [9: 269]; [2: 272]; Al-Mughni Tuhfat Al-Muhtaj [7: 124]; [7: 124]; [3: 84]; Tuhfat Al-Muhtaj ; and articles Majallat Al-Ahkam Al-Adliyyah; and articles 508508 Shariah Standard No. (18): Possession (Qabd) the amount accepted is customary banking practice and trading transac- tions in this respect. The confirmation of this is laid down in a resolution (24) of the International Islamic Fiqh Academy.(24) of the International Islamic Fiqh Academy. The basis for considering a payment on a credit card as constructive The basis for considering a payment on a credit card as constructive possession of the amount of repayment is banking practice in this respect. Likewise, in the consideration of a deposit by a person of an amount in a bank account of the client, irrespective of this being cash, a bank endorsement, or a cheque accepted for payment by the drawee bank, bank endorsement, or a cheque accepted for payment by the drawee bank, session by the beneficiary. This has been confirmed by possession by the beneficiary. This has been confirmed by as as constructive (25) a resolution of the International Islamic Fiqh Academy.(25) a resolution of the International Islamic Fiqh Academy. constructive pos (24) Resolution No. (53) 4/6 in its 6 (24) (25) 25 Resolution No. (53) 4/6) in its 6 (25) Resolution No. (53) 4/6 in its 6thth Session (Shaban 1410 A.H./March 1990 A.D.). Session (Shaban 1410 A.H./March 1990 A.D.). 25 Resolution No. (53) 4/6) in its 6thth Session. Session. 509509 Shariah Standard No. (18): Possession (Qabd) Appendix (C) Definitions Al-Aqar (Immoveable Property) It is something that has a permanently affixed foundation and it is not possible to transfer it or move it, along with the subsistence of its shape and form, like land and houses. Al-Manqul (Moveable Property) It is something that can be transferred and moved. Thus, it includes cash, loans, animals, cars, ships, airplanes, trains, things subjected to cubic measure or weight. Bay Al-Juzaf (Sale by Random Estimate) It is the sale of something whose precise quantity is not known, and its quantity is known through estimation without employing a cubic measure, weight, linear measure, count. Al-Qabd Bi-Sifat Al-Daman (Possession Creating a Liability for Return) It is the acquisition of a thing that leads to the liability for the return of the thing, if it is a fungible commodity, that is, its return to its owner as long as the thing exists, and its value, if it is non-fungible, on its loss or conversion, whatever the cause of this, and this when it occurs without the permission of the owner (as a wrongful act, delict, tort), like the possession by a thief or usurper, or with the permission of the owner, but with the intention of owning it, like the possession of one bargaining for it or one who has expressed the intention to own it. Some Jurists have deemed the possession by the borrower, the mortgagee (pledge), lessor and the independent contractor to be of this nature. Al-Qabd Bi-Sifat Al-Amanah (Possession Creating a Trust) It is the acquisition of a thing that leads to its treatment as a trust in the possession of the possessor insofar as he does not bear the liability of its 510510 Shariah Standard No. (18): Possession (Qabd) loss, and as long as he has not committed a tort or negligence in its safe- keeping. This occurs with the permission of the owner when there is no intention to own it rather it is for the interest of the owner, like the bailee, agent, dedicated servant, Wali and Wasi, or it is for the interest of the person acquiring it, like the tenant, borrower, and mortgagee, or for their common interest, like the Mudarib, partner, tenant and irrigator. Urf (Custom) It is what is practised by the people and what they have come to follow in terms of words, acts or relinquishment. The Urf that is acknowledged by the Shariah is the one that meets the following conditions: Urf goes against
That it should not contradict the Shariah. If the Urf goes against
That it should not contradict the Shariah. If the a Shariah Text or one of the principles of the Shariah, it is a custom that is void.
That the Urf should be continuous or predominantly so.
That the Urf be prevalent at the time of the undertaking of the transaction.
That the two parties to the contract should not have expressly stip- ulated against it. If they express such a stipulation the Urf is not ulated against it. If they express such a stipulation the Urf is not admissible. 511511 Shariah Standard No. (19) Loan (Qard) Contents Subject ................................................................................................... Preface ................................................................................................... Preface ..................................................................... Statement of the Standard ..................................................................... Statement of the Standard
Scope of the Standard ..............................................................................
Scope of the Standard .............................................................................. Definition of QardQard ..................................................................................
1. Definition of .................................................................................. ) Contract and Its Conditions... Elements (Arkan) of a LoanLoan ( (QardQard) Contract and Its Conditions...
1. Elements (Arkan) of a Rules for Excess Benefit Stipulated in the Qard Contract
1. Rules for Excess Benefit Stipulated in the Qard ................... Contract ................... Rules for Excess Benefit Not Stipulated in the Contract ............
1. Rules for Excess Benefit Not Stipulated in the Contract ............ Stipulation of a Period in QardQard ...........................................................
1. Stipulation of a Period in ........................................................... Stipulation of a Contract in Qard ...........................................................
1. Stipulation of a Contract in Qard ........................................................... Stipulation of a Reward for Raising Loans for Another ..............
1. Stipulation of a Reward for Raising Loans for Another .............. .......................................................................... Service Charges for QardQard..........................................................................
1. Service Charges for ..........................................................
Key Modern Applications of Qard ..........................................................
Key Modern Applications of Qard .............................................................
Date of Issuance of the Standard .............................................................
Date of Issuance of the Standard ...................................................................... Adoption of the Standard ...................................................................... Adoption of the Standard Appendices Appendix (a): Brief History of the Preparation of the Standard............... Appendix (a): Brief History of the Preparation of the Standard............... Appendix (b): TheThe Shariah Basis for the Standard Appendix (b): ..................................... Shariah Basis for the Standard ..................................... Appendix (c): Definitions Appendix (c): .............................................................................. Definitions .............................................................................. PagePage 517517 518518 519519 520520 522522 523523 524524 526526 533533 515515 IN THE NAME OF ALLAH, THE ALL-MERCIFUL, THE MOST MERCIFUL All praise be to Allah, the Lord of all the worlds, and blessings and peace be upon our master, Muhammad, and his household and all his companions Preface This standard aims to elaborate the rules of the Shariah for loan (Qard). Among these are the rules for a benefit (Manfaah) arising from a loan whether or not this is stipulated (in the contract), just as it includes the regulations of the Shariah that must be followed by Islamic financial institutions (Institution/Institutions).(1)(1) Likewise, the Standard includes the Shariah rules (Institution/Institutions). Likewise, the Standard includes the Shariah rules for some applications that the institutions need to implement, like current accounts, perquisites in return for loans, service charges for loans, and mutual overdrafts between the institution and its correspondents. The word (Institution/Institutions) is used here to refer, in short, to Islamic financial (1)(1) The word (Institution/Institutions) is used here to refer, in short, to Islamic financial institutions including Islamic Banks. 517517 Shariah Standard No. (19): Loan (Qard) Statement of the Standard
Scope of the Standard This Standard covers loans and the accompanying benefits or costs irrespective of the institution being a lender or a borrower. The Standard does not cover what is not a loan (Qard), like the price in a credit sale and investment accounts, because they have standards specific a credit sale and investment accounts, because they have standards specific to them. Definition of Qard
1. Definition of Qard Qard is the transfer of ownership in fungible wealth to a person on whom it is binding to return wealth similar to it.
Elements (Arkan) of a Loan (Qard) Contract and Its Conditions 3/1 The contract of loan (Qard) is concluded through offer and acceptance by the use of the words Qard and Salaf or any other word or act that conveys the meaning of Qard. 3/2 The legal capacity for making a donation is stipulated for the lender. 3/3 The legal capacity to undertake transactions is stipulated for the borrower. 3/4 It is stipulated for the subject-matter of the contract that it be known fungible (Mithli) marketable wealth. 3/4/1 The borrower comes to own the subject-matter of Qard (the wealth loaned) through possession, and he becomes liable for (the repayment of) a similar subject-matter. 3/4/2 The applicable rule is the return of an amount similar to the loan amount at the place where it was delivered. Contract
Rules for Excess Benefit Stipulated in the Qard Contract
Rules for Excess Benefit Stipulated in the Qard 4/1 The stipulation of an excess for the lender in loan is prohibited, and it amounts to Riba, whether the excess is in terms of quality or 518518 Shariah Standard No. (19): Loan (Qard) quantity or whether the excess is a tangible thing or a benefit, and whether the excess is stipulated at the time of the contract or while determining the period of delay for satisfaction or during the period of delay and, further, whether the stipulation is in writing or is part of customary practice. 4/2 It is permissible to stipulate the satisfaction (repayment) of Qard at a place other than that where the loan was made.
1. Rules for Excess Benefit Not Stipulated in the Contract Rules for Excess Benefit Not Stipulated in the Contract 5/1 It is not permissible to the borrower to offer tangible property or extend a benefit to the lender during the period of the Qard when this is done for the sake of Qard, unless giving of such benefits is a practice continuing among the parties from a time prior to the contract of Qard. 5/2 An excess over Qard is permissible in terms of quantity or quality, or offering of tangible property or extending of a benefit, at the time of satisfaction when it is not stipulated or is part of custom, irrespective of the subject-matter of Qard being cash or kind.
Stipulation of a Period in Qard It is permissible to stipulate a period in Qard. The borrower is, therefore, under no obligation to return it prior to the termination of the period nor can the lender demand it back prior to the end of the period. If, however, no period is stipulated, it is binding upon the borrower to return its substitute (Badal substitute ( ) on demand. Badal) on demand.
Stipulation of a Contract in Qard It is not permissible to stipulate a contract of Bay (exchange, sale) or Ijarah or other commutative contract within the contract of Qard.
Stipulation of a Reward for Raising Loans for Another permissible to stipulate a reward for raising loans for another as long It is to stipulate a reward for raising loans for another as long It is permissible ) for dealing in Riba. [see item 8/3/2 of as it is not a fictional device (HilahHilah) for dealing in Riba. [see item 8/3/2 of as it is not a fictional device ( Shariah Standard No. (15) on Jualah at the end of which it is stated with the condition that the transactions are not employed for raising interest bearing loans through stipulations, customary practice or dealings among Institutions] 519519 Shariah Standard No. (19): Loan (Qard)
Service Charges for Qard 9/1 It is permissible to a lending institution to charge for services rendered in loans equivalent to the actual amount directly spent on such services. It is not permissible to the institution to charge an amount in excess of such a service charge. All charges in excess of the actual amount spent are prohibited, and it is necessary to ensure precision in the determination of the actual charges so that they do not lead to an excess that can be deemed a benefit. The fundamental rule is that each loan bears its own specific charges, unless this becomes difficult as in the case of a group or common loan, in which case there is no restriction in the way of bearing direct collective charges for all the loans on the basis of the entire sum. It is necessary that the method of determining the charges be laid down by the Shariah Supervisory Board of the institution in detail, and this is to be done by distributing the expenses incurred among all the loans and each loan is to bear its share proportionately. An explanation of such circumstances is to be presented before the Board along with suitable documents. 9/2 Indirect expenses incurred in rendering services for loans are not included in actual expenses, like the salaries of the employees, the rentals of space, assets and means of transport as well as other management and general expenses of the institution.
Key Modern Applications of Qard Among the most important modern applications of Qard are the following: 10/1 Current accounts 10/1/1 The reality of current accounts is that these are loans and not deposits. Thus, the institution comes to own the amounts and a liability to repay the amount is established against it. 10/1/2 It is permissible for the institution to demand wages for ser- vices rendered to the holders of the current accounts. 10/1/3 It is permissible for the institution to render services related to deposits and withdrawals to the owners of the current accounts with or without compensation like chequebooks and ATM cards and the like. There is no restriction on the institution 520520 Shariah Standard No. (19): Loan (Qard) if it distinguishes between owners of current accounts with respect to what relates to deposits and withdrawals, like exclusive booths for receiving the owners of some accounts, or like distinguishing between the types or cheques. 10/2 Perquisites for Qard It is not permitted to the institution to present to the owners of current accounts, in lieu of such accounts, material gifts, financial incentives, services or benefits that are not related to deposits and withdrawals. Among these are exemptions from charges in whole or in part, like exemption from credit card charges, deposit boxes, transfer charges and letters of guarantee and credit. The perquisites and incentives that are not specific to current accounts are not governed by this rule. 10/3 Charges on credit cards for cash withdrawals from ATMs 10/3/1 The charges imposed on cards for cash withdrawals from bank teller machines are a charge for services and are independent of the loan. 10/3/2 It is necessary that the charges imposed on credit cards for cash withdrawals from bank teller machines be an amount that is certain within the limits of reasonable charges permissible to link the excluding profit from Qard. It is not to link the excluding profit from Qard. It is not permissible charge to the amount withdrawn. It is not to the permissible to the charge to the amount withdrawn. It is not permissible institution to slice the withdrawals as a device for obtaining repeated charges just as it is not (for this purpose) permissible (for this purpose) repeated charges just as it is not permissible to take into account the period of repayment of the amount withdrawn. Where there is a difference in currencies, the application of the rate for the prevailing currency is stipulated. [see also item 4/5, Shariah Standard No. (2) on Credit and Charge Cards] 10/4 Overdrafts between the institution and its correspondents In order to avoid interest between the institution and its cor- respondents, there is no restriction if the institution comes to 521521 Shariah Standard No. (19): Loan (Qard) an agreement with other correspondent banks to place a ceiling upon the overdrafts of one drawn upon the other without any claims for profits (interest). [See item 2/4/a of Shariah Standard No. (1) on Trading in Currencies]
Date of Issuance of the Standard This Standard was issued on 30 Rabi I, 1425 A.H., corresponding to 19 May 2004 A.D. 522522 Shariah Standard No. (19): Loan (Qard) Adoption of the Standard The Shariah Standard on Qard was adopted by the Shariah Board in its meeting No. (12) held in Al-Madinah Al-Munawwarah during the period of 26-30 Rabi I, 1425 A.H., corresponding to 15-19 May 2004 A.D. 523523 Shariah Standard No. (19): Loan (Qard) Appendix (A) Brief History of the Preparation of the Standard In its meeting No. (8) held in Al-Madinah Al-Munawwarah during the n its meeting No. (8) held in Al-Madinah Al-Munawwarah during the period of 28 Safar to 3 Rabi I, 1423 A.H., corresponding to 6-11 May 2002 A.D., the Shariah Board decided to issue the Shariah Standard on Qard (loan). On 24 Rajab 1423 A.H., corresponding to 1 October 2002 A.D., the Shariah Standards Committee decided to commission a Shariah consultant to prepare an exposure draft on the Shariah Standard on Loan (Qard). In its meeting No. (7) held in the Kingdom of Bahrain on 16 Muharram 1424 A.H., corresponding to 19 March 2003 A.D., the Shariah Standards Committee (1) discussed the Shariah study and required the consultant to incorporate necessary amendments in the light of the discussions and observations of the members. In its meeting No. (8) held in the Kingdom of Bahrain during the period of 16-17 April 2003 A.D., the Shariah Standards Committee (1) discussed the exposure draft of the standard on Qard and made necessary amendments in the light of the discussions and the observations of the members. The Committee discussed the exposure draft of the standard in its meeting held on 25 and 26 Rabi II, 1424 A.H., corresponding to 25 and 26 June 2003 A.D., and incorporated necessary amendments in the light of the discussions and observations of the members. The Committee discussed the exposure draft of the standard in its meeting No. (9) held it Amman, the Hashimite Kingdom of Jordan, on 23 and 24 Jumada I, 1424 A.H., corresponding to 23 and 24 July 2003 A.D., and made necessary amendments in the light of the discussions and observations of the members. 524524 Shariah Standard No. (19): Loan (Qard) The revised exposure draft of the Shariah Standard was presented to the Shariah Board in its meeting No. (11) held in Makkah Al-Mukarramah during the period of 2-8 Ramadan 1424 A.H., corresponding to 27 October-2 November 2003 A.D. The Shariah Board made amendments to the exposure draft of the standard and decided that it be sent to specialists and interested parties in order to obtain their comments in preparation for the discussion of the exposure draft in a public hearing. A public hearing was held in the Kingdom of Bahrain on 29 Dhul-Qadah 1424 A.H., corresponding to 21 January 2004 A.D. The public hearing was attended by more than fifteen participants representing central banks, institutions, accounting firms, Shariah scholars, academics and others interested in the field. The members of the Shariah Standards Committees (1) and (2), responded to the written comments that were sent prior to the public hearing as well as to the oral comments that were expressed in the public hearing. The Shariah Standards Committees (1) and (2) in a joint meeting in the Kingdom of Bahrain on 30 Dhul-Qadah 1424 A.H., corresponding to 22 January 2004 A.D., discussed the comments that were made during the public hearing as well as the observations received in writing. The Committees made amendments that were deemed suitable. The amended exposure draft was presented to the Drafting Committee in its meeting held in the Kingdom of Bahrain on 25 Safar 1425 A.H., corresponding to 15 April 2004 A.D. The Shariah Board in its meeting No. (12) held in Al-Madinah Al- Munawwarah during the period of 26-30 Rabi I, 1425 A.H., corresponding to 15-20 May 2004 A.D., discussed the amendments suggested by the Shariah Standards Committee and the Drafting Committee, and incorporated the amendments deemed suitable. The Shariah Board unanimously adopted some of the items of the Standard and some items were adopted by the majority vote of the members of the Shariah Board, as recorded in the minutes of the meetings of the Shariah Board. 525525 Shariah Standard No. (19): Loan (Qard) Appendix (B) The Shariah Basis for the Standard The basis for stipulating that wealth given as Qard be known is to enable The basis for stipulating that wealth given as Qard be known is to enable the borrower to return a similar substitute of the wealth of Qard. The basis for the rule that the borrower does not come to own the wealth The basis for the rule that the borrower does not come to own the wealth lent except through possession is that the contract of Qard is one in which commutative aspect and that of donation stand combined, however, the act of donation is predominant. It is for this reason that the rule is similar to that for gift (Hibah) in which ownership is transferred with the taking of possession. The basis for the rule that the subject-matter of Qard be a fungible item is The basis for the rule that the subject-matter of Qard be a fungible item is that it is only such an item that can be returned by the borrower. Further, fungible items are compensated through similar substitutes in usurpa- tion and destruction. The basis for the obligation of returning the counter-value of Qard at the The basis for the obligation of returning the counter-value of Qard at the same place where it was granted, when there is no contrary stipulation, is that this is the governing rule. Stipulation of an Excess in the Counter-Value of Qard The basis for the prohibition of stipulating an excess in the counter-value of The basis for the prohibition of stipulating an excess in the counter-value of Qard for the lender are evidences from the Qur`an, the Sunnah, consensus of Fuqaha (Ijma) as well as rational arguments that convey the prohibition of Riba (usury) in Qard. Stipulation of Repayment in a Land (Place) Other Than That of Qard The basis for the permissibility of repayment in a land other than that The basis for the permissibility of repayment in a land other than that where Qard was granted so as to provide a facility to the borrower whether or not the lender benefits from this, is as follows:
The reports(2)(2) from the Companions, may Allah be pleased with from the Companions, may Allah be pleased with
The reports them, which indicate the permissibility of stipulating repayment in (2)(2) Al-Musannaf Al-Musannaf by Ibn Abu Shaybah [6: 279]; and [5: 352]. by Ibn Abu Shaybah [6: 279]; and Al-Sunan Al-Kubra by Al-Bayhaqi, Al-Sunan Al-Kubra by Al-Bayhaqi, 526526 Shariah Standard No. (19): Loan (Qard) a land other than that where Qard was made. This is a view upheld by the Malikis and the Hanbalis and it was preferred by Ibn Taymiyyah and Ibn Al-Qayyim Al-Jawziyyah.
The stipulation of repayment in a land other than that of the Qard is in the interest of both the lender and the borrower without cau- sing injury to either along with the existence of a need. The Shariah does not lay down the prohibition of interests that bear no injury. In fact it lays down their permissibility. It does prohibit those that are injurious, but here the benefit is mutual and they are cooperating to arrange this. It, therefore, belongs to the category of cooperation and participation.
The basic rule in transactions (Muamalat) is permissibility, and the stipulation of repayment of a loan in a land other than that of the stipulation of repayment of a loan in a land other than that of the Qard is not expressly prohibited by the texts, nor is the meaning expressly stated in the texts so that prohibition could be extended through analogy. Thus, the repayment falls under the rule of permis- sibility. Stipulation of a Period in Qard The basis for the permissibility of stipulating a period in Qard, for The basis for the permissibility of stipulating a period in Qard, for Qard can be delayed by stipulating a period, are evidences about the permissibility of a period of delay, the obligation of abiding by conditions and contracts, for the realisation of the purposes of the Qard, and for repelling injury. Stipulating a Contract of Sale within the Contract of Qard The bases for the prohibition of stipulating a contract of sale within the The bases for the prohibition of stipulating a contract of sale within the contract of Qard are the following:
The saying of the Prophet (peace be upon him): A Salaf (loan) and A Salaf (loan) and
The saying of the Prophet (peace be upon him): sale (in one contract) are not permitted nor are two conditions in a sale nor the profit from a thing for which the liability for loss is not borne nor the sale of what you do not have.(3)(3) borne nor the sale of what you do not have. (3) Related by Abu Dawud. The text of this Hadith belongs to him as narrated from Abdullah Ibn Amr Ibn Al-Ass (may Allah be pleased with him), chapter on the person who = 527527 Shariah Standard No. (19): Loan (Qard)
The underlying reasoning is that the word Salaf in the words A Salaf (loan) and sale (in of the Prophet (peace be upon him): A Salaf (loan) and sale (in of the Prophet (peace be upon him): one contract) are not permitted , means Qard. The Hadith indi-di- one contract) are not permitted, means Qard. The Hadith in cates the impermissibility of combining a Qard and a sale in a single contract. The generality of its meaning includes the imper- missibility of stipulating a contract of sale in a contract of Qard as well as the impermissibility of stipulating a Qard contract within a contract of sale.
The stipulation of a contract of sale within a contract of Qard is a means towards obtaining an excess in Qard as he may oblige him with respect to the price for the sake of Qard, and in this way the Qard will be created with a stipulated excess, which is Riba. These are means that, by agreement, are to be prevented and blocked.
The stipulation of a contract of sale within a contract of Qard removes the contract of Qard from its main purpose, which is to provide a facility. The reason is that Qard is not a commutative contract, it is rather a contract of piety and virtue; thus, it is not valid if compen- sation is stipulated in it. If Qard is linked to a commutative contract, it will receive a part in the compensation and this will take it out of its required purpose. This will nullify it and nullify the commutative contract linked to it as well. The basis for the prohibition of a stipulation by the lender that the borrower The basis for the prohibition of a stipulation by the lender that the borrower gives him a gift is that in reality this amounts to Qard with an excess that is stipulated for the benefit of the lender and this excess is the gift. Thus, it amounts to prohibited Riba and removes the contract from the category of Further, this stipulation a compassionate contract moving it to one of Riba. Further, this stipulation a compassionate contract moving it to one of Riba. = sells what he does not have, Kitab Al-Buyu = sells what he does not have, , (H: 3504): Sunan Abu Dawud (H: 1234): Sunan Al-Tirmidhi Kitab Al-Buyu (H: 4644): Sunan Abu Dawud [3: 283]; [3: 283]; Kitab Al-Buyu, (H: 3504): Al-Tirmidhi, chapter on the disapproval of selling what one does not have, Kitab Al- Al-Tirmidhi, chapter on the disapproval of selling what one does not have, Kitab Al- Sunan Al-Tirmidhi [3: 526-27]; Al-Nasai, chapter on two conditions [3: 526-27]; Al-Nasai, chapter on two conditions Buyu Buyu (H: 1234): Musnad [7: 340]; Ahmad in Musnad Sunan Al-Nasai [7: 340]; Ahmad in in a sale, Kitab Al-Buyu in a sale, Al-Mukthirin Min Al-Sahabah [2: 3730] through different Musnad Ahmad [2: 3730] through different Al-Mukthirin Min Al-Sahabah (H: 6633): channels, all of them: From Ayyub, who said: Amr Ibn Shuayb related to me saying, My father related to me from ... till he mentioned Abdullah Ibn Amr reporting it. The due to its Sahih Li-ghayrihi due to its Hadith is deemed hasan Hadith is deemed numerous channels. Hadith, but rises to the level of Sahih Li-ghayrihi hasan Hadith, but rises to the level of (H: 4644): Sunan Al-Nasai (H: 6633): Musnad Ahmad 528528 Shariah Standard No. (19): Loan (Qard) generates a benefit for the lender and the Jurists have unanimously agreed that any contract that yields a benefit stipulated for the lender is imper- missible. The benefit in this stipulation is that the lender will benefit from a second loan from the borrower, and this benefit is not in lieu of anything other than the very Qard that he gave him. Stipulation of a Reward for Raising Loans on the Basis of Credit- Worthiness The basis for permitting the stipulation of a reward for raising loans on The basis for permitting the stipulation of a reward for raising loans on the basis of credit status is that this is a counter-value for a service rende- red, and this is what is upheld by the Jurists that a reward may be acquired for recommendations and lending of status. Charges for Services Actually Rendered The basis for the permissibility of the lender charging only what is equivalent The basis for the permissibility of the lender charging only what is equivalent to the actual costs incurred is that these are in lieu of the costs alone. The lender is doing a favour and the person doing a favour is not to be penalised. The basis for the prohibition of charging in excess of this is that in such a case it would amount to an excess in lieu of the Qard. Resolution No. 13 (1/3) was issued by the International Islamic Fiqh Academy (OIC) regarding the recovery of actual costs. Material Benefits at the Time of Repayment That Are Not Stipulated The basis for the permissibility of giving an excess, in terms of quantity The basis for the permissibility of giving an excess, in terms of quantity or quality, at the time of repayment by way of generosity and goodwill, when these are neither stipulated nor is there a practice of paying them, is the Hadith reported from Abu Rafi, may Allah be pleased with him, that the Messenger of Allah (peace be upon him) borrowed a very young camel from a man and then wished to present to him one of the camels of the Sadaqah (Zakat), so he asked Abu Rafi` to repay the man his camel. Abu Rafi returned it to him and said, I do not find anything there ex- cept a full grown four year old camel. The Prophet (peace be upon him) Give him this camel. The best people are those who do better in of said, Give him this camel. The best people are those who do better in of said, repayment.(4)(4) It is reported from Abu Hurayrah that a man came to the It is reported from Abu Hurayrah that a man came to the repayment. (4) Related by Muslim in his Sahih (4) Related by Muslim in his Sahih in the Book of in the Book of Musaqat , chapter on the person who Musaqat, chapter on the person who borrows may return what is better. 529529 Shariah Standard No. (19): Loan (Qard) Messenger of Allah (peace be upon him) seeking alms. The Messenger of Allah (peace be upon him) borrowed food amounting to one-half of a Wasq and gave the man this. When the lender came demanding his loan, he gave him a full Wasq saying, One-half of this is your repayment loan, he gave him a full Wasq saying, One-half of this is your repayment and the other half is a present from me.(5)(5) and the other half is a present from me Material Benefits Not Stipulated Prior to Repayment The basis for the prohibition of material benefits not stipulated prior to The basis for the prohibition of material benefits not stipulated prior to repayment, unless these benefits are not for the sake of Qard or in lieu thereof, are the following:
From Anas Ibn Malik, may Allah be pleased with him, who said: The Messenger of Allah (peace be upon him) said, `When one of you grants a Qard and a gift is made to him by the borrower or he offers him a free ride on his animal, he is not to accept this from him, unless such a practice was prevalent among them prior to the Qard.(6)(6) unless such a practice was prevalent among them prior to the Qard.
Reports of precedents laid down by the Companions, may Allah be pleased with them, which indicate the prohibition of accepting the gift of the borrower and other types of benefits, unless there is an evidence that this is not for the sake of the loan, and that the lender responds with a similar gift or adjusts it as repayment of the debt. Current Accounts The basis for the determination that current accounts constitute loans The basis for the determination that current accounts constitute loans (Qurud), are the following:
That the bank comes to own the deposits in the current accounts and has the right to undertake transactions in the amounts and to seek growth in them (through investment). Further, it is under an obligation to return a similar amount on demand. This is the very meaning of Qard, which employs it is the giving of wealth to one who benefits from it -that is, employs it is the giving of wealth to one who benefits from it -that is, and consumes it in pursuit of his aims- and then returns its counter- value. This differs from Wadiah (deposit) in the terminology of Fiqh, which is wealth deposited with a person for safe-custody so that he does not employ the wealth and returns this very wealth to the owner. (5) Related by Al-Bayhaqi, Al-Sunan Al-Kubra (5) Related by Al-Bayhaqi, (6) Related by Ibn Majah in his Sunan (6) Related by Ibn Majah in his , [5: 351]. Al-Sunan Al-Kubra, [5: 351]. (H: 2457). Sunan (H: 2457). 530530 Shariah Standard No. (19): Loan (Qard)
It is binding on the bank to return a similar amount on demand for the current deposit, and it guarantees such return even upon loss of the wealth, whether or not it was negligent. This is the purpose of the contract of Qard, as against Wadiah in Fiqh terminology insofar as the Wadiah is a trust in the possession of the custodian, thus, if it is destroyed due to his transgression or negligence, he is held liable for it, but if it is destroyed without such transgression or negligence, he is not liable. Resolution No. 86 (3/9) was issued by the International Is- lamic Fiqh Academy (OIC) regarding the status of current accounts. The basis for the permissibility of the bank demanding service charges The basis for the permissibility of the bank demanding service charges -for maintaining current accounts- for the services rendered, is an excess over the duty owed by it, because it is entitled to such charges in lieu of the acts undertaken by it and services rendered to the client. The basis for the permissibility of the owner of a current account utilising The basis for the permissibility of the owner of a current account utilising a chequebook and ATM card without compensation are the following:
The additional benefit arising out of this issue is common for both parties -the lender and the borrower- as both benefit from it, thus, both benefits are set off against each other. In fact, the benefit that goes to the client through the issuance of a chequebook and an ATM card is secondary and is not a primary benefit insofar as the bank has set up this system for serving its own numerous aims and objectives, thus, the benefit accruing to the bank from this system is a primary benefit, while the realisation of the benefit for the client from this system is a consequence of the employment of this system by the bank for its aims and objectives.
The benefit derived by the owner of a current account -the lender- from this system without a counter-value is not a benefit separate from the Qard. In fact, it is a means for the satisfaction of the loans acquired by the bank insofar as these are ways for the repayment of loans for every lender as when he demands them. The basis for the prohibition of presents and gifts, when the underlying The basis for the prohibition of presents and gifts, when the underlying cause is Qard, insofar as the bank gives these presents and gifts to one who gives it a Qard, is that these are by way of gifts to the lender prior to 531531 Shariah Standard No. (19): Loan (Qard) the satisfaction of the loan when these are due to the Qard.(7)(7)As for the the satisfaction of the loan when these are due to the Qard. As for the basis of presents and gifts in general, they are not related to Qard and there is no suspicion about them. Overdrafts between the Institutions and Their Correspondents The basis for the permissibility of overdrafts between institutions and The basis for the permissibility of overdrafts between institutions and their correspondents is general need and that the benefit derived from this practice is not specific to the lender alone. In fact, the benefit is mu- tual. Further, it does not fall under the category of Qard rather it is a step for transacting with one who deals with you. Thus, the issue does not resemble the case of You give me a loan and I will give you a loan.(8)(8) resemble the case of You give me a loan and I will give you a loan. (7) Resolution No. (355) of the Shariah Board of Al Rajhi Banking Corporation was issued (8) Al-Mughni (8) with respect to presents and gifts in lieu of loans (Qurud). Al-Mughni by Ibn Qudamah, [6: 436]; Resolutions and Recommendations of Al by Ibn Qudamah, [6: 436]; Resolutions and Recommendations of Al Baraka, No. (8/10) and (11/6); Shariah Rulings on economic Matters, issued by Bayt Al-Tamwil Al-Kuwayti, [1: 178]. 532532 Shariah Standard No. (19): Loan (Qard) Appendix (C) Definitions Benefit Arising from Qard It is a benefit or an interest that is derived by the lender in a contract of Qard due to this contract. Current Accounts These are loans that constitute the current accounts insofar as the bank comes to own these amounts and it is possible for the owner of these accounts to withdraw these amounts at any time he likes. Mithlis (Fungibles) These are cash, things subjected to cubic measure, weight, linear measure and very similar countable things that do not differ to an extent that their difference will lead to a difference in their value. Qimis (Non-Fungibles) These are types of wealth whose difference, one from another, leads to a difference in their value, as in the case of animals. Legal Capacity for Donation It is the ability of the subject (Mukallaf) to grant wealth or a benefit to another in the present or in the future without compensation in lieu thereof and with the usual intention of piety and the doing of good. Legal Capacity to Undertake Transactions It is the ability of a person to commit an act or to issue a statement in a manner that is acknowledged by the Shariah, and the underlying basis is discretion, reason and puberty. Deficient Legal Capacity for Execution It is the ability of a person to undertake certain transactions and not others so that the execution of such transactions depends upon ratification by another. 533533 Shariah Standard No. (20) Sale of Commodities in Organized Markets Contents Subject ................................................................................................... Preface ................................................................................................... Preface ..................................................................... Statement of the Standard ..................................................................... Statement of the Standard ..............................................................................
Scope of the Standard ..............................................................................
Scope of the Standard ...............................
Definition of International Sales and Their Kinds ...............................
Definition of International Sales and Their Kinds ..............................
Shariah Basis for International Commodity Sales ..............................
Shariah Basis for International Commodity Sales ..........................
Key Applications of International Commodity Sales ..........................
Key Applications of International Commodity Sales .................................................................................................
Derivatives .................................................................................................
Derivatives .............................................................
Date of Issuance of the Standard .............................................................
Date of Issuance of the Standard ...................................................................... Adoption of the Standard ...................................................................... Adoption of the Standard Appendices Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (b): The Shariah Basis for the Standard Appendix (b): ..................................... The Shariah Basis for the Standard ..................................... PagePage 539539 540540 541541 543543 546546 548548 549549 550550 552552 537537 IN THE NAME OF ALLAH, THE ALL-MERCIFUL, THE MOST MERCIFUL All praise be to Allah, the Lord of all the worlds, and blessings and peace be upon our master, Muhammad, and his household and all his companions Preface This Standard aims to elaborate the foundations on which international commodity sales, between parties from different countries, are based whether the contracts have been concluded for spot or deferred commodities or through derivatives (futures, options, indexes and swaps). The Standard also explains what is permissible out of these according to the Shariah and what is not, along with an explanation of the Shariah substitutes for them within the Islamic financial institutions (Institution/Institutions).(1)(1) Islamic financial institutions (Institution/Institutions). (1) The word (Institution/Institutions) is used here to refer, in short, to Islamic financial institutions including Islamic Banks. 539539 Shariah Standard No. (20): Sale of Commodities in Organized Markets Statement of the Standard
Scope of the Standard This Standard covers international sales contracts whose subject-matter are commodities and to derivatives of various kinds: Swaps, Indexes, Futures and Options. The Standard does not cover financial and commercial paper or currencies, because these have their own specific standards, just as it does not cover sales that are concluded outside the organized markets.
Definition of International Sales and Their Kinds 2/1 Definition of international commodity sales 2/1/1 International commodity sales are contracts that are concluded in organized commodity markets under the supervision of specialised Organizations and through intermediaries who coordinate the demand for sales and the demand for pur-pur- coordinate the demand for sales and the demand for various chases by employing standard contracts that contain various chases by employing standard contracts that contain conditions and specifications along with a statement of the period and place of delivery. The contract may also stipulate the deposit of a portion of the price as a security for the ex- ecution of the contract and opening of an account with the intermediary. 2/2 Types of international commodity sales International commodity sales are divided into three types: 2/2/1 Spot contracts These are contracts that require immediate delivery and accep- tance of delivery, however, delivery and possession may take place within the limit of a day or two days in accordance with the regulations of the market. 540540 Shariah Standard No. (20): Sale of Commodities in Organized Markets 2/2/2 Forward contracts These are contracts in which both counter-values are deferred with the legal effects of the contracts taking place at a deter- mined future date, and delivery and possession take place at that time. 2/2/3 Futures commodity contracts These are contracts whose legal effects take place at a determined future date either through liquidation between the parties, or cash settlement or through counter-contracts, but they rarely end in actual delivery and possession. 2/3 Termination of international commodity sales International commodity sales end in one of the following ways: 2/3/1 Contracts in which actual delivery takes place for both counter- values or in one of them; 2/3/2 Contracts that end through the operation of liquidation between the two parties; 2/3/3 Contracts that end in cash settlement by agreement; and 2/3/4 Contracts that end in counter-contracts.
Shariah Basis for International Commodity Sales 3/1 Spot contracts Conclusion of spot contracts in the commodity markets is permitted with the following conditions: That the commodity sold must be in existence and owned by 3/1/1 That the commodity sold must be in existence and owned by 3/1/1 the seller; 3/1/2 That the commodity sold must be ascertained in a manner that distinguishes it from others; The documents that establish the existence of the commodity, its ownership and distinguish it from others are sufficient proof of the realisation of the two previous conditions. 541541 Shariah Standard No. (20): Sale of Commodities in Organized Markets 3/1/3 That the contract should not include a condition that prevents the buyer from taking delivery of the commodity sold and obliges him to accept a set-off for value; 3/1/4 That the price be paid on a spot basis. Delay, without the stip- ulation of delay, in the delivery of an existing and ascertained commodity, or delay in the acceptance of spot price, does not affect the validity of the contract. 3/2 Forward contracts (both counter-values delayed) 3/2/1 These are the selling and buying of commodities with the stip- ulation of delivery in the near future. They differ from futures transactions insofar as they are not organized in an exchange and they are instruments of hedging that do not submit to financial supervision. 3/2/2 There are two forms for contracts with both counter-values delayed: 3/2/2/1 That the commodity is a liability through description, while the price is deferred, irrespective of the contract being concluded with the word sale or with the word Salam. These contracts are not permitted, because they amount to a Salam contract in which the capital of Salam (Ras al-Mal) is not paid promptly. [see Shariah Standard No. (10) on Salam and Parallel Salam] 3/2/2/2 That the commodity is ascertained, but a delay in its delivery is stipulated along with a delay in the price. Such contracts are not permitted. 3/2/3 When the contract is that of Istisnaa, such a contract is valid even when the price is delayed. [see Shariah Standard No. (11) on Istisnaa and Parallel Istisnaa, item 3/1/5] 3/2/4 There is no restriction in delaying one of the counter-values: the price, while observing Accounting Standard No. (20) on Deferred Sale; and the commodity sold, while observing Shariah Standard No. (10) on Salam and Parallel Salam. 542542 Shariah Standard No. (20): Sale of Commodities in Organized Markets 3/3 Futures transactions in commodities the It is not permitted to undertake futures transactions according to the It is not permitted to undertake futures transactions according to Shariah, either through their formation or by trading in them. [see items 2/2/3, 5/1]
1. Key Applications of International Commodity Sales Key Applications of International Commodity Sales 4/1 Permissible applications of international commodity sales: 4/1/1 Appointing another person as an agent for the purchase of a commodity at a spot price, and the sale of the commodity by the agent to a third person for a deferred price on behalf of the principal along with the determination of compensation for the agent as part amount or percentage of the purchase price of the commodity. These are the operations of the Investment Agency. 4/1/2 Appointing another person for the management of purchase operations with a spot price and sale on a deferred basis with the manager being entitled to a known undivided share in the profit. These are Mudarabah operations. [see Shariah Standard No. (13) on Mudarabah] 4/1/3 The agent undertaking -after the purchase of the commodity on account of the principal- to buy it for himself from the principal with the stipulation of distinguishing between the liability of the agent and the liability of the principal for the commodity and this by ensuring two independent offers and acceptances between the principal and the agent. It is possible that this be accomplished through the exchange of two advices, one for notifying ownership by means of agency and the proposal of purchase (offer), and the other for agreement to sell (acceptance). [see Shariah Standard No. (8) on Murabahah (appendices A and B)] 4/1/4 Purchase by the institution of a commodity on a spot basis and the subsequent sale of this commodity by the institution to another on a deferred payment basis. In this application the avoidance of 543543 Shariah Standard No. (20): Sale of Commodities in Organized Markets buy-back is stipulated, like the buyer selling what he purchased with a deferred price to one from whom it was initially bought on a spot basis at a price lesser than this (deferred price). 4/2 International commodity sales prohibited by the Shariah 4/2/1 Transactions in commodities that are not permissible. 4/2/2 Sale of the purchased commodity prior to its ascertainment in a manner that distinguishes the commodity sold from other commodities leading to the overlapping of the liability of the buyer and the liability of the seller due to the mixing up of what is owned by the buyer with what remains with the seller. 4/2/3 Purchase by the agent of a commodity for the institutions account and its sale thereafter to himself without the exchange of two advices of offer and acceptance between the agent- buyer and the institution that owns the commodity so that the liability of the principal (seller) and the liability of the agent selling the commodity to himself come to overlap. 4/2/4 Sale by the agent of the purchased commodity before actually or legally taking delivery. Legal delivery includes the transfer of liability to the buyer (agent) by ascertaining the commodity in a manner that distinguishes it from things other than the commodity sold. 4/2/5 Commodity purchase operations of the institution through agency and purchase thereafter by the agent for his own account on a deferred basis by confining the transaction to an offer by the agent to the institution to enter into the transaction and acceptance by the institution thereof prior to taking possession of the commodity by the institution or without the exchange of the two advices of offer and acceptance. 4/2/6 Purchase of a commodity by an institution on the basis of a spot price and thereafter its sale to the (same) institution it- self on a deferred basis, or its sale to a holding institution of of self on a deferred basis, or its sale to a holding institution the seller institution with complete or majority ownership, or 544544 Shariah Standard No. (20): Sale of Commodities in Organized Markets with effective control, amounts to a buy-back (Inah) sale. [see Shariah Standard No. (8) on Murabahah and item 2/2/4 of Shariah Standard No. (11) on Istisnaa and Parallel Istisnaa] 4/2/7 Sale by an agent of a commodity for his client, prior to the transfer of ownership to him through purchase, to an institu- tion that is his principal. 4/2/8 Sale of ascertained specified commodity, without its passing into the ownership of the seller, through fictitious documents or the sale of the same commodity at the same time to more than one institution dealing with the commodity. It is necessary to be precise about the numbers of the title documents of the commodity along with the fixing of liability for the person causing a discrepancy. 4/2/9 The lack of detail about compensation for agency (brokerage) and merging it with the determined purchase price, which is stated as an amount that includes it. The substitute for this is the mentioning of the compensation and then deducting it from the inclusive price, or the addition of the compensation to the purchase price or the determination of the sale price with the specification that what is in excess is the compensation of the agent. 4/2/10 A statement within the general memorandum of agency for purchase and sale of commodities that denies the right of the buyer (principal) to take delivery of the commodity. 4/2/11 The institution making the payment of the purchase price of the commodity contingent upon the agent providing a guarantee for the payment of the sale price by the agent himself or by another person. 4/2/12 Stipulation of a guarantee by the seller for the sale price under all circumstances. He is obliged to provide a guarantee in case like of tort, negligence or breach of the provisions of agency like of tort, negligence or breach of the provisions of agency the stipulation that he obtain sureties from the buyers of the 545545 Shariah Standard No. (20): Sale of Commodities in Organized Markets commodities with respect to the deferred period. [see Shariah Standard No. (5) on Guarantees]
1. Derivatives Derivatives Derivatives have a large number of kinds, the most important of which are: Futures, Options, Indexes and Swaps. The Shariah rule for derivatives is based on the rule for the contracts employed within their framework, as stated in paragraphs that follow: 5/1 Futures 5/1/1 A contract that is binding under law. It is concluded on the trading floor of the exchange for the sale and purchase of commodities or financial instruments for a period linked to the near future. The transaction is arranged with the mentioning of the quantity, type and category along with the statement of the date and place of delivery. As for the price, it is the sole element that varies, and it is ascertained in the trading hall. 5/1/2 The Shariah rule for futures contracts It is not permitted according to the Shariah to undertake futures contracts either through their formation or trading. [see para. 4] 5/2 Options 5/2/1 A contract by means of which a right is bestowed -but not an obligation- for the purchase or sale of an identified item (like shares, commodities, currencies, indexes or debts) at a etermined price and for a determined period. There is no obligation in this contract except on the person selling this right. 5/2/2 The Shariah rule for options Options indicated above are not permitted neither with respect to their formation nor trading. 5/2/3 Shariah substitutes for options 546546 Shariah Standard No. (20): Sale of Commodities in Organized Markets 5/2/3/1 The conclusion of a contract pertaining to ascertained assets is permitted according to the Shariah, along with the payment of part of the price as Arboun (Earnest Money) with the stipulation that the buyer has the right to revoke the contract within a specified period in lieu of the entitlement of the seller to the amount of earnest money in case the buyer exercises his right of revocation. It is not permitted to trade the right established with respect to the earnest money. 5/2/3/2 The conclusion of a contract for commodities in them- selves along with the stipulation of an option for estab- lishing the right of revocation for one of the parties, or for both, during a known period. This option is not eligible for trading. 5/2/3/3 The issuance of a binding promise by the owner of assets to sell them, or a binding promise by one desiring to buy them, without specifying a counter-value for the promise. This promise is not eligible for trading. 5/3 Swaps 5/3/1 Swaps are agreements between two parties for the temporary exchange of determined financial assets, material assets or interest rates. In some cases the sale of a commodity or deferred currency takes place without the transaction resulting in any exchange of the commodity, while in other cases there may be an option, in return for a counter-value, that gives the owner the right to execute or not to execute the contract. 5/3/2 The Shariah rule for swaps Swaps are not permitted in the forms in which they are practised in commodity exchanges. 547547 Shariah Standard No. (20): Sale of Commodities in Organized Markets
Date of Issuance of the Standard This Standard was issued on 30 Rabi I, 1425 A.H., corresponding to 20 May 2004 A.D. 548548 Shariah Standard No. (20): Sale of Commodities in Organized Markets Adoption of the Standard The Shariah Standard on International Commodity Sales in Organized Markets was adopted by the Shariah Board in its meeting No. (12) held in Al-Madinah Al-Munawwarah during the period of 26-30 Rabi I, 1425 A.H., corresponding to 15-20 May 2004 A.D. 549549 Shariah Standard No. (20): Sale of Commodities in Organized Markets Appendix (A) Brief History of the Preparation of the Standard In its meeting No. (8) In its meeting held in Al-Madinah Al-Munawwarah during the No. (8) held in Al-Madinah Al-Munawwarah during the period of 28 Safar to 3 Rabi I, 1423 A.H., corresponding to 11-16 May 2002 A.D., the Shariah Board decided to issue the Standard on International A.D., the Shariah Board decided to issue the Standard on International Commodity Sales in Organized Markets. On 25 Rajab 1423 A.H., corresponding to 2 October 2002 A.D., the decided to commission a Shariah consultant Shariah Standards Committee decided to commission a Shariah consultant Shariah Standards Committee to prepare an exposure draft on international commodity sales in organized markets. The Shariah Standards Committee (2) in its meeting held in the Kingdom of Bahrain on 13 Safar 1424 A.H., corresponding to 15 April 2003 A.D., discussed the juristic study and required the consultant to incorporate necessary amendments in the light of the discussion and the observations of the members. The Committee also discussed the exposure draft in its meeting held on Monday 23 Rabi II, 1424 A.H., corresponding to 23 June 2003 A.D., and made necessary amendments in the light of the discussion and the observations of the members. The revised exposure draft of the standard was presented to the Shariah Board in its 11th meeting held in Makkah Al-Mukarramah during the period of 2-8 Ramadan 1424 A.H., corresponding to 27 October - 2 November 2003 A.D. The Shariah Board made amendments to the exposure draft of the standard and decided that it be sent to specialists and interested parties in order to obtain their comments in preparation for its discussion in a public hearing. A public hearing was held in the Kingdom of Bahrain on 29 Dhul-Qadah The public hearing was 1424 A.H., corresponding to 21 January 2004 A.D. The public hearing was 1424 A.H., corresponding to 21 January 2004 A.D. 550550 Shariah Standard No. (20): Sale of Commodities in Organized Markets attended by more than fifteen participants representing central banks, institutions, accounting firms, Shariah scholars, academics and others interested in the field. The members of the Shariah Standards Committees (1) and (2), responded to the written comments that were sent prior to the public hearing as well as to the oral comments that were expressed in the public hearing. The Shariah Standards Committees (1) and (2) in a joint meeting in the Kingdom of Bahrain on 30 Dhul-Qadah 1424 A.H., corresponding to 22 January 2004 A.D., discussed the comments that were made during the public hearing as well as the observations received in writing. The Committees made amendments that were deemed suitable. The amended exposure draft was presented to the Drafting Committee in its meeting held in the Kingdom of Bahrain on 25 Safar 1425 A.H., corresponding to 15 April 2004 A.D. The Shariah Board in its meeting No. (12) held in Al-Madinah Al-Mu- nawwarah during the period of 26-30 Rabi I, 1425 A.H., corresponding to 15-20 May 2004 A.D., discussed the amendments suggested by the Shariah Standards Committee and the Drafting Committee, and incorporated the amendments deemed suitable. The Shariah Board unanimously adopted some of the items of the standard and some items were adopted by the majority vote of the members of the Shariah Board, as recorded in the minutes of the meetings of the Shariah Board. 551551 Shariah Standard No. (20): Sale of Commodities in Organized Markets Appendix (B) The Shariah Basis for the Standard The basis for the permissibility of international sales transactions that The basis for the permissibility of international sales transactions that fulfil the required Shariah elements and conditions of the validity of sales is their inclusion within the fold of the sale with respect to which the Words of Allah, the Exalted, were laid down: (...Where Allah has (...Where Allah has the Words of Allah, the Exalted, were laid down: permitted trading...),(2)(2) as well as His Words: (...Eat not up your property as well as His Words: (...Eat not up your property permitted trading...) among yourselves unjustly except it be a trade amongst you, by mutual consent...).(3)(3) The implementation of the international conventions on consent...) The implementation of the international conventions on sales or the implementation of the laws of some countries does not re- quire prohibition of these sales if they do not contain what conflicts with the rules and principles of the Shariah, and this is due to the Words of Al- (O you who believe! fulfil (your) obligations...),(4)(4) with lah the Exalted: (O you who believe! fulfil (your) obligations...) with lah the Exalted: the proviso except what legalizes the prohibited and prohibits what is le- the proviso except what legalizes the prohibited and prohibits what is le- galgal, due to the words of the Prophet (peace be upon him): Muslims shall , due to the words of the Prophet (peace be upon him): Muslims shall abide by their conditions, except for a condition that legalises the prohibited or prohibits the lawful.(5)(5) or prohibits the lawful The basis for the prohibition of delaying of both counter-values is that in The basis for the prohibition of delaying of both counter-values is that in this there is the creation of two liabilities, along with what the jurists have mentioned with respect to the impermissibility of delaying the capital of Salam. Further, there is opposition to the conditions required by the contract. The basis for the conditions of spot contracts in the commodity (2) [Al-Bqarah (The Cow): 275]. (3) [Al-Nisa (Women): 29]. (4) [Al-Maidah (The Table): 1]. (5) This Hadith has been narrated by a number of Companions. It has been related by Ahmad [1: 312]; Ibn Majah with a hasan chain of transmission [2: 784], Mustafa Al-Babi Al-Halabi edition, Cairo (1372 A.H./1952A.D.); Al-Hakim (Hyderabad, India edition, 1355 A.H.); Al-Bayhaqi [6: 70, 156], [10: 133], Hyderabad, India edition, 1355 A.H.); Al- Daraqutni [4: 228], [3: 77], Dar Al-Mahasin Lil-Tibaah, Cairo (1372 A.H./1952 A.D.). 552552 Shariah Standard No. (20): Sale of Commodities in Organized Markets and Salam. Bay Muajjal and Salam. markets is that these are general conditions of sale and are permitted markets is that these are general conditions of sale and are permitted according to the Shariah. The basis for the permissibility of contracts in which one of the counter- The basis for the permissibility of contracts in which one of the counter- values is deferred is the validity of values is deferred is the validity of Bay Muajjal The basis for the permissibility of forms of transactions mentioned in The basis for the permissibility of forms of transactions mentioned in the Standard related to international commodity sales is that they are concluded in accordance with the principles of Wakalah (agency), sale with a deferred period, Murabahah sale, and all these are valid contracts. The basis for the obligation of issuing an offer by the agent for seeking The basis for the obligation of issuing an offer by the agent for seeking a sale on his own account and its acceptance by the principal as a seller is the distinction between the liability of the seller (the principal) and the liability of the buyer (the agent). The basis for the obligation of specifying the wages of the agent, and The basis for the obligation of specifying the wages of the agent, and not merging it with the price is the Hadith: He who hires a hired worker not merging it with the price is the Hadith: He who hires a hired worker make known to him his wages.(6)(6) This rule of the contract of Ijarah is must must make known to him his wages This rule of the contract of Ijarah is applicable to agency for wages. The basis for the prohibition of stipulating the lack of delivery in com- The basis for the prohibition of stipulating the lack of delivery in com- modity sales is that this negates the requirements of sale, which are the transfer of ownership to the buyer and his right to undertake transactions in the sold commodity. The basis for prohibiting the stipulation of a guarantee by the agent is that The basis for prohibiting the stipulation of a guarantee by the agent is that the agent is a trustee and does not provide a guarantee except for cases of transgression, negligence or going against the constraints of agency. The bases for the prohibition of deferred transactions in currencies are The bases for the prohibition of deferred transactions in currencies are the Hadiths prescribing the obligation of possession in their sale. This has received support from a resolution of the International Islamic Fiqh Academy emphasising this.(7)(7) Academy emphasising this. The basis for the prohibition of derivatives is that these are binding The basis for the prohibition of derivatives is that these are binding promises that are converted to sale contracts pertaining to the future without an offer and acceptance. The Shariah substitutes mentioned in the Standard for derivatives are stated in a resolution of the International Islamic Fiqh Academy.(8)(8) Islamic Fiqh Academy. (6) Related by Ibn Majah in his Sunan (6) Related by Ibn Majah in his Sunan [2: 817]; See also [2: 817]; See also Majma Al-Zawaid by Al- Majma Al-Zawaid by Al- Haythami [4: 98], Dar Al-Rayyan Lil-Turath and Dar Al-Kitab Al-Arabi. (7) The International Islamic Fiqh Academy Resolution No. (63) 1/7. (8) The International Islamic Fiqh Academy Resolution No. (63) 1/7. 553553 Shariah Standard No. (20): Sale of Commodities in Organized Markets The basis for the impermissibility of options is that the subject-matter The basis for the impermissibility of options is that the subject-matter of the contract in them is not wealth that can be deemed compensation according to the Shariah.(9)(9) according to the Shariah. The basis for the impermissibility of swaps is that no actual exchange of The basis for the impermissibility of swaps is that no actual exchange of counter-values takes place thereby. Such swaps, as well, usually constitutes interest payment, Inah, and deferment of one of the counter-values. (9) The International Islamic Fiqh Academy Resolution No. (63) 1/7. 554554 Shariah Standard No. (21) Financial Paper (Shares and Bonds) Contents Subject ................................................................................................... Preface ................................................................................................... Preface ..................................................................... Statement of the Standard ..................................................................... Statement of the Standard
Scope of the Standard ..............................................................................
Scope of the Standard .............................................................................. Rules for Issuance of Shares ................................................................
1. Rules for Issuance of Shares ................................................................ Rules for Dealing in Shares ................................................................
1. Rules for Dealing in Shares ................................................................ ....................................................................
Rules for Issuance of Bonds ....................................................................
Rules for Issuance of Bonds ................................................................
The Rule for Trading in Bonds ................................................................
The Rule for Trading in Bonds ..................................................................
Shariah Substitute for Bonds ..................................................................
Shariah Substitute for Bonds ............................................................
Date of Issuance of the Standard ............................................................
Date of Issuance of the Standard ...................................................................... Adoption of the Standard ...................................................................... Adoption of the Standard Appendices Appendix (a): Appendix Appendix (b): Appendix Appendix (c): Appendix (a): Brief History of the Preparation of the Standard.............. Brief History of the Preparation of the Standard.............. (b): The Shariah Basis for the Standard .................................... The Shariah Basis for the Standard .................................... (c): Definitions.............................................................................. Definitions.............................................................................. PagePage 559559 560560 562562 567567 568568 569569 570570 572572 580580 557557 IN THE NAME OF ALLAH, THE ALL-MERCIFUL, THE MOST MERCIFUL All praise be to Allah, the Lord of all the worlds, and blessings and peace be upon our master, Muhammad, and his household and all his companions Preface This Standard aims to elaborate the rules for the shares of corporations just as it seeks to explain the rules for interest-bearing bonds. 559559 Shariah Standard No. (21): Financial Paper (Shares and Bonds) Statement of the Standard
Scope of the Standard This Standard covers shares with respect to their issuance and flotation including investment, trading, renting, loaning, pledging and Salam in them, along with the rule for concluding futures, options and swapping contracts on the basis of shares. The Standard also covers issuance of and trading in interest-bearing bonds. The Standard does not cover investment Sukuk for which there is a separate specific standard.
Rules for Issuance of Shares 2/1 The issuance of shares is permissible if the objectives for which the corporation was established are permissible according to the Shariah, thus, the objectives of its formation should not be transactions that are prohibited, like the manufacturing of liquor, trading in swine or transactions in Riba. If the objectives of the corporation are impermissible, the formation of the corporation is permissible too, and consequentially so is the issuance of shares that constitute such a corporation. 2/2 It is permissible to add a determined percentage to the value of the share at the time of subscription to cover the expenses of issuance as long as this percentage is fixed and determined to be a reasonable amount. [see item 4/1/2/2 of Shariah Standard No. (12) on Sharikah (Musharakah) and Modern Corporations] 2/3 It is permissible to issue new shares for increasing the capital of a corporation if such shares are issued at a price that is equivalent to the value of the old shares, which is worked out through expert valuation of the assets of the corporation or on the basis of the mar- ket-value whether this is at a premium or at a discount with respect to the price of the issue. [see item 4/1/2/3 of Shariah Standard No. (12) on Sharikah (Musharakah) and Modern Corporations] 560560 Shariah Standard No. (21): Financial Paper (Shares and Bonds) 2/4 It is permissible to underwrite the issue when this is done without compensation in lieu of underwriting. This is an agreement, at the time of the formation of the corporation, with someone who undertakes to purchase the entire issue of shares, or a part thereof. It is an undertaking from the person bound to subscribe at the nominal value to all that remains and has not been subscribed to by another. It is permissible to acquire compensation for work, like the preparation of feasibility studies or the marketing of shares, irrespective of the work being undertaken by the underwriter or someone if such compensation is not in lieu of a guarantee. [see item 4/1/2/4 of Shariah Standard No. (12) on Sharikah (Musharakah) and Modern Corporations] 2/5 It is permissible to split the value of the share into instalments at the time of subscription so that one instalment is paid and the re- maining instalments are deferred. The subscriber will be considered a participant to the extent of what he has paid up and will be bound to pay his additional capital in the company, and this on the condition that the instalments apply to all the shares and that the liability of cor- poration remains restricted to the value of the shares subscribed to. [see item 4/1/2/5 of Shariah Standard No. (12) on Sharikah (Musharakah) and Modern Corporations] 2/6 It is not permissible to issue preference shares that have special financial features leading to the granting of priority to these shares at the time of liquidation or the distribution of profits. It is permitted to grant certain shares features related to procedural or administration matters, in addition to the rights attached to ordinary shares, like voting rights. [see item 4/1/2/14 of Shariah Standard No. (12) on Sharikah (Musharakah) and Modern Corporations] 2/7 It is not permissible to issue Tamattu 2/7 It is not permissible to issue shares. These are shares that Tamattu shares. These are shares that grant the participant compensation in lieu of his shares, whose value is redeemed during the existence of the company, and he is granted Tamattu shares that grant him rights that are available for shares Tamattu shares that grant him rights that are available for shares based on capital, except the right to profits and the distribution shares Tamattu shares of assets at the time of winding up, insofar as the Tamattu of assets at the time of winding up, insofar as the 561561 Shariah Standard No. (21): Financial Paper (Shares and Bonds) are entitled to profit lesser than that given to the owner of shares shares does not have Tamattu shares does not have based on capital, just as the owner of Tamattu based on capital, just as the owner of a share in the assets of the company at the time of winding up until the owners of shares based on capital have been granted the value of their shares. [see item 4/1/2/15 of Shariah Standard No. (12) on Sharikah (Musharakah) and Modern Corporations] 2/8 The share certificate or what stands in its place is a document that is deemed evidence of ownership of the shareholder for his undivided share in the assets of the company. It is permitted that this document be in the name of the owner, to his order, or for the bearer.
Rules for Dealing in Shares 3/1 A share represents an undivided share in the capital of a corporation, just as it represents an undivided share in its assets and the rights associated with it upon conversion of the capital into tangible things, benefits, debts and so on. The subject-matter of the contract at the time of trading of shares is this undivided share.(1)(1) time of trading of shares is this undivided share. 3/2 It is permissible to buy and sell shares of corporations, on a spot or deferred basis in which delay is permissible, if the activity of the corporation is permissible irrespective of its being an investment (that is, the share is acquired with the aim of profiting from it) or dealing in it (that is, with the intention of benefiting from the difference in prices). 3/3 Participation or trading in shares for purposes of conversion Participation or trading is permitted for purposes of conversion for one for who has the ability to effect conversion by adopting a resolution for who has the ability to effect conversion by adopting a resolution (1) See the Shariah basis for the standard, item (18), for the permissibility of trading in shares of corporations whose assets represent tangible things and profits along with debts and cash that are in excess of the tangible assets and profits with the stipulation that such tangible and cash assets should not be less than one-third. The reason is that the debts and cash can be properly considered as secondary to them. (This explanatory note is intended to complete the text of the Standard for implementing subsequent amending procedures, God willing). 562562 Shariah Standard No. (21): Financial Paper (Shares and Bonds) conversion in accordance with the Shariah at the first general meeting or by striving for conversion in line with item 3/4/6. [see Shariah Standard No. (6) on Conversion of a Conventional Bank into an Islamic Bank] 3/4 Participation or trading (for investment and trading) in the shares of corporations whose primary activity is permissible, but they make deposits or borrow on the basis of interest The fundamental rule is that of prohibition of acquiring shares of and transactions (investment and trading) in the shares of corporations that sometimes undertake transactions in Riba and other prohibited things even when their primary activity is permissible, but from this rule subscription and transactions (investment or trading) are exempted with the following conditions: 3/4/1 That the corporation does not state in its memorandum of association that one of its objectives is to deal in interest, or in prohibited goods or materials like pork (swine) and the like. 3/4/2 That the collective amount raised as loan on interest whether long-term or short-term debt does not exceed 30% of the market capitalization of the corporation, knowingly that raising loans on interest is prohibited whatsoever the amount is. 3/4/3 That the total amount of interest-taking deposits, whether short-, medium- or long-term, shall not exceed 30% of the market capitalization of total equity, knowingly that interest- taking deposits are prohibited whatsoever the collective amount is.is. 3/4/4 That the amount of income generated from prohibit- ed component does not exceed 5% of the total income of the corporation irrespective of the income being generat- ed by undertaking a prohibited activity, by ownership of a prohibited asset or in some other way. If a source of income is not properly disclosed then more effort is to be exerted for identification thereof giving due care and caution in this respect. 563563 Shariah Standard No. (21): Financial Paper (Shares and Bonds) 3/4/5 For the determination of these percentages, recourse is to be had to the last budget or verified financial position. 3/4/6 It is obligatory to eliminate prohibited income specific to the share that is mixed up with the earnings of the corporations, and this in accordance with the following: 3/4/6/1 The elimination of prohibited income is obligatory on one who is the owner of the share, whether an investor or a trader, at the end of the financial period, even if the payment is due at the time of issuance of the final financial statements whether quarterly, annual or for other period. Accordingly, elimination is not obligatory for one who sells the shares before the end of the financial period. 3/4/6/2 The subject-matter of elimination is the prohibited in- come specific to the share whether or not the profits have been distributed and whether or not the corpora- tion has declared a profit or suffered a loss. 3/4/6/3 Elimination is not obligatory for the intermediary, agent or manager out of part of their commission or wages, because this is their right in lieu of the work they have undertaken. 3/4/6/4 The figure, whose elimination is obligatory on the person dealing in shares, is arrived at by dividing the total prohibited income of the corporation whose shares are traded by the number of shares of the cor- poration, thus, the figure specific to each share is obtained. Thereafter the result is multiplied by the number of shares owned by the dealer individual, institution, fund or another and the result is what is to be eliminated as an obligation. 3/4/6/5 It is not permissible to utilise the prohibited component in any way whatsoever nor is any legal fiction to be 564564 Shariah Standard No. (21): Financial Paper (Shares and Bonds) created to do so even if this is through the payment of taxes. 3/4/6/6 The responsibility for elimination of the prohibited component of the income, for the benefit of all, falls upon the institution in case it is trading for itself or in case it is managing the operations. In the case of inter- mediation, however, it is bound to inform the person dealing in them of the mechanism for the elimination of the prohibited component so that he can undertake it himself. The institution may offer these services, with or without a charge, for those dealers who desire them. 3/4/7 The institution will apply the above rules whether it does so directly or through another and whether it is trading for itself or for another by way of intermediation or management of wealth, like funds, or is doing so as the agent of another. 3/4/8 It is necessary to observe these rules throughout the period of participation or trading. If the rules cannot be applied, it is obligatory to give up such investment. 3/5 It is not permissible to purchase shares by raising interest-bearing loans through a broker or another (margin sales), just as it is not permitted to mortgage the shares for such a loan. [see item 4/1/2/6 of Shariah Standard No. (12) on Sharikah (Musharakah) and Modern Corporations] 3/6 It is not permissible to sell shares that the seller does not own (short sale), and the promise of a broker to lend these at the time of delivery is of no consequence. [see item 4/1/2/7 of Shariah Standard No. (12) on Sharikah (Musharakah) and Modern Corporations] 3/7 It is permissible to the buyer of a share to undertake transactions in it by way of sale to another and the like after the completion of the formalities of the sale and the transfer of liability to him even though the final settlement in his favour has not been made. 565565 Shariah Standard No. (21): Financial Paper (Shares and Bonds) 3/8 To secure lawful interests, it is permissible to specialised official agen- cies to organize trading in some shares so that it cannot be undertaken except through specialised brokers or those licensed to undertake the activity. [see item 4/1/2/8 of Shariah Standard No. (12) on Sharikah (Musharakah) and Modern Corporations] 3/9 It is not permissible to lend shares of corporations. 3/10 It is permissible to mortgage shares that are lawful according to the Shariah, and in this respect there is no difference whether the assets of the corporation are cash, tangible assets or debts or they are a com- bination of cash, tangible assets and debts and irrespective of one type being predominant in them. This is to be done in conformity with the conditions for selling shares at the time of liquidation. 3/11 The contract of Salam is not permissible in shares. 3/12 It is not permissible to conclude futures contracts for shares. [see item 5/1 of Shariah Standard No. (20) on the Sale of Commodities in Organized Markets] 3/13 It is not permissible to conclude contracts of options for shares. [see item 5/2 of Shariah Standard No. (20) on the Sale of Commodities in Organized Markets] 3/14 It is not permitted to conclude swap contracts with respect to shares and their returns. 3/15 It is not permissible to rent shares, whether this is for pledging them or for the purpose of selling the rented shares, and returning shares similar to them, as is done in the stock-markets, or for acquiring their profits or for showing a stronger financial position of the hirer or for another reason. 3/16 It is permitted to lend shares by way of Iarah for the purpose of pledging them or for the purpose of granting their profit to the borrower as is done in stock markets. The borrower does not have the right to sell the shares except for the execution of the terms of the mortgage. 566566 Shariah Standard No. (21): Financial Paper (Shares and Bonds) 3/17 It is not permissible to undertake trading in the shares of a corpora- tion, when the assets of the corporation are cash exclusively, whether this is during the period of subscription or after that, prior to the commencement of the business of the company or at the time of liquidation, except at their nominal value and with the condition of delivery of possession. 3/18 It is not permissible to undertake trading in the shares of a corporation if the entire assets of the corporation are composed of debts, unless rules for dealing in debts are observed. the rules for dealing in debts are observed. the 3/19 If the assets of a corporation are composed of tangible assets, benefits, cash and debts, the rule for trading in the shares of such a corporation will differ according to the primary asset, which conforms to the objective of the corporation and its usual activity. If its purpose and trading activity pertain to trading in tangible assets, benefits and rights, trading activity pertain to trading in tangible assets, benefits and rights, in its shares is permissible without taking into account the rules of in its shares is permissible without taking into account the rules of SarfSarf or transactions in debts, with the condition that the total market value of assets, benefits and rights should not be less than 30% of the total assets value of the corporation including all assets, benefits, rights and cash liquidity (the corporations debts, current accounts with others, and bonds it holds which constitute debts) irrespective of their size and bonds it holds which constitute debts) irrespective of their size objective of the as in such a case these are secondary. If, however, the objective of the as in such a case these are secondary. If, however, the corporation and its usual activity is dealing in gold, silver or currencies (Sirafah ), it is obligatory to undertake trading in its shares in the light Sirafah), it is obligatory to undertake trading in its shares in the light of the rules of SarfSarf. of the rules of 3/20 It is stipulated for the implementation of what is laid down in paragraph 3/18 that it shall not be adopted as a means for bargains in debts and trading in them by merging parts of tangible assets and benefits with the debts as a legal device for transaction in debts.
Rules for Issuance of Bonds The issuance of all kinds of bonds is prohibited when these bonds include stipulations for the return of the amount of loan and excess in any form, whether such excess is paid at the time of the satisfaction of the principal amount of loan, is paid in monthly or yearly instalments or in another 567567 Shariah Standard No. (21): Financial Paper (Shares and Bonds) manner and whether this excess represents a percentage of the value of the bond, as in the case with most types of bonds, or a part of it, as is the case with zero-coupon bonds. Likewise, prize bonds are also prohibited. This applies irrespective of the bonds being private, public or governmental.
The Rule for Trading in Bonds Trading in bonds, both sale and purchase, is prohibited and so is their pledging and endorsement and so on.
Shariah Substitute for Bonds The Shariah substitute for bonds are investment Sukuk. [see Shariah Standard No. (17) on Investment Sukuk]
Date of Issuance of the Standard This Standard was issued on 30 Rabi I, 1425 A.H., corresponding to 20 May 2004 A.D. 568568 Shariah Standard No. (21): Financial Paper (Shares and Bonds) Adoption of the Standard The Shariah standard on Financial Paper (Shares and Bonds) was adopted by the Shariah Board in its meeting No. (12) held at Al-Madinah Al-Munawwarah from 26-30 Rabi I, 1425 A.H., corresponding to 15-20 May 2004 A.D. 569569 Shariah Standard No. (21): Financial Paper (Shares and Bonds) Appendix (A) Brief History of the Preparation of the Standard The Shariah Board in its meeting No. (7) The Shariah Board in its meeting held at Makkah Al-Mukarramah No. (7) held at Makkah Al-Mukarramah from 9-13 Ramadan 1422 A.H., corresponding to 24-28 November 2001 A.D., decided to issue the Shariah standard on financial paper (Shares and Bonds). On 25 Rajab 1423 A.H., corresponding to 2 October 2002 A.D., the Shariah Standards Committee decided to commission a Shariah consultant for the preparation of an exposure draft on the Shariah Standard on Financial Paper (Shares and Bonds). In meeting No. (6) In meeting of the Shariah Standards Committee (2) held from No. (6) of the Shariah Standards Committee (2) held from 14-15 Muharram 1424 A.H., corresponding to 17-18 March 2003 A.D., in the Kingdom of Bahrain, the Committee discussed the Shariah standard and required the consultant to incorporate necessary amendments in the light of the discussion and observations of the members. In meeting No. (7) In meeting of the Shariah Standards Committee (1) held from No. (7) of the Shariah Standards Committee (1) held from 14-15 Safar 1424 A.H., corresponding to 16-17 April 2003 A.D., in the Kingdom of Bahrain, the Committee discussed the exposure draft of the Shariah Standard on Financial Paper (Shares and Bonds) and made necessary amendments, just as the Committee discussed the exposure draft of the Standard in its meeting held from 25-26 Rabi II, 1424 A.H., corresponding to 25-26 June 2003 A.D., and made necessary amendments in the light of the discussion and observations of the members. In its meeting No. (9) In its meeting held from 23-24 Jumada I, 1424 A.H., corresponding No. (9) held from 23-24 Jumada I, 1424 A.H., corresponding to 23-24 July 2003 A.D., at Amman, the Hashimite Kingdom of Jordan, the Committee discussed the exposure draft of the Standard and made necessary amendments in the light of the discussion and observations of the members. 570570 Shariah Standard No. (21): Financial Paper (Shares and Bonds) The revised exposure draft of the Shariah standard was presented to the Shariah Board in its meeting No. (11) held in Makkah Al-Mukarramah from 2-8 Ramadan 1424 A.H., corresponding to 27 October - 2 November 2003 A.D. The Shariah Board made further amendments to the exposure draft of the standard, and decided that it be sent to specialists and interested parties in order to obtain their comments in preparation for the discussion of the standard in a public hearing. A public hearing was held in the Kingdom of Bahrain on 29 Dhul-Qadah 1424 A.H., corresponding to 21 January 2004 A.D. The public hearing was attended by more than 50 participants representing central banks, institutions, accounting firms, Shariah scholars, academics and others interested in the field. The members of the Shariah Standards Committees (1) and (2), responded to the written comments that were sent prior to the public hearing as well as to the oral comments that were expressed in the public hearing. The Shariah Standards Committees (1) and (2) in a joint meeting in the Kingdom of Bahrain on 30 Dhul-Qadah 1424 A.H., corresponding to 22 January 2004 A.D., discussed the comments that were made during the public hearing as well as the observations received in writing. The Committees made amendments that were deemed suitable. The amended exposure draft was presented to the Drafting Committee in its meeting held in the Kingdom of Bahrain on 25 Safar 1425 A.H., corresponding to 15 April 2004 A.D. The Shariah Board in its meeting No. (12) held at Al-Madinah Al- Munawwarah during the period 26-30 Rabi I, 1425 A.H., corresponding to 15-20 May 2004 A.D., discussed the amendments suggested by the Shariah Standards Committee and the Drafting Committee, and incorporated the amendments deemed suitable. The Shariah Board unanimously adopted some of the items of the standard and some items were adopted by the some of the items of the standard and some items were adopted by the majority vote of the members of the Shariah Board, as recorded in the minutes of the meetings of the Shariah Board. 571571 Shariah Standard No. (21): Financial Paper (Shares and Bonds) Appendix (B) The Shariah Basis for the Standard Issuance of Shares The basis for the permissibility of the issuance of shares, when the objec- The basis for the permissibility of the issuance of shares, when the objec- tives for which the corporation has been established are permissible, is the basis for the permissibility of the corporation (Sharikat al-Musahamah), which is the generality of the evidences conveying the obligation of abiding by contracts and conditions, the generality of the evidences conveying the permissibility of partnership, and the generality of the evidences conveying the permissibility of Inan, Mudarabah, Musaqat and Muzaraah. Inan is the basis for the permissibility of participation by two or more persons with their wealth and labour, just as Mudarabah, Musaqat and Muzaraah are the basis for the permissibility of participation with wealth from one side and labour from the other side whether the subject-matter of the contract is cash, as in the case of Mudarabah, or is tangible assets that are developed with work on these assets, as in the case of Musaqat and Muzaraah. The evidences for all these forms are well known. The basis for the permissibility of underwriting the issue without com- com- pensation is that it is an undertaking that does not have a coun- ter-value, which is the taking of compensation for it. In this regard a resolution of the International Islamic Fiqh Academy has been issued.(2)(2) a resolution of the International Islamic Fiqh Academy has been issued. The basis for the impermissibility of the issuance of preference shares, that The basis for the impermissibility of the issuance of preference shares, that is, in other than the prescribed manner, is that this leads to the severance of participation in profit and the imposition of injustice on the other shareholders.(3)(3) shareholders. shares is that the Tamattu shares is that the The basis for the impermissibility of issuing Tamattu owners of these shares claim their rights to profit and their redemption is The basis for the permissibility of underwriting the issue without The basis for the impermissibility of issuing (2) International Islamic Fiqh Academy Resolution No. 63 (1/7) on Financial Markets. Financial Markets. (3) International Islamic Fiqh Academy Resolution No. 63 (1/7) on Financial Markets. (3) International Islamic Fiqh Academy Resolution No. 63 (1/7) on 572572 Shariah Standard No. (21): Financial Paper (Shares and Bonds) only in form as they continue to be owners of these share and are entitled to rights at the time of liquidation. The basis for the permissibility of share being in a persons name, at his The basis for the permissibility of share being in a persons name, at his order, or for bearer is that the Lawgiver wishes to establish rights through writing and other forms, but He has not determined a particular form for this. If -in the case of corporations- this takes place through the is- suance of shares on which names of the shareholders are written then this is valid. Likewise, if this is undertaken by recording the names of the shareholders in special registers, or indexes, or in any other way, or even if the names are not recorded at all -neither on the certificates nor elsewhere- then this is permissible. The basis for the permissibility of participation by one who has Trading in Shares The basis for the permissibility of the sale and purchase of shares of cor- The basis for the permissibility of the sale and purchase of shares of cor- porations, when the activity of the corporation is permissible, is that the shares are owned by the shareholder, and he has the right to undertake transactions in them as he desires whether this is by way of sale, gift or another way, especially when each one of the shareholders has been granted permission to undertake such transactions through their parti- cicipation in the memorandum of the corporation and by subscribing to it. pation in the memorandum of the corporation and by subscribing to it. The basis for the permissibility of participation by one who has the the ability to convert or makes an effort to convert insofar as that is al-Amr Bil- a means to alter the rejected and belongs to the category of al-Amr Bil- a means to alter the rejected and belongs to the category of Maruf Wa al-Nahy An al-Munkar (enjoining good and forbidding evil), Maruf Wa al-Nahy An al-Munkar (enjoining good and forbidding evil), which is an act approved by acknowledged evidences. In this regard a jurstic opinion (Fatwa) has been issued by the Third Seminar on Fi- nancial Markets.(4)(4) nancial Markets. The basis for exempting trading in the shares of these corporations, The basis for exempting trading in the shares of these corporations, whose primary activity is permissible, however, they deposit amounts and borrow on the basis of interest, is the application of the rule of removal of hardship and acknowledging of general need, widespread practice, the acknowledged principles of surplus, shortage and predominance,(5)(5)as as well well acknowledged principles of surplus, shortage and predominance, (4) Held in the Kingdom of Bahrain during Jumada I, 1412 A.H., corresponding to (5) Al-Furuq (5) November 1991 A.D. Al-Furuq by Al-Qarafi [4: 104]; Al-Arabi [4: 1804]; and Qawaid Al-Ahkam Fi Masalih Al-Anam Al-Arabi [4: 1804]; and by Ibn Ahkam Al-Quran by Ibn [1: 37]; Ahkam Al-Quran [1: 18, 41-45]. Qawaid Al-Ahkam Fi Masalih Al-Anam [1: 18, 41-45]. by Al-Qarafi [4: 104]; Al-Muwafaqat Al-Muwafaqat [1: 37]; 573573 Shariah Standard No. (21): Financial Paper (Shares and Bonds) as the permissibility of dealing with one the major part of whose wealth as the permissibility of dealing with one the major part of whose wealth is permissible,(6)(6)along with reliance upon the issue of separation of along with reliance upon the issue of separation of is permissible, bargains according to some Jurists.(7)(7) This is upheld by most fatwa issuing bargains according to some Jurists. This is upheld by most fatwa issuing organisations as well as the Shariah Supervisory Boards of Islamic banks.(8)(8) organisations as well as the Shariah Supervisory Boards of Islamic banks. The basis of the impermissibility of buying shares by raising interest-bearing The basis of the impermissibility of buying shares by raising interest-bearing loans from the broker or someone else, is the indulgence in interest and securing this through mortgage, and these are activities prohibited by the Texts along with a curse for those who charge Riba, pay it, write it down and witness it. The basis for the impermissibility of the sale of shares that the seller does The basis for the impermissibility of the sale of shares that the seller does not own is that this leads to the sale of something that is not within the liability of the seller nor in his ownership, and this is prohibited accor- ding to the Shariah. The basis for the permissibility of undertaking transactions in shares The basis for the permissibility of undertaking transactions in shares even though the final registration formalities have not been completed is the transfer of the liability for loss ( ) to the buyer. This is attained Daman) to the buyer. This is attained the transfer of the liability for loss (Daman through possession that is granted through the transacting constructive possession that is granted through the transacting through constructive in what he has purchased. The basis for the impermissibility of lending the shares of corporations is The basis for the impermissibility of lending the shares of corporations is that the share at the time of repayment-in consideration of what it repre- sents-does not represent the same thing that it did at the time of lending due to the constant change in the assets of the corporation. The basis for the permissibility of mortgaging the shares of corporations The basis for the permissibility of mortgaging the shares of corporations is the established principle that a thing can be mortgaged if its sale is permissible. As the sale of shares is permitted, mortgaging them is also permitted. The reason is that the purpose of a mortgage is the securing of a loan and recovering it through the sale price of the asset mortgaged in case recovery is not possible from the debtor. This is what is achieved through the mortgaging of shares and is, therefore, permitted. [4: 104]; Al-Ashbah Wa Al-Nazair by Ibn Nujaym (pp. 112-114); Al-Ashbah Wa Al-Nazair by Ibn Nujaym (pp. 112-114); (6) Badai Al-Sanai (6) Badai Al-Sanai [4: 104]; Al-Bayan Wa Al-Tahsil Al-Bayan Wa Al-Tahsil [18: 194-95]; and Fath al-Qadir [6: 89-90]; (7) Fath al-Qadir (7) Maa Al-Dusuqi [3: 15]; Maa Al-Dusuqi [6: 89-90]; Iqd Al-Jawahir Al-Thaminah [3: 15]; Al-Rawdah [18: 194-95]; and Al-Manthur Fi Al-Qawaid Iqd Al-Jawahir Al-Thaminah [3: 439]; Al-Rawdah [3: 420-25]; and (8) Among these is Al Rajhi Organization in its resolution No. 48, 23/8/1422 A.H. [3: 420-25]; and Majmu Al-Fatawa [2: 335]. Al-Manthur Fi Al-Qawaid [2: 335]. [29: 48]. Majmu Al-Fatawa [29: 48]. Al-Sharh Al-Kabir [3: 439]; Al-Sharh Al-Kabir 574574 Shariah Standard No. (21): Financial Paper (Shares and Bonds) The basis for the impermissibility of Salam in shares is that the sub- The basis for the impermissibility of Salam in shares is that the sub- ject-matter of Salam is a debt and not an ascertained thing, while in shares of corporations nothing works except ascertainment. This is done by mentioning the name of the corporation whose shares are desired through Salam thereby rendering the shares an ascertained thing and not a liability for a debt. Shares cannot, therefore, essentially be the sub- ject-matter of the contract of Salam. Further, Salam in shares implies the sale of ascertained things that are not owned and this is not permitted. In addition to this, the constant availability of specified shares in the market and the ability of the buyer to deliver them at the end of the period is something that cannot be guaranteed. The impermissibility of concluding futures contracts for shares is that The impermissibility of concluding futures contracts for shares is that these contracts imply the stipulation of delay in the delivery of an as- certained sold commodity, that is, shares, and this prohibited and not permitted. Likewise, the delay in the price and the priced commodity, for this is the sale of a debt for a debt, which is prohibited by agreement. Further, the seller -mostly- does not own the shares for which the futures contract has been concluded and is, therefore, selling something that is owned by another. This is something over which there is no disagree- ment among the scholars as to its impermissibility. It is also included primarily in the meaning of the Shariah Texts established By Prophet Muhammad (peace be upon him) that convey the prohibition of the sale of something that one does not possess. Again, most of the futures contracts are completed through a cash settlement between the parties, and this is brazen gambling if this is stipulated within the contract. If it is not stipulated in the contract, it is still one type of gambling. Thereaf- ter, the purpose of contracts is the delivery of possession, while in fu- tures contracts delivery of possession is not the primary purpose of the tures contracts delivery of possession is not the primary purpose of the contracting parties. These contracts, thus, create an obligation for, and engage the liability of, each party for a debt that is of no benefit, except by way of Mukhatarah and for waiting for a loss that will inevitably be incurred by one party. The basis for the impermissibility of concluding options contracts for The basis for the impermissibility of concluding options contracts for shares is the right of option- which is the subject-matter of options 575575 Shariah Standard No. (21): Financial Paper (Shares and Bonds) contracts transacted in financial markets- is not included in rights that can be sold. The reason is that this right is not established at all for the seller as it is created through the contract and after its creation it is not related to wealth rather it is related to an abstract thing, that is, sale and purchase. If established rights cannot be sold when these do not relate to wealth, like the right of pre-emption, the right to custody of children, the right of Qisas, then, rights -like the right of option- cannot be permitted in the first instance. Added to this is the fact that dealing in options contracts is based on Gharar, and Gharar is prohibited, just like dealing in options contracts is based upon gambling and games of chance, equally for the buyer and the seller of a right to an option, and this occurs in cases that terminate in a cash settlement between the two parties. The contract for an option falls under the sale by a person of something that he does not own when he writes an option to buy, for he does not own the shares or commodities that he undertakes to sell; and the sale of what one does not own is prohibited according to the Shariah. The basis for the impermissibility of concluding swap contracts for the The basis for the impermissibility of concluding swap contracts for the dividends of shares is that these contracts include Riba in both its forms if the contracts involve the same currency, or alone if it invol- Riba al-Nasih alone if it invol- the contracts involve the same currency, or Riba al-Nasih ves two different currencies; the sale of a debt for a debt as it is a contract in which both counter-values are deferred; Gharar due to the uncertainty about the amount of the cash at the time of the contract; gambling, as the purpose of these contracts is the acquisition of the difference between the two average returns on the shares and it is not the delivery of possession, which is the purpose of contracts, thus, one of the parties gains and the other inevitably loses, and this is truly gambling. Each one of these prohi- bitions alone is sufficient to prohibit this type of contracts, then what about all of them collectively? The basis for the permissibility of trading in shares or corporations, which The basis for the permissibility of trading in shares or corporations, which include cash assets and debts, without regard for the rules of Sarf and dea- ling in debts, even when such debts are more than one-half, is that in such circumstances such assets are deemed secondary, and in secondary things matters that are not normally overlooked otherwise are overlooked. If, however, the tangible assets and benefits are less than a third, it is not 576576 Shariah Standard No. (21): Financial Paper (Shares and Bonds) permitted to deal in the shares, except by observing the rules of or permitted to deal in the shares, except by observing the rules of SarfSarf or transactions in debts, because in such a case the assets and benefits are meagre and here debts and cash cannot be deemed secondary to them, and they are the primary objective of the contract, thus, those conditions are to be stipulated for them that would be applied to them if they were desired separately. The basis for the permissibility of trading in shares of corporations whose The basis for the permissibility of trading in shares of corporations whose assets include debts and cash, when the objective and activity of the corpo- ration is dealing in things and benefits, without regard for the percentage of debts and cash, is as follows:
The Hadith of Ibn Umar (may Allah be pleased with him) stating: ......
The Hadith of Ibn Umar (may Allah be pleased with him) stating: When a person buys a slave, who has wealth, then the wealth is for the seller, unless the buyer stipulates this too.(9)(9)The Hadith is explicit on seller, unless the buyer stipulates this too. The Hadith is explicit on the permissibility of the sale without regard for the genus of the price. The general meaning of the Arabic term in the Hadith includes The general meaning of the Arabic term MalMal in the Hadith includes all his wealth whether this is cash, debts or goods and whether this is less or more. It indicates that debts or cash, less or more, in comparison with the price of the slave are not taken into account in the Hukm, because they are in this case secondary and are not the primary purpose of the contract. Imam Malik relates this Hadith in Al-Muwatta` and then says: The matter is settled unanimously in our view that if the buyer stipulates the wealth of the slave then it belongs to him, whether this is cash or debt or goods, known or unknown. This applies even if the wealth owned by the slave is more than that with which he is purchased, and (10) irrespective of whether the price is cash debts or goods.(10) irrespective of whether the price is cash debts or goods.
The Hadith of Ibn Umar (may Allah be pleased with him) stating: When a person buys a palm-grove after pollination, then the fruit is Sahih Al-Bukhari, , Kitab Al-Musaqat (9) Agreed upon by both Al-Bukhari and Muslim. The text of this Hadith belongs to Al- Kitab Al-Musaqat, chapter: When the person has a right Bukhari: , chapter: When the person has a right Bukhari: Sahih Al-Bukhari of way or right to water in an orchard or palm-grove (No. 2250); and Sahih Muslim, , of way or right to water in an orchard or palm-grove (No. 2250); and Sahih Muslim , chapter: When a person sells palm-grove with fruit (No. 1543). Kitab Al-Buyu, chapter: When a person sells palm-grove with fruit (No. 1543). Kitab Al-Buyu Al-Muwatta. See Al-Muwatta. (10) See (10) 577577 Shariah Standard No. (21): Financial Paper (Shares and Bonds) (11)The Hadith conveys for the seller, unless the buyer stipulates this too.(11) for the seller, unless the buyer stipulates this too. The Hadith conveys the permissibility of an absolute stipulation on the part of the buyer for the fruit whether or not the fruit has begun to ripen despite the prohibition of the sale of fruit before it has begun to ripen, as is found in the Hadith of Jabir (may Allah be pleased with him)saying: The Messenger of Allah (peace be upon him) forbade the sale of fruit be- (12)As the fruit was secondary to the prima- fore it has begun to ripen.(12) fore it has begun to ripen. As the fruit was secondary to the prima- ry subject-matter, which was the palm-grove, it was overlooked when it would not be if it was the only subject-matter of the contract.
Among the established principles of Fiqh according to the scholars is that the secondary is subservient. One who examines the various issues flowing from this principle, and the cases structured upon the principle, will find that these principles as a group convey the meaning that the secondary thing will take the rule of the primary and will not be assigned a separate rule; it will come to be owned along with the ownership of the primary, and something that will not be overlooked separately will be overlooked when the thing is secondary. Among the cases derived from the rules are the following: a) The subservience of what has not begun to ripen to what has begun to ripen even when what is ripening is very little. It is stated as follows: The ripening of some of the Kashshaf Al-Qina as follows: The ripening of some of the in Kashshaf Al-Qina in fruit of a tree in a garden is its ripening, that is, of the tree as well as the ripening of all that falls in this category in a single garden. It becomes valid with what has begun to ripen as it is subsidiary (13) to it.(13) to it. b) The sale of a house, whose roof is painted with gold, for gold, or is b) The sale of a house, whose roof is painted with gold, for gold, or is painted with silver for silver; the sale of a sword ornamented with gold for gold; the sale of milk for milk; or a thing made of wool for wool and so on. Sahih Al-Bukhari, , Kitab Al-Musaqat Agreed upon by both Al-Bukhari and Muslim. The text of this Hadith belongs to Al- (11) Agreed upon by both Al-Bukhari and Muslim. The text of this Hadith belongs to Al- (11) Kitab Al-Musaqat, chapter: When the person has a right Bukhari: , chapter: When the person has a right Bukhari: Sahih Al-Bukhari of way or right to water in an orchard or palm-grove (No. 2250); and Sahih Muslim, , of way or right to water in an orchard or palm-grove (No. 2250); and Sahih Muslim Kitab Al-Buyu , chapter: When a person sells palm-grove with fruit (No. 1543). Kitab Al-Buyu, chapter: When a person sells palm-grove with fruit (No. 1543). Agreed upon by both Al-Bukhari and Muslim. (12) Agreed upon by both Al-Bukhari and Muslim. (12) Kashshaf Al-Qina [3: 287]; see also (13) Kashshaf Al-Qina (13) [3: 287]; see also Al-Mughni [6: 156]. Al-Mughni [6: 156]. 578578 Shariah Standard No. (21): Financial Paper (Shares and Bonds) Issuance of Bonds The basis for the impermissibility of issuing interest-bearing bonds is The basis for the impermissibility of issuing interest-bearing bonds is that they represent, in their customary nature, a loan and the meaning of a loan is applied to them in their nature according to the Shariah. As each loan that yields a benefit is Riba, and the issuance of bonds is based upon loans with interest, their issuance is prohibited according to the upon loans with interest, their issuance is prohibited according to the Shariah. Dealing in (Negotiation of) Bonds The basis for the impermissibility of dealing in bonds is what has been impermissibility of dealing in bonds is what has been The basis for the settled with respect to their issuance due to their being based on Riba. The reason is that the word negotiation includes the meaning of conti- nuity and the transfer of the bond from one hand to another bearing interest benefits. This means that the buyer of a bond continues to be a creditor of the issuing corporation and demands Riba for his debt. This according to the Shariah, and all dealing leading to this impermissible according to the Shariah, and all dealing leading to this is is impermissible impermissible. is is impermissible 579579 Shariah Standard No. (21): Financial Paper (Shares and Bonds) Appendix (C) Definitions Share It is the share of a shareholder in the assets of the corporation and is represented by a certificate that can be negotiated. The term share is also applied to the certificate that represents such share. Preference Shares These are shares whose bearer is accorded priority over the holder of the ordinary share in the distribution of dividends and in claiming his share in the assets of the corporation at the time of liquidation. Tamattu Shares These are shares whose holder is granted compensation for his shares that are offered for redemption during the existence of the corporation, and in exchange for this he is granted Tamattu shares that grant him the rights that belong to the holder of shares based upon capital, except in dividends and the distribution of assets a the time of its winding up, insofar as the owner of the Tamattu shares is given a share in the profits less than that given to the shares based upon capital, just as the owner of the Tamattu shares does not get a share in the assets of the corporation at the time of winding up until the owners of shares based on capital are granted the value of their shares. Futures Contract It is a contract for a specified thing, or one described as deferred liability, for a deferred prince. Option Contract It is a contract for compensation for an abstract right granting the own- er the right to sell a specified thing, or to buy it for a specified price, during 580580 Shariah Standard No. (21): Financial Paper (Shares and Bonds) a determined period, or at a fixed date, either directly or through an organ- isation that guarantees the rights of the two parties. Swap Contract It is an agreement between two parties to exchange at a subsequent date the average return on a specified share, or a group of share for the average return on a share or for another financial asset. BondBond It is a financial paper issued by trading establishments and governments in order to raise long-term loans (wealth) in lieu of interest that is paid to the bearer of the bond after periods. They are sometimes issued at a discount with respect to their face value. 581581 Shariah Standard No. (22) Concession Contracts Contents Subject PagePage ................................................................................................... Preface ................................................................................................... Preface ..................................................................... Statement of the Standard ..................................................................... Statement of the Standard ..............................................................................
Scope of the Standard ..............................................................................
Scope of the Standard .........................................................................
Definition of Concession .........................................................................
Definition of Concession ................................................
Permissibility of Concession Contracts ................................................
Permissibility of Concession Contracts
Offering the Concession Right ...............................................................
Offering the Concession Right ...............................................................
Concession Contracts for Utilization of Minerals, Water and the ................................................................. Like (Utilization Concession) ................................................................. Like (Utilization Concession)
Concession Contracts for Construction of Projects (Construction ............................................................................................... Concession) ............................................................................................... Concession) ......
Application of Utilization Concession Contracts by Institutions ......
Application of Utilization Concession Contracts by Institutions
Application of Construction Concession Contracts by Institutions . .
Application of Construction Concession Contracts by Institutions
Disposing of the Concession License..................................................... .......................................................
Management Concession Contracts .......................................................
Management Concession Contracts .............................................................
Date of Issuance of the Standard .............................................................
Date of Issuance of the Standard ...................................................................... Adoption of the Standard ...................................................................... Adoption of the Standard Appendices Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (b): The Shariah Basis for the Standard Appendix (b): ................................... The Shariah Basis for the Standard ................................... 587587 588588 589589 592592 594594 595595 596596 597597 598598 599599 601601 585585 IN THE NAME OF ALLAH, THE ALL-MERCIFUL, THE MOST MERCIFUL All praise be to Allah, the Lord of all the worlds, and blessings and peace be upon our master, Muhammad, and his household and all his companions Preface The purpose of this Standard is to indicate the rules that govern Concession Contracts for utilization of minerals, water and the likes (Utilization Concession), or construction of projects (Construction Concession), or management of government facilities and projects that provide services to the public (Management Concession). The Standard also highlights the Shariah adaptation of such contracts, as well as their underlying procedures, rights and duties. Moreover, it portrays application of Concession Contracts by Islamic financial Institutions (the Institution Institutions).(1)(1) financial Institutions (the Institution Institutions). The word (Institution/Institutions) is used here to refer, in short, to Islamic financial (1)(1) The word (Institution/Institutions) is used here to refer, in short, to Islamic financial institutions including Islamic Banks. 587587 Shariah Standard No. (22): Concession Contracts Statement of the Standard
Scope of the Standard This Standard covers the basic Shariah rulings relating to Concession Contracts for utilization, construction or management of projects, and provides guidance to Institutions on application of such contracts. It does not cover legal or consensual concession rights, which are subsidiary rights. This standard does not cover franchises as it should be dealt with by a separate standard.
Definition of Concession Concession in this context refers to the act of an authorized party granting another party the right of utilizing, constructing or managing a project for agreed upon consideration.
Permissibility of Concession Contracts 3/1 The concession contracts described in this Standard are permissible, as set out in the Shariah rulings, unless those contracts comprise an element that does not conform to the rules and principles of Islamic Shariah. Such contracts are considered to be among the devices that facilitate realization of public interest or the interests pursued by the two contracting parties. 3/2 There is no Shariah objection to taking on the procedures required to the offering of concession rights against specific fees or any compensation stipulated in the contract, unless the deal constitutes an element of Riba (usury), Gharar (uncertainty), or any other Shariah-banned practices.
Offering the Concession Right When offering concession rights, due consideration should be given to justice, equality of chances, and realization of public interest. 588588 Shariah Standard No. (22): Concession Contracts
Concession Contracts for Utilization of Minerals, Water and the Like (Utilization Concession): 5/1 Definition of utilization concession contracts A Utilization Concession contract is an agreement between the State and a natural or legal person (Institution) according to which the latter becomes the sole owner of the right of extracting and producing the minerals, water or any other object in question against a specific remuneration, as is shown in item 5/3 below. 5/2 Formal procedures of utilization concession 5/2/1 Granting a survey license The State has the right to require natural or legal persons to obtain permission (license) before conducting survey in a certain area against payment of a specific amount of fee or rent to the State. Such a license does not grant its holder the right of the sole surveyor in that area nor does it grant him the right to conduct works relating to extraction through mining and construction of the required facilities. 5/2/2 Granting exploration licenses The State has the right to require natural or legal persons to obtain permission (license) before conducting exploration in a certain area for a certain period against payment of a specific amount of fee or rent to the State. Such exploration license may entitle its holder the right to become the sole explorer in that area and the right of conducting the works required for exploration. 5/2/3 Obtaining utilization concession The exploration licensee, after discovering the minerals, water or any object in question, becomes eligible for the exclusive right of obtaining the utilization concession in the area specified in the license, unless the license stipulates otherwise. 589589 Shariah Standard No. (22): Concession Contracts 5/2/4 If until the end of the exploration period, the holder of the exploration license (the licensee) does not discover the minerals, water or for whatever the license has been obtained then the licensee is not entitled to utilization concession at the end of that period. 5/2/5 Notwithstanding the procedural order stated in preceding para- para- 5/2/5 Notwithstanding the procedural order stated in preceding graphs, the State may offer exploration or utilization conces- directly, and without resorting to the above-mentioned sions directly, and without resorting to the above-mentioned sions procedures. 5/2/6 When the State requests a specialized body to conduct survey or exploration on its behalf, the contractual relationship becomes subject to the rulings of Ijarah and Jualah. In this case Shariah Standard No. (9) on Ijarah and Ijarah Muntahia Bittamleek, as well as Shariah Standard No. (15) on Jualah, should be referred to.to. 5/3 Shariah perspective on utilization concession contracts Utilization of minerals, water resources and the likes cannot take place without exploration, which entails an unknown amount of effort. Whereas the remuneration to which the holder of concession is entitled, is usually a well-defined lump sum amount or percentage share of the output. The Shariah classifies such contracts as a form of Jualah, where the State is the , the licensee Jail (Jualah initiator), the licensee of Jualah, where the State is the Jail (Jualah initiator) (hired party) and the specific amount to Amil (hired party) and the specific amount to Institution is the Amil Institution is the
be received by the latter is the (compensation amount). [see Jul (compensation amount). [see be received by the latter is the Jul Shariah Standard No. (15) on Jualah] 5/4 Scope of utilization concession contracts Since utilization concession contracts are concluded between the State on the one hand and natural or legal persons on the other, the following should be observed: 5/4/1 When adopting the Fiqh viewpoint that considers minerals to be the property of the State, whether such mineral have been extracted from a State-owned or a privately-owned land, 590590 Shariah Standard No. (22): Concession Contracts concession contracts may be applied to all types of lands, whether State- or privately-owned. 5/4/2 When adopting the Fiqh viewpoint that gives the right of utilization of minerals to the owner of the land or its usufruct against a fee payable to the State, the following types of lands should not become subject to concession contracts: 5/4/2/1 Privately-owned lands whether vacant or built on. 5/4/2/2 Wastelands that have been contracted for development according to the relevant Shariah stipulations and legal rulings. 5/4/2/3 Lands allotted by the State to natural or legal persons, whether through change of ownership title or for tem- porary utilization. 5/5 Requirements of obtaining the utilization concession A holder of a utilization concession is entitled to undertake all the activities required for utilization, such as establishing refineries and treatment laboratories, acquiring transportation devices and facilities, etc. The holder becomes the sole owner of such rights throughout the period of the concession license thereof. 5/6 Continuity of utilization Concession contracts usually indicate the commitment of the licensee to continue utilization as per contract or the prevailing customary practices. In case the licensee ceases utilization without a reasonable excuse, the licensee may be given a reasonable grace period to restart again and preserve utilization, otherwise the State has the right to cancel the license thereof. 5/7 Product pricing and purchase by the State 5/7/1 The State has the right to determine in advance the way in which the licensee should dispose of his share of the extracted products and the value to be paid to him taking into account public interest 591591 Shariah Standard No. (22): Concession Contracts 5/7/2 In addition to its own share in the product, the State has also In addition to its own share in the product, the State has also 5/7/2 the preemptory right of purchasing the quantities it needs from the output, according to the prevailing prices and contractual terms. 5/8 Expiry of utilization concession contracts A utilization concession contract expires at the end of its specified period, or when the two parties agree to prematurely cancel it. The contract can also be cancelled when there remains no more output to be utilized. Moreover, each of the two parties has the right to revoke the contract when the other party breaches a contractual condition or commitment. In this case the breaching party has to compensate the other party for any consequent actual damages.
Concession Contracts for Construction of Projects (Construction Con- cession) 6/1 Definition and forms of a construction concession contract 6/1/1 Definition of a construction concession contract A Construction concession contract is a contract between the State and another party according to which the latter constructs a specifically defined project usually related to public utilities. 6/1/2 Forms of construction concession contracts: Construction concession contracts may take several forms including the following: 6/1/2/1 When the licensee constructs the project according to certain specifications, on a piece of land owned by the State, and the State becomes the owner of the project, while the licensee is entitled to the usufruct of the project for a specific period. After this period, the ownership of the usufruct is transferred to the State. 6/1/2/2 When the licensee constructs the project according to certain specifications on a piece of land owned by the State, and the project and its usufructs become 592592 Shariah Standard No. (22): Concession Contracts the property of the licensee for a specific period after which the ownership of the project (and its usufruct) goes to the State. 6/1/2/3 When the licensee constructs the project according to certain specifications on a piece of land owned by the State, and the project becomes a property of the State, while the two parties agree to share the revenue for a specific period after which the project belongs to the licensee. 6/1/3 In all three cases set out in 6/1/2, the licensee becomes entitled to collection of fees or rent for provision of services to the public. 6/2 Shariah perspective on construction concession contracts: Construction concession contracts vary with regard to their Shariah adaptation, according to the following conditions: 6/2/1 If the commitment of the licensee includes construction works as well as provision of materials, which is the predominant case, the contract is that of Istisnaa. The value of the contract is the right which enables the licensee to utilize the project for ones own benefit for a specific period before handing it over to the State. 6/2/2 If the project is constructed on a piece of land that the licensee obtained on lease from the State against handing over the project thereto after a specific period, the contract is that of Ijarah and the rent is the project itself which will be handed over to the State at the end of the contractual period. 6/3 Remuneration for construction concession contracts 6/3/1 When the remuneration for construction of the project is determined in terms of the right to utilize the project for a specific period, the contract is considered as Istisnaa against facility a price determinable in terms of utilizing the constructed facility a price determinable in terms of utilizing the constructed for a specific period before handing it over to al-Mustasni. 593593 Shariah Standard No. (22): Concession Contracts 6/3/2 If the remuneration for the construction of a project is deter- mined in terms of a certain amount of money, the licensee retains the ownership of the project to ascertain ones right to get the price through utilization of the project. Licensee has also the right of arranging a clearance deal with the licensor so that the licensee can receive the full price and hand over the project to the licensor before the end of the contract peri- od. Otherwise, the licensee keeps on utilizing the project until the receipt of the full amount agreed upon.
Application of Utilization Concession Contracts by Institutions Institutions can apply utilization concession contracts either through direct relationship with the State, or by playing an intermediary role in the contract between the State and the licensee. Application of such contracts may take place in one of the following forms: 7/1 Jualah It is possible to apply Jualah or Parallel Jualah where the licensee re- It is possible to apply Jualah or Parallel Jualah where the licensee re- ceives a specific share of the output as remuneration. 7/2 Ijarah Ijarah contract may be applied where the State gives the land on lease to the licensee for a rent payable as a predetermined share of the output. The licensee may, in turn, give the land on lease to a third the output. The licensee may, in turn, give the land on lease to a third party to establish the project thereon (sub-contracting). 7/3 Mudarabah Mudarabah may be applied where the State provides the land to the licensee to utilize it on the basis of a predetermined rate of profit sharing. The Institutions may either implement the project directly or through two-steps Mudarabah. 7/4 Musharakah In utilization concession contracts, Musharakah - whether fixed or diminishing - may be applied as follows: 7/4/1 In fixed Musharakah, the Institution contributes a share in the required capital besides the State or the party that executes the 594594 Shariah Standard No. (22): Concession Contracts concession license, and the Musharakah continues up to the end of the contracts period. 7/4/2 In diminishing Musharakah, the Institution contributes a share in the required capital, and undertakes (the Institution or the party that executes the concession license) to sell its share in the project gradually to the State.
Application of Construction Concession Contracts by Institutions Institutions may apply construction concession contracts whether through direct relationship with the State, or by entering as an intermediary party in the contract between the State and the licensee. Application of such contracts may take place in one of the following forms: 8/1 Ijarah and Ijarah Muntahia Bittamleek In this case, the licensee hires the land from the State with the aim of constructing the project thereon and presenting the project back to the State based on Ijarah Muntahia Bittamleek. The licensee may, use a sub-contract of operating or diminishing Ijarah, to rent out the land to another party to construct the project thereon. 8/2 Istisnaa Istisnaa and Parallel Istisnaa contracts may be applied where the State is al-Mustasni and the Institution becomes al-Sani (the licensee is a parallel Mustasni) and the price of the product is the income generated from the fee or rent collected from the public for provision of the services. 8/3 Musharakah In construction concession contracts Musharakah, whether fixed or diminishing, may be applied as follows: 8/3/1 In fixed Musharakah, the Institution contributes a share in the required capital besides the State or the party that executes the concession license, and the Musharakah continues up to the end of the contracts period. 595595 Shariah Standard No. (22): Concession Contracts 8/3/2 In diminishing Musharakah, the Institution contributes a share in the required capital, and undertakes (the Institution or the party that executes the concession license) to sell its share in the project gradually to the State.
Disposing of the Concession License Since the concession license is a financial right, its owner may dispose it of through selling, leasing, mortgaging, partnership or securitization according to Shariah rulings, as well as the conditions imposed by the licensor.
Management Concession Contracts 10/1 Definition of management concession contracts These are contracts between the State and other parties according to which the right of managing public utilities and providing services to the public is given against a specific price. 10/2 Shariah perspective on management concession contracts 10/2/1When the price for offering management concession is de- termined as a lump sum amount of money or a percent age of termined as a lump sum amount of money or a percentage of total income, the contract between the State and the licensee is that of Ijarah. The licensor in this case has the right to receive rent for offering the concession license, in addition to the amount/percentage of income the licensor deserves during the period of the contract. If the price of the manage- ment concession is a percentage of the profit (net income af- ter expenses and allocations), the contract between the State and the licensee becomes Mudarabah wherein the capital is the original facility or the project itself. 10/2/2 In both cases mentioned in item (10/2/1) above, the contract between the State and the projects utilizer is either that of (sale) contract, as per the nature of the activity Ijarah or BayBay (sale) contract, as per the nature of the activity Ijarah or in question. 596596 Shariah Standard No. (22): Concession Contracts 10/3 Cancellation of the management concession contract Management concession contract is a fixed-term contract. It may be rescinded by t he State when the licensee breaches a condition be rescinded by the State when the licensee breaches a condition or fails to meet ones contractual obligations. The licensee may also rescind the contract on condition that the licensee takes the measures that ascertain the provision of the services to the public. 10/4 Pricing of services It is permissible for the licensor to fix or adjust the price of the services to be delivered by the licensee in a way that leads to establi- shing justice and preservation of the interests of both the licensee and the beneficiaries. 10/5 Observation of the contracts conditions The licensor has the right to perform (directly or through depu- tation) monitoring and inspection to ascertain observation of the conditions and specifications stipulated in the contract. It has also the right to impose penalties stipulated in the contract, in case of breach of contractual obligations on the part of the licensee.
Date of Issuance of the Standard This Standard was issued on 22 Rabi I, 1426 A.H., corresponding to 2 May 2005 A.D. 597597 Shariah Standard No. (22): Concession Contracts Adoption of the Standard The Shariah Board has adopted the Standard on Concession Contracts in its meeting No. (14) held in Dubai on 2122 Rabi I, 1426 A.H., corresponding to 30 April 2 May 2005 A.D. 598598 Shariah Standard No. (22): Concession Contracts Appendix (A) Brief History of the Preparation of the Standard The Shariah Board decided in its meeting No. (7) held on 913 Ramadan 1422 A.H., corresponding to 2428 November 2001 A.D., in Makkah Al -Mukarramah to issue a Shariah Standard on Concession Contracts. On 12 Jumada I 1423 A.H., corresponding to 22 July 2002 A.D., the Shariah Standards Committee decided to commission a Shariah consultant to prepare a draft standard on concession contracts. In its meeting No. (5) the Shariah Standards Committee (2) held on 1 Rajab 1423 A.H., corresponding to 8 September 2002 A.D., in the Kingdom of Bahrain, the committee discussed the Shariah study and advised the consultant to introduce the necessary amendments, in light of the discussions and observations of its members. In the joint meeting of the Shariah Standards Committees (1) and (2) on 21 January 2004 A.D., held for discussing the observations made in the public hearing that had been convened on the same day in the Kingdom of Bahrain, the committee discussed the draft standard on concession contracts and introduced necessary changes. The committee also requested the consultant to review the document in light of the discussion and comments of its members. The committee once again discussed the draft standard in its meeting in Dubai on 28 Rabi I, 1425 A.H., corresponding to 16 June 2004 A.D., and made further changes therein. The revised draft of the standard was then submitted to the Shariah Board in its meeting No. (3) held in Makkah Al-Mukarramah on 26-30 Shaban 1425 A.H., corresponding to 1014 October 2004 A.D. The Board 599599 Shariah Standard No. (22): Concession Contracts made some changes on the document and decided to present it to some experts for their comments before discussing it later in the public hearing. A public hearing was held in the Kingdom of Bahrain on 15 Safar 1426 A.H., corresponding to 25 March 2005 A.D. and attended by more than 35 participants representing central banks, Institutions, accounting firms, Shariah scholars academics and other concerned parties. Several comments were made before and after the public hearing. Some members of the Shariah Standards Committees (1) and (2) responded to the queries raised during the session. In the meeting of the Shariah Standards Committees (1) and (2), held in the Kingdom of Bahrain on 15-16 Safar 1426 A.H., corresponding to 25-26 March 2005 A.D., the comments made during the public hearing were discussed and some appropriate changes were made. The Shariah Board convened its meeting No. (14) on 2123 Rabi I, 1426 A.H., corresponding to 30 April 2 May 2005 A.D., in Dubai (U. A. E) and adopted the Standard. 600600 Shariah Standard No. (22): Concession Contracts Appendix (B) The Shariah Basis for the Standard Concession for Utilization of Minerals The right of the State to regulate survey or exploration of minerals, water The right of the State to regulate survey or exploration of minerals, water and the like by offering exclusive rights of utilization, stems from the fact that such an act by the State leads to realization of public interest and prevention of disputes. This reasoning is adopted by the fuqhaa who argue that development of wasteland requires State permission. The basic assumption here, knowingly, is that when the State disposes of public property, its act is supposed to be that of serving the cause of public interest, which should always surpass private interest. The distinction between survey on the one hand, and exploration and The distinction between survey on the one hand, and exploration and concession on the other, and the fact that only the latter two can enable the licensee to have the exclusive status as a contractor, stems from the fact that survey is based on mere expectation, while exploration is like (retention) in wasteland development, which usually precedes Tahjir (retention) in wasteland development, which usually precedes Tahjir utilization. Thus, offering the exclusive right to the explorer can be based on the saying of the Prophet (peace be upon him): Whom who develops on the saying of the Prophet (peace be upon him): Whom who develops a piece of wasteland shall become its owner.(2)(2) a piece of wasteland shall become its owner. The ruling that gives the one who discovers the minerals the priority The ruling that gives the one who discovers the minerals the priority in utilizing them is extracted from the fact that exploration resembles wasteland development, which entitles to ownership of the developed land. The alternate viewpoint of the Maliki School, which considers minerals The alternate viewpoint of the Maliki School, which considers minerals as the property of (treasury) even when discovered in a pri- Bayt al-Mal (treasury) even when discovered in a pri- as the property of Bayt al-Mal vate land, leans towards the fact that no body, the landlord included, can claim the honor of bringing these minerals into being. Putting the mi- (2)(2) This Hadith has been Related by Al-Bukhari in his This Hadith has been Related by Al-Bukhari in his Sahih Publications, 1378 A.H. [3: 139], Al-Shaab Sahih [3: 139], Al-Shaab 601601 Shariah Standard No. (22): Concession Contracts nerals at the disposal of the State, therefore, does not leave any room for dispute between the property owner and the one who discovers the minerals. The viewpoint of the majority of the Fuqaha, including the Maliki School, The viewpoint of the majority of the Fuqaha, including the Maliki School, that the minerals are the property of the landowner, focuses on their pers- pective that deems land ownership as underground resources. Moreover, the fact that the imposed on land is one fifth indicates that the Kharaj imposed on land is one fifth indicates that the the fact that the Kharaj remaining four fifths are the property of the landowner. Eligibility of the holder of the concession for utilization of minerals to Eligibility of the holder of the concession for utilization of minerals to other rights pertaining to production and transportation devices is due other rights pertaining to production and transportation devices is due to the fact that such rights constitute the complementary requirements. This reasoning also holds true for eligibility of the licensee to the easement rights pertinent to ones license. The condition that the licensee should sustain the activity in question The condition that the licensee should sustain the activity in question originates from the Shariah ruling on the case of a person who retains a piece of wasteland for a period of time without developing it. In this connection it has been narrated that Caliphate Umar Ibn Al-Khattab said: When somebody develops a piece of wasteland that had been left for three years undeveloped by its original owner, the land becomes the property of the developer(3)(3) property of the developer Eligibility of the State to purchase the quantity it requires from the output Eligibility of the State to purchase the quantity it requires from the output of the project is justifiable by the need to realize public interest without of the project is justifiable by the need to realize public interest without harming the licensee, since purchasing takes place according to the procedures and conditions available to other clients. With regard to the right of the State to fix the price of the product, the justification is hinged on the need to prevent social injury that could result from charging unduly high prices by licensee. The State is given the right of amending concession contracts for mine- The State is given the right of amending concession contracts for mine- rals when necessary, because the acts of the State are normally considered to be in pursuance of public interest, which should always surpass private interest. (3)(3) Related by Abu Yusuf in Related by Abu Yusuf in Al-Kharaj that this Hadith has been narrated by reliable people. Al-Dirayah that this Hadith has been narrated by reliable people. Al-Dirayah (P. 61), Dar Al-Maarif edition. Al-Hafiz said in Al-Kharaj (P. 61), Dar Al-Maarif edition. Al-Hafiz said in 602602 Shariah Standard No. (22): Concession Contracts Concession for Construction of Projects Project construction contracts are permissible because they come under Project construction contracts are permissible because they come under commitments that should be honored by virtue of the divine ordain of (fulfill (all) obligations)(4)(4) and also Allah, Exalted be He, Who says: (fulfill (all) obligations) Allah, Exalted be He, Who says: and also Muslims honor all their the Hadith of the Prophet (peace be upon him): Muslims honor all their the Hadith of the Prophet (peace be upon him): obligations except those which permit prohibited deeds or prohibit permitted deeds(5)(5) deeds Permissibility of remunerating the licensee by allowing him to benefit Permissibility of remunerating the licensee by allowing him to benefit from the project before handing it over to the licensor, relates to the fact that in Istisnaa, temporary benefiting from the product may constitute the price of its production. That is to say, the price can be either money or usufruct including that of the product in question. This viewpoint has been confirmed by a similar resolution of the Al Baraka Seminar.(6)(6) The been confirmed by a similar resolution of the Al Baraka Seminar. The other viewpoint referred to in this Standard is that the price should be fixed first, and then the licensee is given the chance to utilize the project until he gets the remuneration agreed upon, regardless of any specific period of time. The basis for this viewpoint is that a predetermined period may not be sufficient for getting the full price. This viewpoint, therefore, seems to visualize the relationship between the State and the Institution as a management relationship, as well as a clearance arrangement with regard to the price to be paid and the period of utilization. Permissibility for Institutions to enter into concession contracts with Permissibility for Institutions to enter into concession contracts with the State directly or as intermediaries is clear because they do this in a permissible contractual form such as Jualah, Mudarabah, Musharakah, Istisnaa and Ijarah. All these contractual forms are permissible whether performed directly or though entering as an intermediary between the State and the other original party to the contract. [Al-Maidah (The Table): 1] (4)(4) [Al-Maidah (The Table): 1] (5)(5) Narrated by several companions of the Prophet (peace be upon him) and quoted by: Narrated by several companions of the Prophet (peace be upon him) and quoted by: Ahmad [1: 312], Ibn Majah [2: 784], Mustafa Al-Babi Al-Halabi, Cairo, 1372 A.H./1952 A.D.); Al-Hakim (Hyderabad Publications, India, 1355 A.H.); Al-Bayhaqi [6: 70 and 156], [10: 133], Hayderabad Publications, India, 1355 A.H.); Al-Daraqatni [4: 228], [3: 77], Dar Al-Mahasin, Cairo, 1372 A.H./ 1952 A.D.). Resolutions and Recommendations of the 17thth Seminar of Al Baraka, Resolution No. Seminar of Al Baraka, Resolution No. (6)(6) Resolutions and Recommendations of the 17 13/2, (P. 220). 603603 Shariah Standard No. (22): Concession Contracts Management Contracts Permissibility for the State to offer concession licenses for management Permissibility for the State to offer concession licenses for management of public utilities is justified by the fact that the State has the right of regu- lating such facilities and collecting fees, and therefore it can transfer this right to a second party. The management contract in this case is Ijarah and the government has the right of identifying the lessee on the ground of common interest. Permissibility of fixing the contracts value in terms of money is that the Permissibility of fixing the contracts value in terms of money is that the deal is considered as Ijarah, and determination of the contracts value as a specific share of the projects income could embody uncertainty ( Jahalah) ) a specific share of the projects income could embody uncertainty (Jahalah pertaining to the possibility of realizing the agreed upon amount during the contracts period. The relationship between the State and the licensee, in this sense, is considered as an Ijarah deal. If such relationship is consi- dered as Mudarabah, the basis for determination of the contracts value will become a given share of the projects profit, which can be determined only after preservation of the projects capital, which is the managed asset in this case. The Hanbalis permit Mudarabah on income-generating as- sets like animals. The reason behind the justification for sharing the net profit after allocations is the preservation of the projects capital. Permissibility for licensor to rescind the contract when the other party Permissibility for licensor to rescind the contract when the other party breaches a condition or fails to fulfill an obligation is derived from the commitment of Muslims to honor contractual obligations according to the Hadith of the Prophet (peace be upon him) stating: Muslims shall honor Hadith of the Prophet (peace be upon him) stating: Muslims shall honor their obligations(7)(7) their obligations (7)(7) Narrated by several companions of the Prophet (peace be upon him) and quoted by: Narrated by several companions of the Prophet (peace be upon him) and quoted by: Ahmad [1: 312], Ibn Majah [2: 784], Mustafa Al-Babi Al-Halabi, Cairo, 1372 A.H./1952 A.D.); Al-Hakim (Hyderabad Publications, India, 1355 A.H.); Al-Daraqatni [4: 228] and [3: 77], Dar Al-Mahasin, Cairo, 1372 A.H./ 1952 A.D.). 604604 Shariah Standard No. (23) Agency and the Act of an Uncommissioned Agent (Fodooli) Contents Subject ................................................................................................... Preface ................................................................................................... Preface ..................................................................... Statement of the Standard ..................................................................... Statement of the Standard ..............................................................................
Scope of the Standard ..............................................................................
Scope of the Standard .......................................................................................................
Agency .......................................................................................................
Agency .........................................................
Conditions on the Agency Parties .........................................................
Conditions on the Agency Parties ........................................................................................
Types of Agency ........................................................................................
Types of Agency .....................................
Commitments of the Principal and the Agent .....................................
Commitments of the Principal and the Agent Stipulations on the Agent ....................................................................
1. Stipulations on the Agent .................................................................... ......................................................................................
Expiry of Agency ......................................................................................
Expiry of Agency ........................................
Act of an Uncommissioned Agent (Fodooli) ........................................
Act of an Uncommissioned Agent (Fodooli)
Date of Issuance of the Standard............................................................. ...................................................................... Adoption of the Standard ...................................................................... Adoption of the Standard Appendices Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (b): The Shariah Basis for the Standard Appendix (b): ..................................... The Shariah Basis for the Standard ..................................... PagePage 609609 610610 612612 613613 616616 617617 619619 620620 621621 622622 624624 607607 IN THE NAME OF ALLAH, THE ALL-MERCIFUL, THE MOST MERCIFUL All praise be to Allah, the Lord of all the worlds, and blessings and peace be upon our master, Muhammad, and his household and all his companions Preface The purpose of this Standard is to clarify the Shariah rulings that govern the activities of Islamic financial Institutions (Institution/Institutions)(1)(1) in the activities of Islamic financial Institutions (Institution/Institutions) in appointing agents or becoming agents of others, whether in arranging contracts and disposing of property, or undertaking procedural tasks, or managing/ investing funds. The Standard also indicates the underlying conditions of Agency, elaborates on its various forms, spells out its repercussions, and outlines the responsibilities of both the Principal and the Agent. Moreover, the Standard aims to embark upon the Act of an Uncommissioned Agent Fodooli and the Shariah rulings thereon. The word (Institution/Institutions) is used here to refer, in short, to Islamic financial (1)(1) The word (Institution/Institutions) is used here to refer, in short, to Islamic financial institutions including Islamic Banks. 609609 Shariah Standard No. (23): Agency and the Act of an Uncommissioned Agent (Fodooli) Statement of the Standard
Scope of the Standard This Standard covers agency and the acts of an uncommissioned agent in This Standard covers agency and the acts of an uncommissioned agent in concluding contracts on financial transactions (such as sale, Ijarah and compensatory reconciliation), disposing of assets, providing services and conducting practical acts such as receipt, payment and delivery. The Standard also covers areas such as fund management, real estate and investment agency. However, it does not cover agency and the act of an uncommissioned agent in several other affairs of life such as worshipping (like Zakah, for which there is a separate standard), personal affairs, penalty affairs, legal prosecution/advocacy, and documentary credits (which have also been dealt with in a separate standard).
Agency 2/1 Definition, permissibility and characteristics of agency 2/1/1 Agency is the act of one party delegating the other to act on its behalf in what can be a subject matter of delegation and it is, its behalf in what can be a subject matter of delegation and it is, thus, permissible. 2/1/2 Agency is, basically, a non-binding contract for both the parties thereto. However, it may sometimes become a binding contract. [see 3/4 below] 2/2 Basic elements of agency 2/2/1 The basic elements of agency include the form, the subject matter of agency, and the two parties to the contract (the principal and the agent). 2/2/2 The form of agency comprises any act that customary prac- 2/2/2 The form of agency comprises any act that customary prac- tices traditionally consider a delegation of the right to acting by someone on behalf the other. Such delegation comprises of 610610 Shariah Standard No. (23): Agency and the Act of an Uncommissioned Agent (Fodooli) offer and acceptance which has no standard form of wording and may be expressed through utterance of words, writing, messaging or gesture. In accepting non-paid agency, silence is also considered as sufficient acceptance, while a negative re- sponse is indicative of rejection of agency. 2/2/3 Agency may take place in any of the following forms: 2/2/3/1 Immediate Agency, as usually the case, where the contract becomes effective as soon as it is entered into. 2/2/3/2 Conditional Agency: where the validity of the contract is made subject to fulfillment of a certain condition, for instance when a debtor agrees to put his own assets under the management of his creditor in case of default. 2/2/3/3 Future Agency: where the contract becomes valid only at a specific date in the future. 2/2/3/4 Agency, whether free or limited, shall be subject to specific conditions. In case of free agency, consideration should be given to customary practices, interest and the state of the principal. 2/2/4 While conditionality and limitation may be resorted to in concluding agency contracts, they may also be confined to the disposal of the subject matter of agency. In this case, though the agency contract is immediately effective, disposal is made subject to the fulfillment of a specific condition, such as re- sorting back to the principal before disposal. The conditions set by the principal should be observed such as offering him a guarantee or lien. 2/2/5 The subject matter of agency is for what the contract is entered into. [see item 3/3] 2/2/6 The two parties to the contract are the principal and the agent. [see items 3/1 and 3/2] 611611 Shariah Standard No. (23): Agency and the Act of an Uncommissioned Agent (Fodooli)
Conditions on the Agency Parties 3/1 Conditions on the principal 3/1/1 The principal should possess legal capacity to enter into con- tract. 3/1/2 The principal should have the right to dispose of the asset in question. Agency, therefore, is not acceptable from a legally incapable person like a lunatic or an indiscriminating minor. A partially capable person, such as a discriminating minor, may appoint an agent for matters that result in absolute benefit to him, such as accepting donations from others, but he cannot appoint an gent in harmful matters like making donations. In acts that may be harmful or useful, such as buying and selling, a partially capable person may appoint an agent, but the acts of that agent remain pending the approval of the principals guardian or whosoever enjoys the similar right on behalf of the principal. 3/2 Conditions on the agent 3/2/1 The agent should have full legal capacity, because a lunatic or an indiscriminating minor cannot become an agent. A dis- criminating minor may become an agent, provided that all the contractual commitments are the sole responsibility of principal. 3/2/2 The agent should be aware of his status as an agent. When somebody acted on behalf of another and later on, the former comes to know that he is an agent of the latter, the preceding act does not fall under the agency contract. If, however, he does so with the intention of performing the act regardless of agency, the case should be subjected to the rules governing the act of an uncommissioned agent (Fodooli act of an uncommissioned agent ( ). [see item 8] Fodooli). [see item 8] 3/3 Conditions on the subject matter of agency 3/3/1 The subject matter of agency should be known to the agent. (unknowability) that does not lead to Jahalah (unknowability) that does not lead to However, minor Jahalah However, minor 612612 Shariah Standard No. (23): Agency and the Act of an Uncommissioned Agent (Fodooli) dispute, or temporary uncertainty, may be dispensed with. It can also be overlooked when, in absolute agency, the principal authorizes the agent to channel the funds in any form of investment. Nevertheless, the agent should observe the interest of the principal, as well as the norms and customary practices if necessary. 3/3/2 It should be owned by the principal, or he has the right of deposing thereof. 3/3/3 It should be something that can be disposed of through agency. This includes all types of financial contracts and dealings that a person can perform personally. Any contract that a person is permitted by Shariah to be involved in personally can be performed through agency. It should not involve a Shariah-banned practice, like trading in impermissible commodities or committing usurious lending.
Types of Agency 4/1 Agency may take the following forms: 4/1/1 Specific versus general agency. General agency includes all methods of disposing of assets provided that the interest of the principal and the customary practices are well observed. Disposal of assets here does not include making donations, unless the principal authorizes the agent to do so. 4/1/2 Limited versus absolute agency. Absolute agency is bound by by customary practices and the interest of the principal. It is customary practices and the interest of the principal. It is not permissible in absolute agency to sell at less or buy at more than the market price, nor is it permissible to perform barter and deferred payment sales, except with the prior consent of principal. 4/1/3 Paid versus non-paid agency. [see item 4/2] 4/1/4 Binding versus non-binding agency. [see item 4/3] 4/1/5 Temporary versus continuous agency. [see item 4/4] 613613 Shariah Standard No. (23): Agency and the Act of an Uncommissioned Agent (Fodooli) 4/2 Paid agency 4/2/1 Paid agency is permissible in Shariah, whether remuneration is is 4/2/1 Paid agency is permissible in Shariah, whether remuneration explicitly stipulated in the contract or ascertained in accordance with the customary practices, as when the agent doses provide such service except for remuneration. 4/2/2 When agency is paid, it falls under the Shariah rulings on Ijarah. [see item 4/3] 4/2/3 The amount payable as remuneration for agency should be known, whether in lump sum or as a share of a specific amount of income. It may also be defined in terms of an amount of income to be known in the future, as when remuneration is linked to an indicator that may be quoted at the beginnings of different intervals of time. However, it is not permissible to leave remuneration for agency undetermined and allow the agent to take an unspecified share from the entitlements of the principal. 4/2/4 When remuneration for agency is not specified, it may be measured in terms of the prevailing market rate for similar effort. 4/2/5 Remuneration for agency may be any gain in excess of a specific amount of output of the operation, or a share of the output. 4/2/6 A certain share of the output may be added to the specific re- muneration of the agent, as a motivation. 4/2/7 When the agent, for no reasonable excuse, refrains from car- rying on agency that he has been paid for, and the work he has done was beneficial, he becomes entitled to the remuneration commensurate with the part of work done, and within the limits of the contract value for that part of work. The agent in this case is bound to indemnify the principal for any actual loss resulting from his refusal to continue the work. When the principal, for no reasonable excuse, forces the agent to discontinue the work before the end of the agency period, 614614 Shariah Standard No. (23): Agency and the Act of an Uncommissioned Agent (Fodooli) the agent becomes entitled to the full remuneration agreed upon. When the principal, for a valid reason, forces the agent to dis- continue the work before the end of the contract, the agent becomes entitled to remuneration for that part of work he has already performed. 4/2/8 Damage of the subject matter of agency does not relieve the principal from paying remuneration to the agent for the part of the work the latter has already performed. When the damage occurs because of misconduct or negligence of the agent, he is bound to indemnify the principal for it. 4/3 Binding agency Agency is, basically, not binding, because each of the two parties has the right to revoke the contract without denying its effects that may continue after revocation. However, agency becomes binding in the following cases: 4/3/1 When it involves rights of others, as when the mortgagor ap- points the mortgagee as an agent, or when the mortgagor is authorized to seize the mortgaged asset or sell it on maturity. Agency in the latter case is binding to the mortgagor (the debt- or). A further example of binding agency is a case when the owner of an income-generating asset assigns the collection of his entitlements to an agent manager. 4/3/2 When agency is a paid agency. [see item 4/2] 4/3/3 When the agent commences tasks that cannot be discontinued or phased out without causing injury to him or to the princi- pal. Agency in this case remains binding until it is possible to suspend the work, or phase it out without causing injury to any of the two parties. 4/3/4 When the principal or the agent undertakes not to revoke the contract within a certain period. 615615 Shariah Standard No. (23): Agency and the Act of an Uncommissioned Agent (Fodooli) 4/4 Temporary agency 4/4/1 Basically, agency has no time limit beyond which the contract becomes no longer valid, because the agent can be terminated at any time. The two parties, however, may agree on a certain period after which the agency becomes invalid without a request from any of them to revoke the contract. 4/4/2 The effect of specification of a time limit for agency is con- fined to restrain the agent from commencing new operations subsequently. 4/4/3 Unless the contract stipulates otherwise, the agent may com- mence new operations during the contract period even if the effects of such operations will succeed the period of the con- tract.
Commitments of the Principal and the Agent 5/1 Commitments of the principal 5/1/1 In contract of procurement agency, the price and other expenses should be borne by the principal. Besides the price of purchased commodity, the principal should reimburse the agent expenses such as those of transportation, storage, taxation, maintenance and insurance. In paid agency, such expenses should not be stated in the contract as payable by the agent now or in the future. 5/1/2 In paid agency, the principal should pay the agent the amount of remuneration agreed upon in the contract. [see item 4/2] 5/2 Commitments of the agent The agent is considered as a trustee in holding the asset in question, and therefore, he is not bound to indemnify the principal for that asset in case of damage. He shall be held responsible for indemnity only when the damage results from his own misconduct, negligence or breach of terms or stipulations of the contract. Breach of contract for this purpose does not include acts that serve the interest of the 616616 Shariah Standard No. (23): Agency and the Act of an Uncommissioned Agent (Fodooli) principal, like selling at a higher or buying at a lower price. In this regard, Shariah Standard No. (5) on Guarantees indicates under item 2/2/2 the following: It is not permissible to combine agency and personal guarantees in one contract at the same time (i.e. the same party acting in the capacity of an agent on one hand and acting as a guarantor on the other hand), because such a combination conflicts with the nature of these contracts. In addition, a guarantee given by a party acting as an agent in respect of an investment turns the transaction into an interest-based loan, since the capital of the investment is guaranteed in addition to the proceeds of the investment, (i.e. as though the investment agent had taken a loan and repaid it with an additional sum which is tantamount to Riba). But if a guarantee is not stipulated in the agency contract and the agent voluntarily provides a guarantee to his principals independently of the agency contract, the agent becomes a guarantor in a different capacity from that of agent. In this case, such an agent will remain liable as guarantor even if he is discharged from acting as agent.
Stipulations on the Agent 6/1 Performing deals with ones self and relatives 6/1/1 When an agent conducts deals with his ascendant or descendant relatives, who are neither under his guardianship, nor are the agents spouse, the deal is permissible unless it encompasses injustice or favoritism. In case of deals that involve relatives who are under the guardianship of the agent, or deals that involve the agents spouse, the agent should obtain the consent of the principal. 6/1/2 An agent should not conduct deals with his own self or with his son/daughter who is still under his guardianship, or with ) in the same contract. Sharik) in the same contract. his partner (Sharik his partner ( 6/1/3 The agent should not act for both parties to the contract. 6/1/4 An agent may purchase what he has bought for the principal, by way of offer and acceptance. The deal should be concluded 617617 Shariah Standard No. (23): Agency and the Act of an Uncommissioned Agent (Fodooli) in such a way that the guarantees stemming from the agency contract and the sale contract are kept separate. After the completion of the conclusion of the sale contract, the commodity becomes under the guarantee of the purchaser/agent. [see Shariah Standard No. (8) on Murabahah item 3/1/5] 6/2 Monitoring of the provisions and rights of the contract Monitoring the provisions of contract is the responsibility of principal, whereas monitoring the activities stipulated in the contract (except donations that should be assigned to the principal) is the responsibility of agent. Nevertheless, the principal, by virtue of ownership, may pursue the agents activities. 6/3 Breach of contract stipulations 6/3/1 When the agent breaches the contract in a way that does not serve the interest of the principal, the latter is free to maintain the contract or declare it invalid. Breach of the contract on the part of the agent may relate to the subject matter of agency or part thereof, the price, on spot or deferred payment, possession (purchase), or transfer of ownership (sale). [see items (8) and 5/2]5/2] 6/3/2 When the agent breaches the contract by purchasing at a price that exceeds both the market price and the price set forth by the principal, he should compensate the principal for the difference between the purchase price and the market price. Similarly, if the breach is by selling at less than the price specified by the principal, compensation should be for the difference between the selling price and the market price. Hence, the case here is similar to what happens in Mudarabah or investment agency whereby selling is stipulated to take place for a profit not less than a specified proportion. And hence, the agent (or the Mudarib) doesnt guarantee that proportion, but his guarantee is limited to any amount less than the price of a similar fungible good. 618618 Shariah Standard No. (23): Agency and the Act of an Uncommissioned Agent (Fodooli) 6/4 Appointing a sub-agent The agent has no right to appoint a sub-agent except with the permis- sion of the principal. Once a sub-agent is appointed, his termination does not spontaneously follow the termination of the first agent, but the principal can terminate him. 6/5 Appointing more than one agent When more than one agent are appointed in the same contract, none of them should become the sole decision-maker unless with the authorization of principal. If they have been appointed by separate contracts, each of them has the right to discharge their responsibilities independently, unless the principal requires joint action from them.
Expiry of Agency 7/1 The agency contract expires in the following cases: 7/1/1 The contract expires when the principal or the agent dies or loses legal capacity or when the Institution undergoes bankruptcy or liquidation. 7/1/2 When the principal terminates the agent or the latter resigns. In case of termination, the principal has to inform the agent [see item 4/2/7], for compensation of loss resulting from refusal by the agent to continue the work, or forced discontinuation of work imposed by the principal before the expiration of contract or agency term, in regard to the consequent remuneration or damage compensation. 7/1/3 When the agent completes the work assigned to him in fixed- task agency or the principal performs the task in question. 7/1/4 When the principal no longer owns the asset in question or the principal has lost the right of disposing thereof. Agency also expires if the principal has performed the work, or the subject matter of agency no longer exists. 7/1/5 At the occurrence of the incidence that has been stipulated for ipso facto expiry of the agency. 619619 Shariah Standard No. (23): Agency and the Act of an Uncommissioned Agent (Fodooli) 7/1/6 At the expiry of the contract term in temporary agency. In this case, the contract may be extended to the required term when necessary. [see item 4/3] 7/2 Interminable agency remains effective even after the death of the 7/2 Interminable agency remains effective even after the death of the principal or liquidation of the Institution. It continues up to the end of the subject matter of agency.
Act of an Uncommissioned Agent (Fodooli) 8/1 An uncommissioned agent (Fodooli) is a person who discharges (in the absence of any need or urgency) the affairs of others without being an agent or having a right to do so by virtue of Shariah. The deal becomes subject to the rulings on the Fodooli, even when the acts of a real owner makes him appear an agent. 8/2 The approval or denial of a contract concluded by an uncommissioned agent is subject to the discretion of the owner. Approval of such contract by the owner should also precede revocation of the contract by either of the two parties; otherwise, a new contract has to be initiated. If the owner of the property does not approve the act of the uncommissioned agent, the act becomes binding to the latter, if he did not declare at the time of signing the contract that he had no authority. 8/3 The rulings on the uncommissioned agent are applicable to all financial contracts, including compensatory contracts like sale, purchase, rent and hiring contracts, donations by way of gift, and investment agency contracts. 8/4 When the owner of the asset approves the act of the uncommissioned agent, the contract becomes effective, and subject to all rulings on agency. The approval shall be retroactively effective, based on the date of such an act.
Date of Issuance of the Standard This Standard was issued on 23 Rabi I, 1426 A.H., corresponding to 30 April 2005 A.D. 620620 Shariah Standard No. (23): Agency and the Act of an Uncommissioned Agent (Fodooli) Adoption of the Standard The Shariah Board adopted the Shariah Standard on Agency and the Act of An Uncommissioned Agent in its meeting No. (14) held in Dubai on 21 22 Rabi I, 1426 A.H., corresponding to 30 April 2 May 2005 A.D. 621621 Shariah Standard No. (23): Agency and the Act of an Uncommissioned Agent (Fodooli) Appendix (A) Brief History of the Preparation of the Standard The Shariah Board decided in its meeting No. (10), held on 27 Rabi I, 1424 A.H., corresponding to 38 May 2001 A.D., in Al-Madinah Al- Munawwarah to issue a Shariah Standard on Agency and the Act of Uncommissioned Agent. On 17 Shaban 1423 A.H., corresponding to 13 October 2002 A.D., the Shariah Standards Committee decided to commission a Shariah consultant to prepare a draft standard on Agency and the Act of Uncommissioned Agent. In its meeting No. (10) held on Friday and Saturday 26-27 Safar 1425 A.H., corrsponding to 16-17 April 2004A.D., in the Kingdom Of Bahrain, the Shariah Standards Committee (2) discussed the Shariah study and advised the consultant to make necessary changes in light of the discussions and observations of its members. In its meeting No. (11) In its meeting held on Wednesday 28 Rabi II, 1425 A.H., No. (11) held on Wednesday 28 Rabi II, 1425 A.H., corrsponding to 16 June 2004 A.D., in Dubai (U.A.E), the Shariah Standards Committee (2) discussed the draft Standard on Agency and the Act of Uncommissioned Agent (Fodooli) and introduced some changes thereto in light of the discussions and observations of the members. Once again, the committee discussed the draft standard in its meeting held on 2425 Rajab 1425 A.H., corresponding to 9-10 September 2004 A.D., and made further changes in light of the discussions and observations of its members. The revised draft of the standard was then submitted to the Shariah Board in its meeting No. (13) held in Makkah Al-Mukarramah on 26-30 622622 Shariah Standard No. (23): Agency and the Act of an Uncommissioned Agent (Fodooli) Shaban 1425 A.H., corresponding to 1014 October 2004 A.D. The Board made some changes in the document and decided to send the amended document to a number of experts for their comments before discussing it in a public hearing. A public hearing was held in the Kingdom of Bahrain on 15 Safar 1426 A.H., cooresponding to 25 March 2005 A.D., and attended by more than 35 participants representing central banks, financial Institutions, accounting firms, Shariah scholars, academics and other concerned parties. Several comments were made before and after the public hearing. Some members of the Shariah Standards Committees (1) and (2) responded to the quires made during the session. In the meeting of the Shariah Standards Committees (1) and (2), held in the Kingdom of Bahrain on 15-16 Safar 1426 A.H., corresponding to 25- 26 March 2005 A.D., the comments made during the public hearing were discussed and some changes were made to the document. The Shariah Board convened its meeting No. (14) The Shariah Board convened its meeting on 2123 Rabi I, 1426 No. (14) on 2123 Rabi I, 1426 A.H., corresponding to 30 April - 2 May 2005 A.D., held in Dubai (U.A.E) and adopted the Standard. 623623 Shariah Standard No. (23): Agency and the Act of an Uncommissioned Agent (Fodooli) Appendix (B) The Shariah Basis for the Standard Permissibility of agency by Shariah is demonstrated in the noble Quran, Permissibility of agency by Shariah is demonstrated in the noble Quran, (...So send one of you with this silver where Allah, Exalted be He, says: (...So send one of you with this silver where Allah, Exalted be He, says: coin of yours to the town, and let him find out which is the good lawful food...).(2)(2) Similitude of this incidence to agency is that the one who was food...). Similitude of this incidence to agency is that the one who was sent to the town to buy the food was the agent of the others.(3)(3) In Sunnah, In Sunnah, sent to the town to buy the food was the agent of the others. a Hadith was narrated by Urwah Al-Bariqi (may Allah be pleased with him) who said that the Prophet (peace be upon him) had given him one dinar to purchase a sacrificial sheep for the Prophet,(4)(4) an incidence that an incidence that dinar to purchase a sacrificial sheep for the Prophet, involves agency. As regards to Ijma ( ), the author of consensus of Fuqaha), the author of involves agency. As regards to Ijma (consensus of Fuqaha the and others have demonstrated permissibility Al-Bahr Al-Zakhkhar and others have demonstrated permissibility the Al-Bahr Al-Zakhkhar of agency. Also, in common sense agency is well demonstrated in terms of the help of others that one may sometimes need, especially for things that he cannot do himself.(5)(5) that he cannot do himself. Permissibility of initiating agency in any wording which indicates initiation Permissibility of initiating agency in any wording which indicates initiation thereof is based on the fiqh principle that What matters in contracts are intentions and meanings rather than wording and constructions. Therefore, whatever indicates delegation, which is the essence of agency, is acceptable for initiating the contract. The underlying reason for consideration of silence as acceptance in case of non-paid agency is that acceptance in this case is considered to have been given implicitly(6)(6). Effectiveness of the agency case is considered to have been given implicitly . Effectiveness of the agency contract can be linked to fulfillment of a certain condition or to a future date because agency is delegation of power rather than an act of ownership [Al-Kahf (The Cave): 19]. (2)(2) [Al-Kahf (The Cave): 19]. Related by Al-Bukhari, Abu Dawud and Al-Tirmidhi: Al-Talkhis Al-Habir (3)(3) Related by Al-Bukhari, Abu Dawud and Al-Tirmidhi: Nayl Al-Awtar [5: 352]; (4)(4) Nayl Al-Awtar Ibn Qudamah [5: 203]; and Al-Bahr Al-Zakhkhar. Ibn Qudamah [5: 203]; and Al-Bahr Al-Zakhkhar by Ibn Nujaym [7: 153]. Al-Bahr Al-Raiq by Ibn Nujaym [7: 153]. Al-Minhaj by Al-Nawawi [2: 164]; and (5)(5) Al-Bahr Al-Raiq (6)(6) Al-Minhaj Fath Al-Qadir by Ibn Al-Humam [6: 554]; by Al-Nawawi [2: 164]; and Fath Al-Qadir [5: 352]; Fath Al-Qadir [6: 553]. Fath Al-Qadir [6: 553]. [3: 304]. Al-Talkhis Al-Habir [3: 304]. by Ibn Al-Humam [6: 554]; Al-Mughni by Al-Mughni by 624624 Shariah Standard No. (23): Agency and the Act of an Uncommissioned Agent (Fodooli) transfer that could be required immediately. On the contrary, a person may need to tie delegation to the occurrence of a certain incidence, or to a specific date in the future. The principal shall possess the right of disposing of the asset in question The principal shall possess the right of disposing of the asset in question because the agent is going to derive such right from him; hence the former cannot delegate a right that he does not own(7)(7). . cannot delegate a right that he does not own As for the detailed rulings pertaining to partial legal capacity of the agent, As for the detailed rulings pertaining to partial legal capacity of the agent, these rulings hold true for all dealings including agency. The ruling that agency should be known to the agent is manifested in the The ruling that agency should be known to the agent is manifested in the fact that knowledge in this case is a necessity for completion of the pro- cess of offer and acceptance, and hence distinction between a real agent and an uncommissioned agent. Imposition of four conditions on the subject matter of agency is necessary Imposition of four conditions on the subject matter of agency is necessary to facilitate conclusion and validity of the contract that cannot be attained without these four conditions namely: existence of the asset, asset ownership by the principal, possibility of disposing of the asset through agency and the absence of any Shariah restriction that prevents the deal. Permissibility of paid agency stems from the fact that agency is a useful Permissibility of paid agency stems from the fact that agency is a useful work for which the agent has the right to ask remuneration. An agent who is known to be providing agency services only against payment is entitled to remuneration even when remuneration is not explicitly mentioned in the contract, because a customary practice is acceptable as long as it does not encounter a Shariah restriction. Non-paid agency is also permissible because it is considered, in this case, as a form of donation. The justification for the clauses relating to remuneration of the agent is that The justification for the clauses relating to remuneration of the agent is that such clauses are essential to make remuneration well known at either the time of the contract conclusion or in the future. Temporary uncertainty about the exact amount of the remuneration is overlooked because knowledge of the amount in the future will leave no room for dispute.(8)(8) Permissibility of the amount in the future will leave no room for dispute. Permissibility of adding a certain share of the profit to the principal remuneration rests on the fact that such addition does not distort knowledge of the principal (7)(7) Al-Lubab (8)(8) Al-Insaf by Al-Maydani [2: 139]. Al-Lubab by Al-Maydani [2: 139]. [5: 403]; Al-Rawdah Al-Insaf [5: 403]; Al-Hamidiyyah [1: 324]; and Al-Hamidiyyah Al-Rawdah by Al-Nawawi [4: 301]; by Al-Nawawi [4: 301]; Al-Khurashi by Al-Hilli [2: 114]. Tadhkirat Al-Fuqaha by Al-Hilli [2: 114]. Al-Khurashi [7: 5]; [1: 324]; and Tadhkirat Al-Fuqaha Al-Fatawa [7: 5]; Al-Fatawa 625625 Shariah Standard No. (23): Agency and the Act of an Uncommissioned Agent (Fodooli) amount. In this case, the commitment to offer the agent a certain share of the profit is in the sense of a pledge to offer donation. Thus, the offered share of the profit can be considered as a conditional gift, or as Jualah. There is another viewpoint that considers the pledged share of the profit as a subsidiary addition to the principal remuneration, and concludes that in a subsidiary we can overlook what we cannot overlook in the principal. Agency is, originally, non-binding because it is an act of delegation that Agency is, originally, non-binding because it is an act of delegation that neither the principal nor the agent should be forced to continue. The exceptional cases of binding agency have been dealt with to preserve whatever rights of others involved therein. Moreover, an exceptional treatment is also needed for paid agency that should be subjected to the rulings on Ijarah, as well as the case when there is a pledge not to revoke the contract within a specific period because breaching such commit- ment may cause injury to others. It is permissible to specify a time limit for agency, because agency is nothing It is permissible to specify a time limit for agency, because agency is nothing but a contract that could have a specific duration, like Ijarah for instance. The justification for defining the commitments of the principal and the The justification for defining the commitments of the principal and the agent is as set out in the Standard- the need to honor contractual obli- gations of agency and pursue the acts and liabilities that emerge from it. The agent is considered as a trustee in holding the asset because he works The agent is considered as a trustee in holding the asset because he works for the interest of others (the principal) and trusteeship is the normal status in similar engagements. Moreover, the principals act of choosing the agent for the purpose in question is an indication of his good faith on him, and therefore the principal should not reverse that good faith, except for misconduct, negligence or breach of the contracts limitations. Impermissibility of combining agency and guarantee in the same contract, contract, is based on their opposing implications, in addition to the fact that guarantee by the agent entails a suspicion of Riba (usury). Therefore, the status of the agent as a trustee contradicts with provision of guarantee. Impermissibility for the agent to represent both parties to the contract
Impermissibility for the agent to represent both parties to the contract
as per the Hanafi School and the predominant view in the Shafii School is to avoid assigning both offer and acceptance to the same party, and hence prevent any probable self bias. Adopting the viewpoint of these two Schools is, therefore, most suitable for Institutions to avoid malpractices and Impermissibility of combining agency and guarantee in the same 626626 Shariah Standard No. (23): Agency and the Act of an Uncommissioned Agent (Fodooli) misleading formalism in making transactions and prevent overlapping of guarantees. Monitoring of the contracts provisions is assigned to the principal because Monitoring of the contracts provisions is assigned to the principal because he is the principal party of the contract, whereas the agent, who is just a contractor, has to monitor the activities of the contract. Suspension of an agent act that breach the contract without adding to the Suspension of an agent act that breach the contract without adding to the benefit of the principal, until obtaining the principals approval conforms to the normal Shariah practice of exerting the best possible effort to rectify an act of a Muslim.(9)(9) The act here remains pending approval of the princi- an act of a Muslim. The act here remains pending approval of the princi- pal to safeguard him against injury. An agent who breaches the contract by selling or buying at a price other An agent who breaches the contract by selling or buying at a price other than the price agreed upon has to indemnify the principal for the diffe- rence between the price he accepted/offered, and the market price. The justification for this ruling is the need to establish justice and compensate the principal for loss, without committing the Shariah-banned practice of accepting capital on pre-fixed return, which entails a suspicion of Riba. This case has been discussed in by Ibn Qudamah, who refer- Al-Mughni by Ibn Qudamah, who refer- This case has been discussed in Al-Mughni (10) red also to another viewpoint that suggests revocation of the deal.(10) red also to another viewpoint that suggests revocation of the deal. Agency in selling a mortgaged asset is treated as an exceptional case where Agency in selling a mortgaged asset is treated as an exceptional case where the contract does not expire on the death of the agent (agency to be pursued by inheritors), in order to preserve the rights of the mortgagee. Moreover, such agency is originally irrevocable before fulfillment of its purpose, for thereto is attached others rights. The justification for adopting the fiqh viewpoint that advocates suspen- The justification for adopting the fiqh viewpoint that advocates suspen- ding the act of the uncommissioned agent rather than revoking the deal (for uncertainty about its confirmation by the principal), is the fact that an (11) act of a Muslim should, as far as possible, be preserved from cancellation.(11) act of a Muslim should, as far as possible, be preserved from cancellation. Preservation of the act against cancellation is possible here through sus- pension, in addition to the fact that the act may prove to be useful to the (9)(9) Al-Mughni by Ibn Qudamah [5: 135-136]. Al-Mughni by Ibn Qudamah [5: 135-136]. Ibid. (10) (10) Ibid. In Al-Badai (11) In (11) be perceived as correct; and in Fath Al-Qadir be perceived as correct; and in possible effort to rectify the act of the Muslim. Al-Badai [5: 177], it is stated: The act of the Muslim should, as far as possible, [5: 177], it is stated: The act of the Muslim should, as far as possible, [2: 445], it is stated: Making the best Fath Al-Qadir [2: 445], it is stated: Making the best 627627 Shariah Standard No. (23): Agency and the Act of an Uncommissioned Agent (Fodooli) owner of the property in question. In this connection, Ibn Al-Humam owner of the property in question. In this connection, Ibn Al-Humam said: When the case is viewed from the standpoint of Gharar (uncer- tainty), the contract appears to be invalid, whereas if it is viewed from the standpoint of benefit and absence of harm the contract appears to be permissible. Therefore, Ibnul Humam supports reconciliation of the (12) It has two standpoints by suggesting permissibility with suspension.(12) It has two standpoints by suggesting permissibility with suspension. also been narrated that the Prophet (peace be upon him) said: Whoever also been narrated that the Prophet (peace be upon him) said: Whoever can offer a benefit to his Muslim brother, should do so. If, however, the act can offer a benefit to his Muslim brother, should do so. If, however, the act turned to be harmful to the principal, he can revoke it by virtue of the right he has. Moreover, permissibility of suspending the act of the uncommissioned agent until approval of the principal can also be derived from the Hadith narrated by Hakim Ibn Hizam (May Allah be pleased with him) stating that the Prophet (peace be upon him) gave him one dinar so as to buy a sheep that the Prophet (peace be upon him) wanted to sacrifice. Hakim purchased the sheep for one dinar and sold it for two. Then he purchased another sheep for the Prophet (peace be upon him) for one dinar and handed over the remaining dinar to him. The Prophet (peace be upon him) took the remaining dinar and spent it on charity and then prayed to (13) Allah to bless Hakims trading business.(13) Allah to bless Hakims trading business. (12) Fath Al-Qadir (12) [5: 317]. Fath Al-Qadir [5: 317]. Related by Abu Dawud and Al-Tirmidhi. (13) Related by Abu Dawud and Al-Tirmidhi. (13) 628628 Shariah Standard No. (24) Syndicated Financing Contents Subject PagePage ................................................................................................... Preface ................................................................................................... Preface ..................................................................... Statement of the Standard ..................................................................... Statement of the Standard ..............................................................................
Scope of the Standard ..............................................................................
Scope of the Standard .......................................................
Definition of Syndicated Financing .......................................................
Definition of Syndicated Financing ..............................................
Projects Financed Through Syndication ..............................................
Projects Financed Through Syndication
Modes of Providing Syndicated Financing to Customers ...................
Modes of Providing Syndicated Financing to Customers ...................
Participation of Institutions with Conventional Banks in Syndicated ................................................................................................... Financing ................................................................................................... Financing
Shariah-Compliant Methods of Arranging the Relationship Between ............................................................................... the Syndication Parties ............................................................................... the Syndication Parties .....................................................
Preparatory Tasks and Commissions .....................................................
Preparatory Tasks and Commissions
Provision of Guarantee and Suretyship by the Syndication Manager...
Exchange Rates.......................................................................................... .................................................................
Exit in Syndicated Financing .................................................................
Exit in Syndicated Financing ...........................................................
Date of Issuance of the Standard...........................................................
Date of Issuance of the Standard ...................................................................... Adoption of the Standard ...................................................................... Adoption of the Standard Appendices Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (b): The Shariah Basis for the Standard Appendix (b): .................................... The Shariah Basis for the Standard .................................... 633633 634634 635635 636636 637637 638638 639639 640640 642642 631631 IN THE NAME OF ALLAH, THE ALL-MERCIFUL, THE MOST MERCIFUL All praise be to Allah, the Lord of all the worlds, and blessings and peace be upon our master, Muhammad, and his household and all his companions Preface The purpose of this standard is to highlight syndicated financing operations that take place either between Islamic financial Institutions (Institution/Institutions),(1)(1) or between these Institutions and conventional or between these Institutions and conventional (Institution/Institutions), banks. The word (Institution/Institutions) is used here to refer, in short, to Islamic financial (1)(1) The word (Institution/Institutions) is used here to refer, in short, to Islamic financial institutions including Islamic Banks. 633633 Shariah Standard No. (24): Syndicated Financing Statement of the Standard
Scope of the Standard This standard covers syndicated financing operations, whether those arranged among Institutions, or between them and conventional banks, and the Institution-agent relationships relating to such operations.
Definition of Syndicated Financing It refers to the participation of a group of institutions in a joint financing operation through one of the Shariah-compliant modes of financing. The accounts of the syndicated financing operation are kept independent from the accounts of the participating Institutions.
Projects Financed Through Syndication Syndicated financing should be channeled towards investment activities that are permissible in Shariah. It should not be totally or partially directed towards projects that encounter Shariah restriction or constitute Riba.
Modes of Providing Syndicated Financing to Customers Syndicated financing should be provided to customers through Shariah- compliant modes of financing, including the following: 4/1 Sale through bargaining, Murabahah or installments. 4/2 Ijarah and Ijarah Muntahia Bittamleek. 4/3 Salam and Parallel Salam. 4/4 Istisnaa and Parallel Istisnaa. 4/5 Mudarabah. 4/6 Muzaraah, Musaqat and Mugharasah. 4/7 Investment Sukuk.
Participation of the Institutions with Conventional Banks in Syndicated Financing 5/1 Originally, syndicated financing shall take place among Islamic finan- cial Institutions. 634634 Shariah Standard No. (24): Syndicated Financing 5/2 There is no Shariah restriction against participation of conventional banks and Islamic financial Institutions in syndicated financing, as long as subscription and utilization of funds are arranged according to Shariah-compliant forms. 5/3 Originally, the syndication should be led by an Islamic financial In- stitution. However, there is no Shariah restriction against appointing a conventional bank to lead the syndication and initiate, on its own or with Islamic financial Institutions, the mechanisms and conditions of operation management. Assigning the role of the Musharakah lead manager to a conventional bank as indicated above is acceptable only if the contracts, projects financed and the modes of financing are all Shariah-compliant. 5/4 Arrangement, implementation and follow up of syndicated financing operations should take place under supervision of the Shariah su- pervisory boards of the Institutions participating in the syndication. Preferably, a joint committee of the Shariah supervisory boards of these Institutions could be formed and delegated to make decisions that become binding to all parties. 5/5 It is not prohibited for Islamic financial Institutions to provide syn- dicated financing to certain parts of a project that also receives fi- nancing for its remaining parts from other sources through conven- tional modes. This could be done on condition that the accounts and lead manager arrangements of the two types of financing are kept separate. It is well known that usurious lending and borrowing is a Shariah-impermissible practice and the responsibility thereof falls right on the party who commits it.
Shariah-Compliant Methods of Arranging the Relationship Between the Syndication Parties The relationship between the Institutions participating in a syndicated financing operation may be arranged in one of the following forms: 6/1 6/1 Mudarabah: Mudarabah: The syndication manager acts as a Mudarib and becomes The syndication manager acts as a Mudarib and becomes the exclusive operation manager according to the Mudarabah contract. [see Shariah Standard No. (13) on Mudarabah, item 8/9] 635635 Shariah Standard No. (24): Syndicated Financing 6/2 6/2 Musharakah: Musharakah: The institutions participate jointly in providing the The institutions participate jointly in providing the funds and bearing any losses proportionately, whereas profits are shared as agreed upon. In this case, the Institutions may select a joint committee to undertake management, or they may delegate one of them to manage the company against an increase in its profit share or a lump sum payment. A separate management contract in this case should be signed with the selected Institution. [see Shariah Standard No. (12) on Sharikah (Musharakah) and Modern corporations] 6/3 Paid agency: 6/3 Paid agency: In this case, the work to be done should be clearly defined, In this case, the work to be done should be clearly defined, along with estimation of the period of agency. The agent shall become entitled to remuneration whether profit is actually materialized or not. Furthermore, the agent may be given a bonus as a lump sum amount or a share of profits above a certain limit. [See Shariah Standard No. (23) on Agency and the Act of an Uncommissioned Agent (Fodooli)] 6/4 6/4 Non-paid agency: Non-paid agency: The lead manager in this case undertakes to manage The lead manager in this case undertakes to manage the operations for no reward, and the financing Institutions share the profit.
Preparatory Tasks and Commissions 7/1 It is permissible for the leading Institution to receive commission for performing the preparatory tasks such as conducting feasibility stud- ies, organization, mobilization of participatory funds, preparations of contracts etc. The commission thus obtained may be equal to, less or more than the actual cost the Institution incurs for carrying out such tasks. Furthermore, an Institution performing such tasks against the commission may or may not be a lead manager. 7/2 Musharakah It is not permissible to receive commitment commission. [see Shariah Standard No. (17) on Investment Sukuk and Shariah Standard No. (8) on Mudarabah, item 2/4/1]
Provision of Guarantee and Suretyship by the Syndication Manager 8/1 In dealing with the syndication funds the lead manager (being a Mudarib, partner or an agent) is considered as a trustee, and there- fore he should not guarantee these funds except in case of miscon- 636636 Shariah Standard No. (24): Syndicated Financing duct, negligence or breach of conditions embodied in syndication arrangement. [see Shariah Standard No. (5) on Guarantees, item 2/2/2] 8/2 It is not permissible for the Institution that manages the syndica- tion as a Mudarib, partner or an agent to guarantee the debtors of his partners, or to guarantee the contributions of these partners against exchange rate fluctuations. [see Shariah Standard No. (5) Agency and the on Guarantees and Shariah Standard No. (23) on Agency and the on Guarantees and Shariah Standard No. (23) on Act of an Uncommissioned Agent (Fodooli)]
Exchange Rates 9/1 A specific currency should be fixed for the syndicated financing oper- ation. However, the participating parties may pay their contributions in other currencies on condition of revaluating the contributions in terms of the syndication currency, and according to the prevailing ex- change rate on the same day of contributions payment. 9/2 It is permissible for any of the participating Institutions to receive all its profits and entitlements in a currency other than the currency of the syndication on the condition of revaluing the receipts in terms of syndication currency and , according to the prevailing exchange rate on the day of receiving such amounts. 9/3 It is impermissible for the investment agent or any other party of the Musharakah or the Mudarabah to provide a commitment to safeguard any other party against exchange rate fluctuations. [see Shariah Standard No. (1) on Trading in Currencies, item 2/9/3]
Exit in Syndicated Financing 10/1 It is permissible to agree on a closed syndicated financing operation that does not allow premature exit. 10/2 It is permissible for an Institution to dispose of its share in the in- vestment to an external or internal party before liquidation, as per the contract conditions, and at the value agreed upon, if the physical assets and usufructs of the company exceed its cash money, debts and financial rights. If the companys cash money, debts and finan- 637637 Shariah Standard No. (24): Syndicated Financing cial rights are predominant, Shariah rulings on currency exchange and debt-related transactions should be referred to and applied. It is, however, not permissible to agree beforehand on such transfer of shares at nominal value or on guarantee of a certain limit of profits. [see Shariah Standard No. (17) on Investment Sukuk and Shariah Standard No. (21) on Financial Paper (Shares and Bonds)]
Date of Issuance of the Standard This Standard was issued on 23 Rabi I, 1426 A.H., corresponding to 2 May 2005 A.D. 638638 Shariah Standard No. (24): Syndicated Financing Adoption of the Standard The Shariah standard on Syndicated Financing was adopted by the held in Dubai on 2122 Rabi I, No. (14) held in Dubai on 2122 Rabi I, Shariah Board in its meeting Shariah Board in its meeting No. (14) 1426 A.H., corresponding to 30 April 2 May 2005 A.D. 639639 Shariah Standard No. (24): Syndicated Financing Appendix (A) Brief History of the Preparation of the Standard The Shariah Board decided in its meeting No. (10) held on 2 7 Rabi I, 1424 A.H., corresponding to 38 May 2001 A.D., in Al-Madinah Al- Munawwarah to issue a Shariah Standard on Syndicated Financing. On 7 Dhul-Hajjah 1424 A.H., corresponding to 29 January 2004 A.D., the Shariah Standards Committee decided to appoint a Shariah consultant to prepare a draft standard on Syndicated Financing. In its meeting No. (11) held on 25-26 Safar 1425 A.H., corresponding to 15-16 April 2004 A.D., in the Kingdom Of Bahrain, the Shariah Standards Committee (1) discussed the Shariah study and advised the consultant to make necessary changes in the light of the discussions and observations of its members. In its meeting No. (12) held on 28 Rabi II, 1425 A.H., corresponding to 16 June 2004 A.D., in Dubai (U.A.E) the Shariah Standards Committee (1) discussed the draft Standard on Syndicated Financing, introduced some changes and asked the consultant to make further necessary changes in the light of the discussions and observations of its members. Once again, the committee discussed the draft standard in its meeting held on 2425 Rajab 1425 A.H., corresponding to 910 September 2004 A.D., and made further changes in the light of the discussions and observations of its members. The revised draft of the standard was then submitted to the Shariah Board in its meeting No. (13) held in Makkah Al-Mukarramah on 26-30 Shaban 1425 A.H., corresponding to 1014 October 2004 A.D. The Board made some changes in the document and decided to present it to some experts for their comments before discussing it in a public hearing. 640640 Shariah Standard No. (24): Syndicated Financing A A public he public hearing was held in the Kingdom of Bahrain on 15 Safar 1426 aring was held in the Kingdom of Bahrain on 15 Safar 1426 A.H., corresponding to 25 March 2005 A.D., and attended by more than 35 participants representing central banks, financial Institutions, accounting firms, Shariah scholars, academics and other concerned parties. Several aring. Some members public hearing. Some members comments were made before and after the public he comments were made before and after the of the Shariah Standards Committees (1) and (2) responded to the quires made during the session. In the meeting of the Shariah Standards Committees (1) and (2), held in the Kingdom of Bahrain on 15-16 Safar 1426 A.H., corresponding to 25-26 March 2005 A.D., the comments made during the aring public hearing 25-26 March 2005 A.D., the comments made during the public he were discussed and some changes were made in the document. The Shariah Board held its meeting No. (14) on 2123 Rabi I, 1426 A.H., 4 April 2 May 2005 A.D., in Dubai (U.A.E) and adopted the Standard. 641641 Shariah Standard No. (24): Syndicated Financing Appendix (B) The Shariah Basis for the Standard Permissibility of Syndicated Financing Permissibility of syndicated financing is derived from Musharakah, Permissibility of syndicated financing is derived from Musharakah, which encounters no Shariah restriction. Projects Financed Through Syndication The ruling that syndicated financing should be directed only towards ac- The ruling that syndicated financing should be directed only towards ac- tivities that do not entail dealing in a Shariah-impermissible commodity or service, is dictated by the need to abide by the directives outlined in the Holy Quran verses and the noble Hadith of the Prophet (peace be upon him). These divine sources prohibit usury, alcoholic drinks, drugs, gam- bling, pork, illegitimate carcasses, prostitution, nightclubs, statues, etc, as well as impermissible acts like deception, bribe, cheating in weight and measurement, and all types of prohibited sales, etc.(2)(2) measurement, and all types of prohibited sales, etc. Participation of Institutions with Conventional Banks in Syndicated Financing, and Permissibility of Assigning the Role of the Lead Manager to a Conventional Bank Partnership between a Muslim and a Non-Muslim is not prohibited or Partnership between a Muslim and a Non-Muslim is not prohibited or cannot be judged right away as invalid, except in case of Shariah-banned dealings. This is so because what really matters is the conformity of the deal in question to the rulings of Shariah, rather than whether the deal has been made by a Muslim or a Non-Muslim. This viewpoint has been adopted by the Al Baraka Seminar,(3)(3) as well as the Fourth Fiqhi as well as the Fourth Fiqhi been adopted by the Al Baraka Seminar, (2)(2) For a detailed account of prohibited dealings, their various modern forms, and the For a detailed account of prohibited dealings, their various modern forms, and the Shariah bases of their prohibition. See: Dr. Ahmad Muhiddin Ahmad: Operations of Islamic Investment Companies in the International Market, (pp. 2743). (3)(3) The text of the Fiqhi opinion is There is no Shariah restriction on participation The text of the Fiqhi opinion is There is no Shariah restriction on participation of conventional banks with Islamic banks in a syndicated financing that observes Shariah rulings in its operations, on condition that conventional banks should not assume the entire task of managing the operations, or making decisions on Shariah related issues., Resolution No. (9/1), The Fatawa of the Al Baraka Seminars (P. 151). 642642 Shariah Standard No. (24): Syndicated Financing Seminar of the Kuwait Finance House (1995). This case also does not come under the Hadith stating that the Prophet (peace be upon him) prohibited involiving in partnership with a Jew or a Christian unless purchase and sale take place by the hands of the Muslim.(4)(4) It is clear that purchase and sale take place by the hands of the Muslim. It is clear that the emphasis of prohibition here relates to avoidance of Riba and invalid contracts, and therefore, no justification for prohibition will remain if due preventive measures against prohibited practices are well catered for. Also, the viewpoint of the Shafii, Maliki, Hanbali and Hanafi Schools(5)(5) Also, the viewpoint of the Shafii, Maliki, Hanbali and Hanafi Schools who advocate (disinclination towards the deal) does not include Karahah (disinclination towards the deal) does not include who advocate Karahah this case. The reason is that the Musharakah can avoid Shariah-banned practices by explicit reference to the firm commitment of the conventional Institution that leads the syndication to Shariah rulings in transactions, besides tightening the control and supervision of the Shariah boards of the participating Institutions throughout the various stages of the syndicated financing operation. Preparatory Tasks and Commissions Permissibility of receiving commissions for performing preparatory Permissibility of receiving commissions for performing preparatory tasks, originates from the fact that such tasks are beneficial to the partners and do not embark on any Shariah-impermissible practice. As regards the justification for the ruling that the commission can be equal to, less or more than the actual cost of providing the tasks, it is because the two parties are free to make what is known as a permissible condition, or resort to mutual consent. This same viewpoint was the Fiqhi opinion of the Al Baraka Seminar as well as the Fiqhi Seminar of the Kuwait Finance House (1995).(6)(6) Finance House (1995). Al-Mughni (Part 4); Al Nawawi, (4)(4) See: (5)(5) Ibn Qudamah, [14: 93]. Al-Majmu Sharh Al-Muhadhdhab [14: 93]. (Part 4); Al Nawawi, Al-Majmu [2: 319]; Al-Mudawwanah [13: 504]; Al-Buhuti, Al-Majmu [13: 504]; Al-Buhuti, [5: 70]; and Al-Kasani, Al-Mudawwanah [5: 70]; and Al-Kasani, See: Al-Majmu Sharh Al-Muhadhdhab Ibn Qudamah, Al-Mughni Sharh Muntaha Al-Iradat Sharh Muntaha Al-Iradat [2: 319]; Badai Al-Sanai [6: 61]. Badai Al-Sanai [6: 61]. (6)(6) The text of the Fiqhi opinion of the Al Baraka Seminar is The preparatory tasks The text of the Fiqhi opinion of the Al Baraka Seminar is The preparatory tasks performed by the bank that creates the operation entitles it to a remuneration which could be equal to, less or more than the actual cost of performing the tasks. The Fiqhi opinion of the Fourth Seminar of the Kuwait Finance House is The preparatory tasks performed by the bank that initiates the operation entitles it to remuneration to be determined through mutual consent, whether the bank has been assigned the role of management or not. 643643 Shariah Standard No. (24): Syndicated Financing Receiving commitment commission is prohibited because such commis- Receiving commitment commission is prohibited because such commis- sion is paid for exercising the right of contracting, which is a matter of will and desire, rather than a subject matter of compensatory deals.(7)(7) will and desire, rather than a subject matter of compensatory deals. Provision of Guarantee and Suretyship by the Lead bank A lead bank should not provide guarantee except in case of misconduct and A lead bank should not provide guarantee except in case of misconduct and negligence. Being a partner in the operation, it is supposed to be holding the assets as a trustee, and hence, it should not provide any guarantee. Stating such guarantee in the contract constitutes a violation of the Shariah rulings on trusteeship. When the managing bank commits misconduct or negligence, or resort to fraud and trickery in the studies it prepares, it should then indemnify the partners for the injury it has deliberately caused to them. A bank that manages the syndication through Mudarabah or Musharakah A bank that manages the syndication through Mudarabah or Musharakah should not provide a warranty cover against default of the debtors of its partners, or guarantee the contributions of these partners against exchange rate fluctuations, because provision of guarantee by a partner or a Mudarib to his other partners/owners of the capital is prohibited by Shariah. When the bank manages the syndication as an agent, it may provide When the bank manages the syndication as an agent, it may provide a warranty cover for the debtors of his partners in a separate contract and without referring to warranty in the agency contract. The justification here is that the bank does not provide such warranty in its capacity as an agent of the partners, and the warranty thus provided against default of the debtors will remain valid even if the agency contract is revoked. Exchange Rates Permissibility for the parties of the syndication to make their contributions Permissibility for the parties of the syndication to make their contributions in currencies other than that of the syndication on condition that such contributions be revaluated according to the prevailing exchange rates is derived from a Hadith narrated by Ibn Umar (may Allah be pleased with him). Ibn Umar said: When I told the Messenger of Allah (peace be upon him) that I used to sell camels at Al-Baqi in dinars and receive the value in dirhams, he (peace be upon him) said: No harm if you apply the exchange dirhams, he (peace be upon him) said: No harm if you apply the exchange rate of the same day and finalize the deal with your partner before leaving Shariah Standards, AAOIFI, Shariah Standard on Murabahah. (7)(7) Shariah Standards, AAOIFI, Shariah Standard on Murabahah. 644644 Shariah Standard No. (24): Syndicated Financing each other.(8)(8) This case also implies combining currency exchange and each other. This case also implies combining currency exchange and Hawalah (transfer of money), which has been approved by a resolution of the Islamic Fiqh Academy.(9)(9) the Islamic Fiqh Academy. The Hadith narrated by Ibn Umar also justifies the fiqhi opinion that the The Hadith narrated by Ibn Umar also justifies the fiqhi opinion that the participating Institutions can stipulate receiving their profits and other en- titlements in a currency other than that of the syndication, and according to the prevailing exchange rate on the day of receiving such profits and entitlements. Prohibition of commitment of one party of the Musharakah or Muda- Prohibition of commitment of one party of the Musharakah or Muda- rabah to safeguard the other party against exchange rate fluctuations is because such commitment leads to the impermissible case of a partner or a Mudarib provides to the other partner guarantee against loss of capital. Controls on Disassociation Participating Institutions can agree on a closed syndicated financing Participating Institutions can agree on a closed syndicated financing operation where premature exit is not allowed. Such a condition is regarded as a proper condition in Shariah, and it does not contradict with the aim of the contract. Moreover, imposing a condition against premature exit does not lead to permitting what Shariah has prohibited or prohibiting what it has permitted, nor does it seem to be a probable (10) Therefore such condition should be honored cause of future dispute.(10) Therefore such condition should be honored cause of future dispute. in abidance to the divine order of Allah, Exalted be He, in the holy (11) (O you who believe! Fulfill (all) obligations...)(11) Quran: (O you who believe! Fulfill (all) obligations...) Quran: Agreement beforehand on exit at nominal value or on guaranteeing Agreement beforehand on exit at nominal value or on guaranteeing a certain amount of profit is prohibited because such condition entails exact Riba, or a suspicion of it. Moreover, it involves other Shariah- Mawquf (Discontinued) Hadith to Ibn Umar, Related by Abu Dawud, Al-Nasai, Ibn Majah and Al-Hakim who deemed it authentic. Al- (8)(8) Related by Abu Dawud, Al-Nasai, Ibn Majah and Al-Hakim who deemed it authentic. Al- Zahabi agreed with Al-Hakim. The Hadith has been narrated both as MarfuMarfu (Traceable) Zahabi agreed with Al-Hakim. The Hadith has been narrated both as (Traceable) Hadith to the Prophet, and Al-Talkhis Al- (Discontinued) Hadith to Ibn Umar,Al-Talkhis Al- Hadith to the Prophet, and Mawquf Habir [3: 29]. Habir [3: 29]. International Islamic Fiqh Academy Resolution No. 184/9. (9)(9) International Islamic Fiqh Academy Resolution No. 184/9. Regarding contractual conditions see: Tabyin Al-Haqaiq (10) Regarding contractual conditions see: (10) Sharh Fath Al-Qadir [5 :215]; Al-Buhuti, Kashshaf Al-Qina Sharh Fath Al-Qadir [5 :215]; Al-Buhuti, Al-Majmu Sharh Al-Muhadhdhab Al-Majmu Sharh Al-Muhadhdhab [9: 364368]; and
[5: 8081]. Khalil [5: 8081]. Khalil [Al-Maidah (The Table): 1]. (11) [Al-Maidah (The Table): 1]. (11) Tabyin Al-Haqa`iq [4: 43]; Ibn Al-Humam, [4: 43]; Ibn Al-Humam, Kashshaf Al-Qina [3: 192193]; Al Nawawi, [3: 192193]; Al Nawawi, Al-Khurashi Ala Mukhtasar [9: 364368]; and Al-Khurashi Ala Mukhtasar 645645 Shariah Standard No. (24): Syndicated Financing impermissible practices like the case of one party providing a guarantee against the loss of the share of the other party in the capital, or guarantees a predetermined rate of profit for him. 646646 Shariah Standard No. (25) Combination of Contracts Contents Subject ................................................................................................... Preface ................................................................................................... Preface ..................................................................... Statement of the Standard ..................................................................... Statement of the Standard ..............................................................................
Scope of the Standard ..............................................................................
Scope of the Standard ..................................................
Concept of Combination of Contracts ..................................................
Concept of Combination of Contracts .......................................
Shariah Status of Combination of Contracts .......................................
Shariah Status of Combination of Contracts ..................................
Shariah Controls on Combination of Contracts ..................................
Shariah Controls on Combination of Contracts ............................
Shariah Concession for Combination of Contracts ............................
Shariah Concession for Combination of Contracts
Prior Agreement (Muwata`ah) for Combination of Contracts ..........
Prior Agreement (Muwata`ah) for Combination of Contracts ..........
Contemporary Applications and General Rules for Combination of Combination of
Contemporary Applications and General Rules for .................................................................................................. Contracts. .................................................................................................. Contracts ............................................................
Date of Issuance of the Standard ............................................................
Date of Issuance of the Standard ...................................................................... Adoption of the Standard ...................................................................... Adoption of the Standard Appendices Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (b): The Shariah Basis for the Standard Appendix (b): ..................................... The Shariah Basis for the Standard ..................................... Appendix (c): Definitions Appendix (c): .............................................................................. Definitions .............................................................................. PagePage 651651 452452 653653 654654 655655 657657 658658 659659 661661 669669 649649 IN THE NAME OF ALLAH, THE ALL-MERCIFUL, THE MOST MERCIFUL All praise be to Allah, the Lord of all the worlds, and blessings and peace be upon our master, Muhammad, and his household and all his companions Preface The purpose of this standard is to explain the process of combining more than one contract in one set. The Standard also aims to elucidate the characteristics, Shariah status and Shariah controls relating to the process of Contracts Combining. Furthermore, the Standard indicates the Shariah rulings on Muwata`ah (prior agreement) and provides guidance on the main applications of combined contracts in Islamic financial Institutions (Institution/Institutions).(1)(1) (Institution/Institutions). The word (Institution/Institutions) is used here to refer, in short, to Islamic financial (1)(1) The word (Institution/Institutions) is used here to refer, in short, to Islamic financial institutions including Islamic Banks. 651651 Shariah Standard No. (25): Combination of Contracts Statement of the Standard Scope of the Standard
1. Scope of the Standard This standard covers transactions that comprise more than one contract combined together in one set. The scope of the discussion in this respect covers the definition, forms, controls, characteristics, and concessions relating to the process of Combination of Contracts and explores the characteristics of Muwata`ah and the Shariah rulings pertaining thereto. The discussion also embarks on contemporary applications of combined contracts.
Concept of Combination of Contracts 2/1 Combination of contracts is a process that takes place between two parties or more, and entails the simultaneous conclusion of more than one contract. Hence, combination of contracts may take any of the following forms: 2/1/1 Combining more than one contract without imposing any of them as a condition in the other, and without prior agreement (Muwataah) to do so. 2/1/2 Combining more than one contract while imposing some of them as conditions in the others, without prior agreement to do so. 2/1/3 Combining more than one contract subject to prior agreement (Muwataah), but without imposing any of them as a condition in the others. 2/1/4 Agreement to conclude the deal through any of different con- tractual forms as will be finally decided in the future. 2/2 Forms of combined contracts 2/2/1 Combined contracts may have a single lump sum counter value. other and For instance, a party may sell his piece of land to the other and For instance, a party may sell his piece of land to the 652652 Shariah Standard No. (25): Combination of Contracts simultaneously rents his car to the same party for one month, both against one thousand dinars. 2/2/2 Combined contracts may be concluded for separate values. For instance, one party may sell his house to the other for one thousand dinars, and rent his car to the same party for one hundred dinars per month. 2/2/3 Some of the combined contracts may be stipulated as conditions in the other contracts. One party, for instance, may say to the other party that I will sell you my house for ten thousand dinars, on condition that you undertake to rent the house to me for two years for one thousand dinars per year. The sale of the house in this manner could also be concluded on condition that the buyer of the house undertakes in return to sell his car to the seller for two thousand dinars. 2/2/4 Combined contracts may take the form of an exhaustive con- tractual statement comprising a number of successive parts and tractual statement comprising a number of successive parts and stages, which finally lead to realization of the desire of the two parties to conclude the deal in question. A good example in this regard may be seen in a number of present day financial transactions like Ijarah Muntahia Bittamleek, Murabahah, and Diminishing Musharakah. Shariah Status of Combination of Contracts
1. Shariah Status of Combination of Contracts It is permissible in Shariah to combine more than one contract in one set, without imposing one contract as a condition in the other, and provided that each contract is permissible on its own. Combining contracts in this manner is acceptable unless it encounters a Shariah restriction that entails its prohibition on exceptional basis.
Shariah Controls on Combination of Contracts 4/1 Contracts combining should not include the cases that are explicitly banned by Shariah like combing sale and lending in one contract. 4/2 It should not be used as a trick for committing Riba such as agreement between two parties to practice Bay al-Inah between two parties to practice Bay al-Inah or Riba al-Fadl. or Riba al-Fadl 653653 Shariah Standard No. (25): Combination of Contracts 4/3 It should not be used as an excuse for practicing Riba. The two parties could misuse, for instance, Contracts Combining when they conclude a lending contract that, at the same time, facilitates some other compensatory gains to them. For example, they could stipulate in the contract that the borrower should offer accommodation in his house to the lender, or should grant him a present. Contracts Combining could also be misused by imposing excess repayment in terms of quantity or quality on the borrower. [see Shariah Standard No. (14) on Loan (Qard) item 1/4] 4/4 Combined contracts should not reveal disparity or contradiction with regard to their underlying rulings and ultimate goals. Examples of contradictory contracts include granting an asset to somebody as a gift and selling/leasing it to him simultaneously, or combining Mudarabah with lending the Mudarabah capital to the Mudarib, or currency exchange with Jualah, or Salam with Jualah for the same contract value, or leasing with selling (i.e. hire-purchase in its traditional form). Combination of Contracts
Shariah Concessions for Combination of Contracts
Shariah Concessions for 5/1 In principle, the Shariah concessions that can be granted to implicit and subsidiary contracts at the time of combining contracts cannot be granted to the same contracts when concluded independently. Here, implicit and subsidiary contracts refer to contractual commitments that are not explicitly embodied in the deal agreement or those which succeed the original commitments of the transaction. The concessions to be granted in this case should be judged in the light of traditions, practice and professional experience, and subjected to clearance by the Shariah Supervisory Board of the Institution. 5/2 Concessions granted to implicit and subsidiary contracts comprise relief from the following impermissible acts: 5/2/1 Gharar, which affects financial contracts, may be overlooked in implicit and subsidiary contracts. 5/2/2 Jahalah, which also affects financial contracts, may be ignored with regard to the object of a subsidiary contract. 654654 Shariah Standard No. (25): Combination of Contracts 5/2/3 Sale-based Riba and violation of currency exchange rules (as when spot delivery is ignored in a contract that combines currency exchange with money transfer) are also forgivable in subsidiary and implicit contracts. 5/2/4 Selling of a debt for another debt may be ignored when it comes in the context of a subsidiary contract. A fitting example here is purchasing (on debt) the shares of an indebted company. 5/2/5 Subsidiary and implicit contracts may also relieved from some prerequisites that underline the validity of contracts (such as offer and acceptance) when such relief is dictated by need or desire to achieve a permissible interest. Combination of Contracts
Prior Agreement (Muwata`ah) for Combination of Contracts
Prior Agreement (Muwataah) for 6/1 Muwataah or Tawatu in Fiqh terminology has several meanings; most important among which are stated below: 6/1/1 Explicit or implicit intention of the parties to the contract to use a certain trick for practicing Riba through a Shariah accepted contractual form. 6/1/2 An unrevealed prior agreement between the two parties to per- form a Shariah-permissible act or deal for the sake of finding a Shariah-accepted exit (acceptable trick). 6/1/3 Coincidence of the intentions of parties to the contract at the stage of preparatory negotiations that precede the signing of the contract as indicated in item (2/2/4) above. 6/2 In Fiqh perception, Muwataah for combining contracts has three distinct characteristics: 6/2/1 It is an agreement between two parties to conclude contracts and fulfill pledges in the future. 6/2/2 When Muwataah is stipulated as part of the contract it becomes a condition precedent to the conclusion of the contract, and the contract becomes subject to the relevant Shariah rulings with regard to permissibility, enforceability, and validity. 655655 Shariah Standard No. (25): Combination of Contracts 6/2/3 Enforceability of Muwataah in Shariah is similar to enforce- ability of conditions precedent to the signing of contracts. A condition that precedes the signing of the contract has the same validity and binding nature of the normal conditions of the contract, since the former constitutes the bases of the con- tract that have been mutually agreed upon between the two parties. 6/3 Muwataah to combine contracts takes several forms, which may be grouped into the following four types: 6/3/1 Muwataah to form up Riba tricks, in which the two parties or its reverse, or Bay al-Inah or its reverse, or agree to practice, for instance, Bay al-Inah agree to practice, for instance, Bay al-Wafa . In this case, Riba al-Fadl. In this case, Bay al-Wafa ( (Bay al-Raja Shariah prohibits Muwataah and the contract so designed is invalid. Bay al-Raja), or ), or Riba al-Fadl 6/3/2 Muwataah for Riba excuses is prohibited by Shariah whereby the two parties agree to combine a loan with another transaction, or stipulate that the borrower has to present a gift to the lender, or make excess repayment in terms of quantity or quality. 6/3/2/1 Prohibition of Muwataah to use such tricks, which are permissible in principle, should be judged in the light of two conditions: First, First, the intention to use the permissible act as a means the intention to use the permissible act as a means of concluding a prohibited deal should be obvious and beyond all doubts. there should be no obvious need or lawful Second, there should be no obvious need or lawful Second, interest that justifies resorting to such a trick. 6/3/3 Muwataah for obtaining Shariah Exits, which refers to tricks that do not violate Shariah rules, or contradict with Shariah objectives, or result in any harm to others, is permissible. 6/3/4 Muwataah for combining contracts that contradict to or op- pose each other is prohibited because it leads to performing of an act that has been strictly banned by Shariah. [see item 4/4] 656656 Shariah Standard No. (25): Combination of Contracts
Contemporary Applications and General Rules for Combination of Contracts 7/1 One of the most distinguishable forms of contemporary financial trans- actions is the contractual arrangements which comprise a number of contracts and pledges that the parties agree beforehand to execute in a specific manner and according to agreed number of successive stag- es. Such arrangements aim to achieve a given purpose or interest of the parties to the contract such as performing Murabahah on Order of Purchase, Ijarah Muntahia Bittamleek, or Diminishing Musharakah. 7/2 Muwata`ah, when provided for in the contract and used for combi- nation of contracts, should be observed by, and remain binding to the parties to the contract, subject to permissible commercial and banking conventions. [see item 6/2/2] 7/3 The pledges contained in such combined contract sets are binding to their respective parties. 7/4 These newly devised sets of combined contracts should observe the general rules of Shariah with regard to structure, rulings, requirements and conditions in order to be Shariah compliant. [see item 5/2] 7/5 These contract sets should also observe the Shariah rulings pertain- ing to combination of contracts, and may make use of the Shariah concessions in this respect. 7/6 Failure of any of the parties to combined contracts to honor its contractual commitments gives the other party right of claiming indemnity for the actual injury encountered.
Date of Issuance of the Standard This Standard was issued on 23 Rabi I, 1426 A.H., corresponding to 2 May 2005 A.D. 657657 Shariah Standard No. (25): Combination of Contracts Adoption of the Standard The Shariah standard on Combination of Contracts was adopted by the Shariah Board in its meeting No. (15) held in Makkah Al-Mukarramah on 2226 Shaban 1427 A.H., corresponding to 26 September 2 October 2005 A.D. 658658 Shariah Standard No. (25): Combination of Contracts Appendix (A) Brief History of the Preparation of the Standard The Shariah Board decided in its meeting No. (10) held on 27 Rabi I, 1424 A.H., corresponding to 38 May 2003 A.D., in Al-Madinah Al- Munawwarah to issue a Shariah Standard on Combination of Contracts. On 17 Shaban 1423 A.H., corresponding to 13 October 2003 A.D., the Shariah Standards Committee decided to commission a Shariah consultant to prepare a draft standard on combination of contracts. In meeting No. (10) of the Shariah Standards Committee (2) held on Friday and Saturday 27-28 Safar 1425 A.H., corresponding 16-17 April 2004 A.D., in the Kingdom of Bahrain, the committee discussed the Shariah study and advised the consultant to incorporate the necessary changes, in the light of the discussions and observations of the meeting. In meeting No. (11) of the Shariah Standard Committee (2) held on Wednesday 28 Rabi II, 1425 A.H., 16 June 2004 A.D., held in Dubai (U.A.E) the Committee discussed the draft standard on combination of contracts and introduced necessary changes in it in the light of discussions and comments of the meeting. The revised version of the Standard was submitted to the Shariah Board in its meeting No. (13) held in Makkah Al-Mukarramah on 30 Shaban 1426 A.H., 14 October 2004 A.D., and further changes were incorporated in the document. The Board then decided to send the document to concerned experts for review and comments before discussing it in a public hearing. AAOIFI held public hearing in the Kingdom of Bahrain on 15 Safar 1426 A.H., corresponding to 25 March 2005 A.D. More than 35 participants representing central banks, institutions, accounting firms, Shariah scholars, 659659 Shariah Standard No. (25): Combination of Contracts university teachers and other interested parties attended the public hearing. Several observations were made in the public hearing to which members of the Shariah Standards Committees (1) and (2) duly responded. In a meeting held in the Kingdom of Bahrain on 15-16 Safar 1426 A.H., corresponding to 25-26 March 2005 A.D., the Shariah Standards Committees (1) and (2) discussed the comments and observations made during the public hearing, and incorporated necessary changes in the document. The Shariah Board discussed the draft standard in its meeting No. (14) held in Dubai (U.A.E) on 21-23 Rabi I, 1426 A.H., corresponding to 30 April 2 May 2005 A.D. and decided, in the light of the comments and observations of the meeting, to send the draft standard to the Shariah Standards Committee (2) for study. In its meeting No. (15) held on 2225 Shaban 1426 A.H., corresponding to 26-29 September 2005 A.D., in Makkah Al-Mukarramah, the Shariah Board discussed the amendments proposed by the Shariah Standards Committee and the Drafting Committee and made the changes in the draft Standard, where it deemed necessary. Consequently, the Shariah Board approved the Standard (unanimously for some clauses and with the majority for others), as indicated in the minutes of the Boards meetings. 660660 Shariah Standard No. (25): Combination of Contracts Appendix (B) The Shariah Basis for the Standard It is permissible to combine more than one contract in a single transaction It is permissible to combine more than one contract in a single transaction as long as each of these contracts is permissible on its own. This is so because freedom of contracting and honoring commitments is acknowledged in principle by the general teachings and directives of Shariah, unless such contracts and commitments lead to violation of Shariah rulings.(2)(2) Ibn Ibn contracts and commitments lead to violation of Shariah rulings. Al-Qayyim said, It is permissible in principle to form up contracts and conditions, except for what has been prohibited by Shariah.(3)(3) conditions, except for what has been prohibited by Shariah. According to the majority of the Hanafi, Shafii and Hanbali Fuqaha, the According to the majority of the Hanafi, Shafii and Hanbali Fuqaha, the set of combined contracts can always be judged in the light of its individual components. Therefore, if the transaction comprises a number of contracts that each of them individually satisfies permissibility requirements, the combined set of such contracts is also permissible. (4)(4) combined set of such contracts is also permissible. Based on the above fact the Hanbali and Shafii Fuqaha, as widely reported, Based on the above fact the Hanbali and Shafii Fuqaha, as widely reported, indicate permissibility of combing two contracts, for the same contract value, even if the two contracts differ with regard to Shariah status and rulings.(5)(5) even if the two contracts differ with regard to Shariah status and rulings. Ibn Taymiyyah indicated permissibility of combining two contracts having two separate values.(6)(6) two separate values. Prohibition of combining contracts in specific cases on exceptional basis, Prohibition of combining contracts in specific cases on exceptional basis, combining as indicated by Al-Shatibi, stems from the fact that the act of combining as indicated by Al-Shatibi, stems from the fact that the act of Al-Qawaid Al-Nuraniyyah Al-Fiqhiyyah, , [29: 132]; and Al-Qawaid Al-Nuraniyyah Al-Fiqhiyyah by Ibn Taymiyyah [2: 317]. Jami Al-Rasail by Ibn Taymiyyah [2: 317]. Al-Bayan by Al-Umrani [5: 148]; by Al-Umrani [5: 148]; Al-Majmu Sharh Al-Majmu Sharh [6: 58]; and Al-Badai [6: 58]; and [4: 174], Al-Badai Tabyin Al-Haqaiq [4: 174], (2)(2) Majmu Fatawa Ibn Taymiyyah [1: 344]; and Jami Al-Rasail [3: 478]; Al-Bayan Majmu Fatawa Ibn Taymiyyah [29: 132]; and (P. 188). Ilam Al-Muwaqiin [1: 344]; and (3)(3) Ilam Al-Muwaqiin Kashshaf Al-Qina [3: 478]; (4)(4) Kashshaf Al-Qina Al- Muhadhdhab [9: 388]; Al- Muhadhdhab Ilam Al- Muwaqiin Ilam Al- Muwaqiin [3: 354]; (5)(5) Al-Mughni Al-Mughni [6: 39 and 355]; [8: 67]. Nazariyyat Al-Aqd by Ibn Taymiyyah (P. 191); and (P. 122). Fatawa Ibn Taymiyyah (P. 122). Fatawa Ibn Taymiyyah Al-Mubdi [5: 43]. [5: 43]. Al Majmu [9: 388]; [9: 388]; Tabyin Al-Haqaiq [6: 39 and 355]; Al Majmu (6)(6) Nazariyyat Al-Aqd [3: 354]; Al-Mubdi Al-Ikhtiyarat Al-Fiqhiyyah Min by Ibn Taymiyyah (P. 191); and Al-Ikhtiyarat Al-Fiqhiyyah Min [9: 388]; Sharh Al-Sunnah by Al-Baghawi Sharh Al-Sunnah by Al-Baghawi 661661 Shariah Standard No. (25): Combination of Contracts (10) or two transaction in one transaction.(10) could sometimes generate Shariah restrictions that do not hold true when the combined acts are taken up individually. Examples of acts that become prohibited when combined, though they are individually permissible, include combining sale and lending, marrying two sisters, or marrying a woman and her aunt.(7)(7) a woman and her aunt. The absence of any exceptional Shariah restriction in the particular case The absence of any exceptional Shariah restriction in the particular case of combining constitutes the first control on contracts combining due to the directives of the Prophet (Peace be upon Him) who has been quoted to have prohibited combining sale with lending,(8)(8) or combining two sales or combining two sales to have prohibited combining sale with lending, in one deal,(9)(9) or two transaction in one transaction. in one deal, The second control, which prohibits using Contracts Combining as The second control, which prohibits using Contracts Combining as a trick for practicing Riba is based on the directives of the prophet (peace be upon him) which indicate prohibition of Riba al- and Riba al- be upon him) which indicate prohibition of Bay al-Inah FadlFadl. As regards , it has been reported that the Prophet (Peace Riba al-Fadl, it has been reported that the Prophet (Peace be upon Him) instructed one of his employees to sell his low-quality dates first and then buy the high-quality dates he wanted, instead of resorting to exchange of more quantity of low-quality dates for less quantity of high- (12) Ibn Al-Qayyim said, This indicates that the employee quality dates.(12) Ibn Al-Qayyim said, This indicates that the employee quality dates. was directed to commence the process of purchasing the high-quality dates after the complete finalization of the former transaction; i.e., selling his low-quality dates. If, instead, he agreed beforehand with another party . As regards Riba al-Fadl Bay al-Inah(11) (11) and Al- Muwafaqat [3: 192]. [3: 192]. (7)(7) Al- Muwafaqat [2: 657]; Mukhtasar Mukhtasar (8)(8) Al-Tirmidhi said: This is a good authentic Hadith: Al-Tirmidhi said: This is a good authentic Hadith: Al-Muwatta Musnad Al-Imam Ahmad [2: 178]; by Al-Munziri [5: 144]; Musnad Al-Imam Ahmad Sunan Abu Dawud by Al-Munziri [5: 144]; Sunan Abu Dawud [2: 178]; [5: 152]. Nayl Al-Awtar [5: 152]. [7: 295]; and Nayl Al-Awtar [5: 249]; Sunan Al-Nasai Aridat Al-Ahwazi [5: 249]; Aridat Al-Ahwazi (9)(9) Ibn Al-Arabi confirmed that these has been the directives of the Prophet (peace be upon Ibn Al-Arabi confirmed that these has been the directives of the Prophet (peace be upon by Al-Munziri [5: 98]; Al-Al- Him): Him): Al-Qabas [2: 663]; Aridat Al-Ahwazi Muwatta Nayl [7: 295]; and Nayl Muwatta [2: 663]; [5: 152]. Al-Awtar [5: 152]. Al-Awtar Mukhtasar Sunan Abu Dawud by Al-Munziri [5: 98]; [2: 842]; Mukhtasar Sunan Abu Dawud Sunan Al-Nasai [7: 295]; and Aridat Al-Ahwazi [5: 239]; [5: 239]; Sunan Al-Nasai Al-Muwatta [2: 657]; Al-Qabas [2: 842]; [5: 152]; Fath Al-Qadir Nayl Al-Awtar [5: 152]; [1: 198]; Nayl Al-Awtar (10) Musnad Al-Imam Ahmad (10) Fath Al-Qadir [6: 81]. Musnad Al-Imam Ahmad [1: 198]; [6: 81]. Al-Haythami said: Ahmad always reports from reliable sources: Majma Al-Zawaid Al-Haythami said: Ahmad always reports from reliable sources: Majma Al-Zawaid [4: 84]. Musnad Al-Imam Ahmad [2: 42, 48]; (11) Musnad Al-Imam Ahmad (11) Subul Al-Salam Subul Al-Salam [3: 14]; Al-Sunan by Ibn Al-Qayyim [5: 99, 104]. Al-Sunan by Ibn Al-Qayyim [5: 99, 104]. Related by Al-Bukhari, Muslim, Al-Tirmidhi, Al-Nasai and Malik: Sahih Al-Bukhari Sahih Al-Bukhari [2: 632]; Al Muwatta [2: 632]; [3: 97]; Sahih Muslim [3: 97]; and Sunan Al-Nasai and [3: 1208]; Aridat Al-Ahwadhi [7: 244]. Sunan Al-Nasai [7: 244]. by Al-Bayhaqi [5: 316]; Al-Sunan Al-Kubra by Al-Bayhaqi [5: 316]; Tahdhib by Al-Munziri; and Tahdhib (12) Related by Al-Bukhari, Muslim, Al-Tirmidhi, Al-Nasai and Malik: (12) Mukhtasar Sunan Abu Dawud by Al-Munziri; and [3: 14]; Mukhtasar Sunan Abu Dawud [2: 42, 48]; Al-Sunan Al-Kubra Aridat Al-Ahwadhi [5: 249]; Sahih Muslim [3: 1208]; [5: 249]; Al Muwatta 662662 Shariah Standard No. (25): Combination of Contracts to conduct the two deals successively, the second contract will not become an independent contract, because it is a mere completion of the first one. The directives of the Prophet (Peace be upon Him), apparently necessitate two separate contracts that neither of them is related to or based on the (13) other.(13) other. The third control, that prohibits using combined contracts as an excuse The third control, that prohibits using combined contracts as an excuse for dealing in Riba, is based on the directives of the Prophet (Peace be (14) In this regard, upon Him) which forbid combining lending with selling.(14) upon Him) which forbid combining lending with selling. In this regard, the Fuqaha unanimously agree that when the two parties stipulate in the loan contract that the borrower should reward the lender by offering him free accommodation, or grant him a present, or the borrower should make excessive repayment in terms of quantity or quality, the contract becomes null and void. In other words, any loan arrangement that comprises a prior condition on a benefit to be rendered to the lender by the borrower is (15) considered Riba.(15) considered Riba. The fourth control, which indicates that the contracts to be combined The fourth control, which indicates that the contracts to be combined should not be contradicting with each other in terms of purpose or Sha- riah rulings, stems from the fact that contracts, as indicted by Al-Qarafi, are devices for using appropriate means to achieve specific objectives. Ob- viously, the same contracting requirement cannot always fit at the same (16). Therefore, contracts that contradict time two contradicting positions(16) time two contradicting positions . Therefore, contracts that contradict each other in their rulings and effects cannot be combined together in the same transaction. The Shariah concessions sanctioned to subsidiary and implicit contracts The Shariah concessions sanctioned to subsidiary and implicit contracts are based on several statements in , including Al-Qawaid Al-Fiqhiyyah, including are based on several statements in Al-Qawaid Al-Fiqhiyyah the following: What can be forgiven in a subsidiary contract cannot be forgiven in What can be forgiven in a subsidiary contract cannot be forgiven in (17) other contracts.(17) other contracts. [2: 103]. Ighathat Al-Lahfan [2: 103]. [3: 238]; and Ighathat Al-Lahfan Ilam Al-Muwaqiin [3: 238]; and (13) (13) Ilam Al-Muwaqiin Related by Abu Dawud, Al-Tirmidhi, Al-Nasai, Ibn Majah, Ahmad, Al-Shafii and (14) Related by Abu Dawud, Al-Tirmidhi, Al-Nasai, Ibn Majah, Ahmad, Al-Shafii and (14) Malik. [See footnote No. (3) in Shariah Standard No. (19): Loan (Qard)]. [6: 436]; Al-Sharh Al-Kabir Ala Al-Muqni Al-Mughni [6: 436]; (15) Al-Mughni (15) Al-kafi by Ibn Qudamah [2: 93]; [5: 289]; [5: 289]; Al-kafi Fatawa by Ibn Taymiyyah [29: 334]. Fatawa by Ibn Taymiyyah [29: 334]. Al-Furuq [3: 142]. (16) [3: 142]. (16) Al-Furuq Article (54) of Majallat Al-Ahkam Al-Fiqhiyyah (17) Article (54) of (17) 120). Al-Sharh Al-Kabir Ala Al-Muqni [12: 432]; Al-Mubdi [4: 209]; and Al-Zakhirah [12: 432]; Al-Zakhirah Majmu Al- [4: 209]; and Majmu Al- by Ibn Qudamah [2: 93]; Al-Mubdi Majallat Al-Ahkam Al-Fiqhiyyah; and ; and Al-Ashbah Wa Al-Nazair , (P. Al-Ashbah Wa Al-Nazair, (P. 663663 Shariah Standard No. (25): Combination of Contracts What can be forgiven in implicit contracts cannot be forgiven in in- What can be forgiven in implicit contracts cannot be forgiven in in- (18) dependent contracts.(18) dependent contracts. Concessions that can be sanctioned to implicit provisions cannot be Concessions that can be sanctioned to implicit provisions cannot be (19) sanctioned to ordinary provisions.(19) sanctioned to ordinary provisions. Provisions in ordinary contracts entail more validity requirements Provisions in ordinary contracts entail more validity requirements (20) than provisions in implicit and subsidiary contract.(20) than provisions in implicit and subsidiary contract. Implicit contracts are relieved of what independent contracts cannot Implicit contracts are relieved of what independent contracts cannot (21) be relieved of.(21) be relieved of. Provisions that hold true in implicit contracts may not hold true in Provisions that hold true in implicit contracts may not hold true in (22) ordinary contracts.(22) ordinary contracts. Shortcomings like Gharar, which affect financial transactions such as sale Shortcomings like Gharar, which affect financial transactions such as sale contracts and the like, may be forgiven when the contract subject matter or the contract itself is subsidiary. The Prophet (peace be upon him) said: When somebody purchases a palm tree, that has not yet been pollinated, the fruits of the tree should belong to the seller unless the buyer stipulates (23) This Hadith in- in the contract that he should be entitled to the fruits.(23) in the contract that he should be entitled to the fruits. This Hadith in- dicates that the reason for ignoring the gharar involved in the act of the buyer who stipulates in the contract that the anticipated fruits of the palm tree should belong to him, is the fact that getting the fruits is an implicit aspect of the contract. As is the case with gharar, excessive Jahalah is also forgivable in subsidiary and implicit contracts. Ignoring sale-based Riba and non-fulfillment of the Shariah requirements Ignoring sale-based Riba and non-fulfillment of the Shariah requirements of currency exchange in subsidiary contracts is based on the Hadith of the Prophet (peace be upon Him) which states: When somebody buys a slave Prophet (peace be upon Him) which states: When somebody buys a slave who has money, the slaves money should go to the seller, unless the buyer Fatawa Al-Ramli [2: 115]. [2: 115]. (18) (18) Fatawa Al-Ramli Badai Al-Fawaid by Ibn Al-Qayyim [4: 27]. by Ibn Al-Qayyim [4: 27]. (19) (19) Badai Al-Fawaid Badai Al-Sanai [5: 58]. (20) [5: 58]. (20) Badai Al-Sanai by Al-Zarkashi [3: 378]. Al-Manthur Fi Al-Qawaid by Al-Zarkashi [3: 378]. (21) Al-Manthur Fi Al-Qawaid (21) Radd Al-Muhtar [4: 170]. (22) [4: 170]. (22) Radd Al-Muhtar Sahih Al-Bukhari with with Fath Al-Bari (23) Sahih Al-Bukhari (23) elaborations [10: 191]; elaborations [10: 191]; Sunan Abu Dawud Sunan Ibn Majah [2: 745]; Sunan Ibn Majah Ahmad [2: 6, 9, 54, 63, 78, 102 and 150]; and Ahmad Fath Al-Bari [5: 49]; Sunan Abu Dawud [2: 240]; Muwatta Al-Imam Malik [2: 617]; [2: 745]; Muwatta Al-Imam Malik [2: 6, 9, 54, 63, 78, 102 and 150]; and Aridat Al-Ahwazi [5: 49]; Sahih Muslim [2: 240]; Sunan Al-Nasai Sahih Muslim with Al-Nawawi with Al-Nawawi Sunan Al-Nasai [2: 260]; [2: 260]; Musnad Al-Imam [2: 617]; Musnad Al-Imam [5: 253]. Aridat Al-Ahwazi [5: 253]. 664664 Shariah Standard No. (25): Combination of Contracts Permissibility of (24) The justification stipulates in the contract that he should get the money.(24) stipulates in the contract that he should get the money. The justification for this is that the buyer may have taken into consideration (at the time of making his offer) the amount of money the slave could have, be it big or small, and explicitly determined a portion of the price for it, though he did not declare such portion independently. Hence, it becomes clear from this Hadith that it is permissible to buy a slave along with his money without observing the Shariah requirements of currency exchange, and regardless of whether the amount of money that the slave has is big or small, known or (25) unknown.(25) unknown. Permissibility of Bay al-Kali Bil-Kali (selling a debt for another debt) in Bay al-Kali Bil-Kali (selling a debt for another debt) in subsidiary and implicit contracts although it is prohibited in original and independent contracts, is based on the previous Hadith about purchasing a slave along with the money he has. In this respect, Imam Malik indicated in in Al-Muwatta the permissibility of selling a slave and providing in the Al-Muwatta the permissibility of selling a slave and providing in the contract for the status of the money he owns, even if that money is a debt owed to the slave by a third party and the slave is himself sold on deferred payment. That is to say, Malik seems to have based his opinion on the apparent and general meaning of the Hadith and the ruling practice in (26) Al-Madinah.(26) Al-Madinah. Permissibility of relieving, upon need or probable interest, subsidiary and Permissibility of relieving, upon need or probable interest, subsidiary and implicit contracts from some of the bases and conditions of contracts Al-Ashbah validity, can be derived from a statement by Al-Sayuti in Al-Ashbah validity, can be derived from a statement by Al-Sayuti in Wa Al-Nazair . In that statement, Al-Sayuti indicates permissibility of Wa Al-Nazair. In that statement, Al-Sayuti indicates permissibility of abandoning offer and acceptance (the form) in case of implicit sale, or accepting deferred, instead of spot, delivery/payment in such sales. Such rulings in fact come as further ramifications of the Fiqh principle that Subsidiary contracts can be relieved from what other contracts cannot (27) be relieved from(27) be relieved from Sahih Muslim [3: 1173]; [5: 49], Sahih Muslim Sunan Ibn Majah [2: 746]; [7: 261]; Sunan Ibn Majah Musnad Al-Imam Ahmad [2: 9 and 78]; and [3: 1173]; Sunan Abu Sunan Abu [2: 746]; Muwatta Muwatta Aridat Al- [2: 9 and 78]; and Aridat Al- Fath Al-Bari [5: 49], (24) Sahih Al-Bukhari (24) [2: 240]; Sunan Al-Nasai Sunan Al-Nasai [7: 261]; [2: 611]; Musnad Al-Imam Ahmad Sahih Al-Bukhari with with Fath Al-Bari Dawud Dawud [2: 240]; Al-Imam Malik [2: 611]; Al-Imam Malik Ahwazi [5: 252]. Ahwazi [5: 252]. by Ibn Al-Arabi [2: 805]; Al-Mughni Al-Qabas by Ibn Al-Arabi [2: 805]; Zurqani Ala Al-Muwtta [3: 253]. Zurqani Ala Al-Muwtta [3: 253]. [3: 253]. Al-Zurqani Ala Al-Muwtta [3: 253]. (26) Al-Zurqani Ala Al-Muwtta (26) by Al-Sayuti (pp. 120 and 377). Al-Ashbah Wa Al-Nazair by Al-Sayuti (pp. 120 and 377). (27) Al-Ashbah Wa Al-Nazair (27) (25) Al-Qabas (25) Al-Mughni by Ibn Qudamah [6: 96]; and by Ibn Qudamah [6: 96]; and Al-Al- 665665 Shariah Standard No. (25): Combination of Contracts Muwataah for combining contracts is considered as an enforceable Muwataah for combining contracts is considered as an enforceable condition that precedes the signing of the contract, because Muwataah, traditionally as well as in fiqh terminology, is an agreement between the two parties to sign contracts and honor pledges in the future. Therefore Ibn Taymiyyah said, When the two parties agree beforehand to do specific things, and then sign a general contract, the contract should honor that (28) prior agreement.(28) prior agreement. A condition that precedes the contract should be regarded as binding A condition that precedes the contract should be regarded as binding and enforceable as a one that comes in the text of the contract, because traditionally there is no difference between the conditions stated in the contract and those agreed upon beforehand, even if such prior conditions are not mentioned at the time of signing the contract. This is only natural since these conditions form the bases of the contract, which the two parties have agreed to observe. This viewpoint is supported by a number of traditionally accepted norms such as: A condition, which the two parties agree to observe, resembles a one A condition, which the two parties agree to observe, resembles a one explicitly mentioned in the contract. Traditionally acceptable conditions resemble explicitly stated condi- Traditionally acceptable conditions resemble explicitly stated condi- tions. Intentions in contracts deserve observation. Intentions in contracts deserve observation. Moreover, enforceability of prior conditions was the ruling practice in (29) Al-Madinah and the predominant opinion in Al-Imam Ahmads School.(29) Al-Madinah and the predominant opinion in Al-Imam Ahmads School. Prohibition of Muwataah for devising Riba tricks is because Muwataah Prohibition of Muwataah for devising Riba tricks is because Muwataah in this case is a means used for practicing Riba. Consequently, since the end objective (which is Riba) is prohibited, the means used for achieving it must also be prohibited. As indicated in Al-Qawaid Al-Fiqhiyyah, it must also be prohibited. As indicated in Al-Qawaid Al-Fiqhiyyah, (30) means are discarded on discarding of objectives(30) means are discarded on discarding of objectives [3: 105, 145, 212 and 241]; Kashshaf Al-Qina Kashshaf Al-Qina [5: 98]; Bayan [5: 98]; Bayan by Ibn Taymiyyah Majmu Al-Fatawa by Ibn Taymiyyah (P. 533); Majmu Al-Fatawa by Ibn Taymiyyah [4: 108]; Al-Madkhal Al-Fiqhi Al-Madkhal Al-Fiqhi by Al-Uqud Wa Al-Shurut Wa Al-Khiyarat by by Al-Zarqa [1: 487]; and Al-Uqud Wa Al-Shurut Wa Al-Khiyarat Al-Fatawa Al-Kubra by Ibn Taymiyyah [4: 108]; (28) (28) Nazariyyat Al-Aqd (29) Ilam Al-Muwaqqiin (29) Nazariyyat Al-Aqd by Ibn Taymiyyah (p. 204). by Ibn Taymiyyah (p. 204). Ilam Al-Muwaqqiin [3: 105, 145, 212 and 241]; Al-Dalil Ala Butlan Al-Tahlil (P. 533); Al-Dalil Ala Butlan Al-Tahlil [29: 336]; [29: 336]; Al-Fatawa Al-Kubra Al-Aam Al-Aam by Al-Zarqa [1: 487]; and Ahmad Ibrahim (P. 711). Al-Furuq by Al Qarafi [2: 33]; and Salam [1: 161 and 168]. (30) Al-Furuq (30) by Al Qarafi [2: 33]; and Al-Qawaid Al-Kubra by Al-Izz Ibn Abdul- Al-Qawaid Al-Kubra by Al-Izz Ibn Abdul- 666666 Shariah Standard No. (25): Combination of Contracts Prohibition of Muwataah as an excuse for Riba, originates from the Prohibition of Muwataah as an excuse for Riba, originates from the . This principle aims Sadd al-Zarai. This principle aims application of the principle of Sadd al-Zarai application of the principle of to prohibit permissible practices that could be used as a means for (31) accomplishing Shariah-banned objectives.(31) accomplishing Shariah-banned objectives. should be Sadd al-Zarai should be However, application of the principle of Sadd al-Zarai However, application of the principle of based on two requirements as indicated by the Maliki Fuqaha. The first requirement is that resort to the (excuse) should be very frequent Zariah (excuse) should be very frequent requirement is that resort to the Zariah and excessive in view of normal practice, and the second requirement is the presence of a strong accusation that rules out the possibility of any (32). Application of the principle good intention behind using the excuse(32) good intention behind using the excuse . Application of the principle Sadd al-Zarai should also observe the non-existence of any need or of of Sadd al-Zarai should also observe the non-existence of any need or , as has been emphasized by several Zariah, as has been emphasized by several lawful interest for using the Zariah lawful interest for using the fiqh principles such as: Prohibition for the sake of blocking the way to excuses is less force- Prohibition for the sake of blocking the way to excuses is less force- (33) ful than prohibition per se.(33) ful than prohibition per se. Practices that originate from the need for devising acceptable Shariah Practices that originate from the need for devising acceptable Shariah (34) exits deserve more Shariah concessions than other practices.(34) exits deserve more Shariah concessions than other practices. Acts that are prohibited for the sake of blocking the way to excuses Acts that are prohibited for the sake of blocking the way to excuses become permissible in case of need or desire to achieve a lawful in- (35) terest.(35) terest. Permissibility of Muwataah for devising acceptable Shariah exits can be Permissibility of Muwataah for devising acceptable Shariah exits can be derived from the statements of several Fuqaha who indicate that using Shariah accepted means to achieve permissible objectives is permissible. According to those Fuqaha practicing acceptable Shariah exits and helping others to devise them is a permissible and reward-worthy practice as long as it abides by the directives of Allah, Exalted be He, leads to avoidance of (36) sins, and facilitates achievement of lawful interests.(36) sins, and facilitates achievement of lawful interests. Al-Furuq by Al-Qarafi [2: 32]; and [2: 876]. Al-Qabas [2: 876]. by Al-Qadi Abdul-Wahhab [2: 996]; and Al-Maunah by Al-Qadi Abdul-Wahhab [2: 996]; and by Al-Qarafi [2: 32]; and Al-Qabas (P. 449); Al-Furuq (31) (31) Sharh Tanqih Al-Fusul (32) Al-Muwafaqat (32) Sharh Tanqih Al-Fusul (P. 449); [4: 198]; Al-Maunah Al-Muwafaqat [4: 198]; [2: 441]. Iqd Al-Jawahir Al-Thaminah [2: 441]. Iqd Al-Jawahir Al-Thaminah Ilam Al-Muwaqqiin [2: 140]. [2: 140]. (33) (33) Ilam Al-Muwaqqiin (34) Al-Ashbah Wa Al-Nazair (34) by Al-Sayuti (P. 158). Al-Ashbah Wa Al-Nazair by Al-Sayuti (P. 158). Zad Al-Maad [4: 78]; (35) Zad Al-Maad (35) Fatawa by Ibn Taimaih [23: 214-215], [32: 228-229]; and Fatawa [1: 339, 383 and 385] and [2: 86]. Ighathat Al-Lahfan [1: 339, 383 and 385] and [2: 86]. [4: 78]; Tafsir Ayat Ashkalat (36) Ighathat Al-Lahfan (36) by Ibn Taimaih [23: 214-215], [32: 228-229]; and Ilam Al-Muwaqqiin Tafsir Ayat Ashkalat by Ibn Taymiyyah [2: 682]; by Ibn Taymiyyah [2: 682]; Majmu Al- Majmu Al- [2: 142]. Ilam Al-Muwaqqiin [2: 142]. 667667 Shariah Standard No. (25): Combination of Contracts (37). It Prohibition of Muwataah for combining contracts that contradict each Prohibition of Muwataah for combining contracts that contradict each other in rulings and objectives is because Muwataah in this case is used as a means of doing an unacceptable act. According to Shariah, means always follow ends with regard to permissibility and prohibition(37) follow ends with regard to permissibility and prohibition has been . It has been that: Disregarding the ends leads Al-Qawaid Al-Fiqhiyyah that: Disregarding the ends leads indicated in Al-Qawaid Al-Fiqhiyyah indicated in (38) to disregard of the means.(38) to disregard of the means. Recognition of Muwataah when it precedes contemporary transactions, Recognition of Muwataah when it precedes contemporary transactions, that comprise a set of successive and inseparable contracts forming up tradition a single transaction, is the present day commercial and banking tradition a single transaction, is the present day commercial and banking that considers Muwataah in this case as binding to the two parties. In fact, Muwataah in this sense is part of a whole system that tends to completely collapse when any of its individual components looses balance. Violating Muwataah in this case will jeopardize the fulfillment of the objectives of the contracting parties, and may cause them serious injuries. The pledges that relate to an agreement are binding to the two parties The pledges that relate to an agreement are binding to the two parties since, according to its nature and Fiqh status, and as perceived by most of the Fuqaha, such pledges are similar to the conditions stipulated in the agreement. Enforceability of such pledges also stems from the fact that they constitute the basis for the transaction. It is well known that Shariah- accepted conditions stipulated in a contract are binding from both the fiqhi as well as the legal viewpoints. Moreover, in present day commercial and banking traditions, such pledges are also considered as binding. Otherwise, it will not be possible for the two parties to form up a definite perception about the purpose and objectives of the contract, and hence they will not be able to sign it. (37) Al-Muafaqat (37) (38) Al-Qawaid (38) [2: 212]. Al-Muafaqat [2: 212]. by Al-Muqri [1: 329]. Al-Qawaid by Al-Muqri [1: 329]. 668668 Shariah Standard No. (25): Combination of Contracts Appendix (C) Definitions Zarai Zarai are the apparently permissible practices used as a means of doing a prohibited act. Therefore, means prohibition of Sadd al-Zarai means prohibition of doing a prohibited act. Therefore, Sadd al-Zarai permissible practices that can be used for committing Shariah-restricted acts. However, prohibition in this sense is subject to two restrictions. The first is the existence of a clear intention of the person in question to use the permissible practice for the sake of accomplishing Shariah-banned objectives, and the second is that resorting to prohibition should be only after wide spread of such misconduct in the society. Subsidiaries Subsidiary contracts or objectives in financial transactions refer to the consequent contracts or objectives that follow the original ones. The subsid- iary status of these contracts or objectives is usually determined according to tradition, practice and the experience of those who are in the field. Transaction It is a binding contractual relationship that carries no optional choices. Inah It is a sale whereby one party, for instance, sells the commodity to the other for one hundred dollars, on deferred payment basis, and repurchases it from the other for eighty dollars payable on spot. In fact, the sale transaction here is nothing but a mere trick for practicing usurious lending, and the commodity is used for no purpose other than facilitating the usurious transaction. The deal in this case has nothing to do with the purposes and objectives of sale, nor does it contain any element of them. In other words Inah takes place when one party buys a commodity from the other 669669 Shariah Standard No. (25): Combination of Contracts on deferred payment basis and before making payment sells back the same commodity to the other for a less amount of money payable on spot. Reverse Inah It takes place when one party sells the commodity to the other party for a spot price, and the seller repurchases the same commodity from the buyer or from his agent for a higher deferred price. Bay al-Wafa) Bay al-Raja ( (Bay al-Wafa Bay al-Raja It is a sale whereby the seller keeps the intention to buy back his sold commodity. One of the most popular forms of this type of sale is when one party, who wants to obtain an interest-bearing loan, agrees to sell an income-earning asset to the lender. The lender will thus become entitled to the income of the asset as long as it remains in his ownership. The buyer then undertakes to return the sold asset to the seller whenever the seller pays back the same price to him. In this manner, the borrower (artificial buyer) succeeds to get the loan amount against payment of the agreed upon interest. Shariah-Banned Tricks It refers to those permissible contractual arrangements and other practices, which may be used to achieve prohibited goals like permitting what Shariah has prohibited, like escaping duties, deceiving people and performing other Shariah-banned practices. Shariah Exit (Shariah-Acceptable Trick) A Shariah exit is an act that is performed for the sake of avoiding com- mitment of sins, or achieving a permissible objective, or refraining from prohibited acts, or realizing a Shariah-acceptable interest. Separation of the Transaction Separation of a transaction means dividing the object of the same contract, into portions. To Fuqaha, it means a situation in which the provisions of the contract do not cover all the components of its object, or they may cover all of them first, and then shrink down to cover only some of them later on. Thus, either the single transaction is broken down into a number of portions, or only 670670 Shariah Standard No. (25): Combination of Contracts some parts of it are separated in this manner. When separation takes place in this manner in a single transaction between a single buyer and a single seller and for a single price, the buyer should have the option to conclude the deal or not. 671671 Shariah Standard No. (26) Islamic Insurance Contents Subject PagePage ................................................................................................... Preface ................................................................................................... Preface ..................................................................... Statement of the Standard ..................................................................... Statement of the Standard ..............................................................................
Scope of the Standard ..............................................................................
Scope of the Standard
1. Definition of Islamic Insurance in Contrast with Conventional Insurance. Definition of Islamic Insurance in Contrast with Conventional Insurance.
Status of Islamic Insurance According to Fiqh (Islamic Jurispru- ........................................................................................................ dence) ........................................................................................................ dence) ...................................
Contractual Relationships in Islamic Insurance ...................................
Contractual Relationships in Islamic Insurance ..............................
Principles and Shariah Bases of Islamic Insurance ..............................
Principles and Shariah Bases of Islamic Insurance ......................................................................
Types of Islamic Insurance ......................................................................
Types of Islamic Insurance .........................................................
Participation in Islamic Insurance .........................................................
Participation in Islamic Insurance .......................
Commitments of the Participant in Islamic Insurance .......................
Commitments of the Participant in Islamic Insurance
Conditions in Islamic Insurance Policies.............................................. ...........
Commitments and Jurisdictions of the Joint Stock Company ...........
Commitments and Jurisdictions of the Joint Stock Company ...................................................................................................
Indemnity ...................................................................................................
Indemnity ......................................................................................
Insurance Surplus ......................................................................................
Insurance Surplus .......................................................................
Expiry of Insurance Policy .......................................................................
Expiry of Insurance Policy .............................................................
Date of Issuance of the Standard .............................................................
Date of Issuance of the Standard ...................................................................... Adoption of the Standard ...................................................................... Adoption of the Standard Appendices Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (b): The Shariah Basis for the Standard Appendix (b): ..................................... The Shariah Basis for the Standard ..................................... Appendix (c): Definitions Appendix (c): .............................................................................. Definitions .............................................................................. 677677 678678 679679 680680 681681 682682 683683 685685 686686 687687 688688 690690 698698 675675 IN THE NAME OF ALLAH, THE ALL-MERCIFUL, THE MOST MERCIFUL All praise be to Allah, the Lord of all the worlds, and blessings and peace be upon our master, Muhammad, and his household and all his companions Preface The purpose of this standard is to present the Shariah rules that govern Islamic Insurance, as well as the characteristics, basic aspects, principles and types of Islamic Insurance. The standard also aims to indicate the controls that Islamic financial Institutions (Institution/Institutions)(1)(1) should observe that Islamic financial Institutions (Institution/Institutions) should observe in this connection. (1) The word (Institution/Institutions) is used here to refer, in short, to Islamic financial institutions including Islamic Banks. 677677 Shariah Standard No. (26): Islamic Insurance Statement of the Standard
Scope of the Standard This Standard covers Islamic Insurance in terms of its definition, Shariah status, characteristics, principles, basic elements, types, and how it differs from Conventional Insurance. The Standard also sets out the controls to be observed by the Islamic financial Institutions offering products based on Islamic insurance. However, it does not cover social insurance schemes arranged by the state.
Definition of Islamic Insurance in Contrast with Conventional Insur- ance Islamic Insurance is a process of agreement among a group of persons to handle the injuries resulting from specific risks to which all of them are vulnerable. A process, thus initiated, involves payment of contributions as donations, and leads to the establishment of an insurance fund that enjoys the status of a legal entity and has independent financial liability. The resources of this fund are used to indemnify any participant who encounters injury, subject to a specific set of rules and a given process of documentation. The fund is managed by either a selected group of policyholders, or a joint stock company that manages the insurance operations and invests the assets of the fund, against a specific fee. As for Conventional Insurance, it is a Muawadah (mutual compensation) contract that seeks to make profit out of the insurance operation itself, and, hence, is subject to Shariah rulings on financial dealings that involve Gharar (uncertainty). Consequently, conventional insurance is banned by Shariah.
Status of Islamic Insurance According to Fiqh (Islamic Jurisprudence) Islamic insurance is based on the commitment of the participants to make donations for the sake of their own interest. The participants, 678678 Shariah Standard No. (26): Islamic Insurance therefore, protect their group by payment of contributions that constitute the resources of the insurance fund, and assign the management of that fund to a committee of policyholders, or to a joint stock company that possesses the license of practicing insurance business. In the latter case, the company assumes this job on the basis of a remunerated Wakalah (Agency) contract. In addition to managing the insurance operations, the committee of policyholders or the company also assumes the responsibility of investing the assets of the fund through Mudarabah or investment agency. 3/1 The managing company is entitled to its own capital and returns on capital, the agency fee, and its specific share of the profits earned by investing the insurance assets through Mudarabah or investment agency. The company also bears all the expenses of its operations including those relating to its tasks for investing the insurance assets. 3/2 The policyholders fund is entitled to the contributions and the returns thereon, the provisions and reserves relating to insurance business, and the insurance surplus. The fund bears all direct expenses pertaining to management of insurance operations.
Contractual Relationships in Islamic Insurance There are three contractual relationships in Islamic insurance, including: 4/1 The Musharakah (partnership) among the participants, which leads to the establishment of a company that has articles of association and all other documents. The relationship between the participants may be confined to a Musharakah contract if a company manages the fund. [see Shariah Standard No. (12), on Sharikah (Musharakah) and Modern Corporations] 4/2 The relationship between the company and the policyholders fund which is a Wakalah relationship in regard to management, and a Mudarabah or investment agency relationship in regard to the investment of the funds assets. 4/3 The relationship between the policy holders and the fund which takes the form of donation commitment at the stage of making 679679 Shariah Standard No. (26): Islamic Insurance contribu tions, and indemnification commitment at the stage of pro-pro- contributions, and indemnification commitment at the stage of viding compensation for injury as per regulations and underlying constituent documents.
Principles and Shariah Bases of Islamic Insurance Islamic insurance is based on the following principles and rules of Shariah, which shall be explicitly mentioned in the articles of association or the rules or the documents of the corporation: 5/1 Donation commitment, as it should be stipulated that the participant donates his contribution and the returns thereon to the insurance account for payment of indemnity, and may undertake to bear any deficit that may occur, as per regulations. 5/2 The company that arranges the insurance deal should maintain two separate accounts: one for its own rights and liabilities, and the other for the rights and liabilities of the policyholders. 5/3 The company should assume the role of the agent in managing the insurance account, and the role of the Mudarib or agent in investing the insurance assets. 5/4 The insurance account is entitled to the insurance assets and their returns on investment, and should bear the liabilities relating to these assets. 5/5 The adopted rules may comprise disposal of the surplus in a way that serves the cause of common interest of the participants, such as accumulation of reserves, reduction of the contribution, charitable donations and partial/full distribution of the surplus among the participants. The managing company is not entitled to any share of the surplus. 5/6 When the company is liquidated, all provisions and accumulated reserves pertaining to insurance should be spent on charitable pur- poses. 5/7 Preference should be given to policyholders to participate in manage- ment of the insurance operations through appropriate legal arrange- protect ments that enable them to exercise their control rights and protect ments that enable them to exercise their control rights and 680680 Shariah Standard No. (26): Islamic Insurance their interest. Such arrangements could include, among others, repre- sentation of policyholders in the Board of Directors. 5/8 Company shall adhere to the rules and principles of Islamic Shariah in all its activities and investments, especially in refraining from provision of insurance coverage for Shariah-banned items, activities or purposes. 5/9 A Shariah Supervisory Board shall be formulated for issuance of Fatawa (plural: Fatwa, i. e. juristic opinion) that are binding to the company, and establishment of an internal unit for Shariah monitoring and auditing.
Types of Islamic Insurance 6/1 Property Insurance: which entails indemnification for actual injury, and comprises insurance against fire, car accidents, airplane accidents, liability, breach of trust, etc. [See Shariah Standard No. (5) on Guarantees item 6/4] 6/2 Person Insurance: which includes insurance against the risk of disability (mutual support). It Takaful (mutual support). It and death, and is sometimes known as and death, and is sometimes known as Takaful corresponds to conventional life insurance. 6/2/1 Insurance against the risk of disability or death takes place as follows: 6/2/1/1 Submission of a request for participation indicating all personal affairs and characteristics, that need to be known for offering the insurance coverage to the insured, along with the particulars of the entitlements and obligations of the insured. 6/2/1/2 Specification of the contribution amount. 6/2/1/3 Specification of the benefits payable to the beneficiary as per agreement. 6/2/1/4 In case of death, the Takaful 6/2/1/4 In case of death, the entitlements should be Takaful entitlements should be distributed among the deserving persons, parties or purposes as indicated in the documents, and accord- 681681 Shariah Standard No. (26): Islamic Insurance ing to the regulatory rules issued by the Shariah Su- ing to the regulatory rules issued by the Shariah Su- pervisory Board. In case the deceased was entitled to some investment balances, then the same should be distributed among the inheritors according to the Is- lamic rules of inheritance. 6/2/1/5 In case of insurance against death, it should be stip- ulated in the insurance policy that the insured (the beneficiary) or his inheritor should not be entitled to any compensation when the death is caused by a murder wherein the said beneficiary or inheritor is involved.
Participation in Islamic Insurance 7/1 Non-Muslims may participate with Muslims in the various types of Islamic insurance. 7/2 The contribution may be determined according to the actuarial principles based on statistical techniques. In this regard, due con- sideration should be given to whether the risk involved is fixed or variable, and to the contribution/risk tradeoff besides determination of the type and period of the risk coverage, and specification of the insurance amount. 7/3 The risk that constitutes the subject matter of insurance should be one that could probably occur. It should not be something that relates to the absolute will of the participant, and should not encounter any Shariah prohibition.
Commitments of the Participant in Islamic Insurance The participant (insurance seeker) should observe the following commit- ments:ments: 8/1 Submission of the required information about the risks to be insured against, and informing the company of any new circumstances that may increase these risks after concluding the contract. If it is proved that the participant had committed fraud or deceit, or submitted false information, he is then subject to partial or full deprivation 682682 Shariah Standard No. (26): Islamic Insurance from indemnity. In case of unintentional misrepresentation by the participant, the indemnity shall become proportionate to the accurate information he presented. 8/2 Payment of contribution on time as per agreement. If the participant refrains from or delays payment of his contribution, the company has the right to terminate the contract or pursue legal enforcement of payment. 8/3 Informing the company, in its capacity as an agent of the policyholders fund, of occurrence of the risk insured. Notification should be made during the period stipulated in the insurance policy, or within reasonable time if such period is not provided for in the policy. If the participant fails to make such notification, the company has the right to claim indemnity from him for the actual loss incurred by the insurance account due to such breach of commitment.
Conditions in Islamic Insurance Policies 9/1 There is no Shariah restriction on providing for special conditions in the insurance policy. Special conditions may relate to periods of insur- ance, denial of indemnity in specific cases as when the participant fails to notify the company about occurrence of risk on time, or charging the participant with a specific portion of the indemnity. A condition thus stipulated in the insurance policy remains binding as long as it does not contradict with the rules of Shariah or the prerequisites of the contract. 9/2 It is permissible to stipulate in the insurance policy special cases that lead to deprivation from indemnity provided that justice, preservation of rights, and avoidance of abusive conditions are well observed.
Commitments and Jurisdictions of the Joint Stock Company 10/1 The Company shall assume the various tasks of managing the insurance operations including; preparation of insurance policies, collection of contributions, payment of indemnities, and all other technical tasks. The Company performs such tasks against a specific fee, which should be stated in the agreement in order to obtain the participants approval thereon by signing the contract. 683683 Shariah Standard No. (26): Islamic Insurance 10/2 The Company is entrusted with the duty of achieving common interest while undertaking the management of the insurance operations. However, it should not guarantee the insurance assets except in case of misconduct, negligence or breach of contractual obligations. 10/3 The Company shall bear its pre-operating expenses as well as all other expenses that relate to conducting its own business or the investment of its own funds. 10/4 The statutory reserve of the Joint Stock Company is deducted from its share capital and becomes part of its shareholders equity, a case that also holds true for all other capital-related deductions. No deduction shall be made from the policyholders fund or profits for the benefit of the shareholders of the Joint Stock Company. 10/5 For the sake of serving the policyholders interest, it is permissible to deduct part of their funds or profits to be used as reserves or allocations pertaining to the insurance fund. Such deductions, however, should by no means belong to the shareholders of the Joint Stock Company. The accumulated balance of the insurance account shall be spent on charity purposes in case of liquidation. 10/6 The Company claims indemnity from the party who causes the injury, whether through breach of contractual commitment or any similar misbehavior. In this case, the Company represents the participants in disposing of all the tasks that relate to the case, such as filing of lawsuits, realization of the consequent rights, and depositing the proceeds in the insurance account. 10/7 When the Company invests the policyholders funds through Mudarabah, it should bear the expenses that are normally borne by the Mudarib [see Shariah Standard No. (13) on Mudarabah]. However, if the Company invests such funds through investment agency, the deal shall be subject to Shariah rulings on remunerated agency. 684684 Shariah Standard No. (26): Islamic Insurance 10/8 When the insurance assets along with indemnities received from re- insurance companies fall short of covering indemnity commitments, the Company may cover the deficit from project financing or Qard Qard the Company may cover the deficit from project financing or HasanHasan (interest-free or benevolent loan) debited to the account (interest-free or benevolent loan) debited to the account of the insurance fund. In this regard, the deficits resulting from commitments of the current year may be covered from the surpluses of the succeeding years. The Company may also claim settlement of the deficit from policyholders if they undertake to do so in the insurance policy. 10/9 The insurance account shall bear all the expenses and fees that relate to insurance activities. 10/10 There is no Shariah restriction on reconciling between the Company and the party who causes the injury, if such reconciliation is in the interest of the participants, and conforms to the relevant Shariah rulings.
Indemnity 11/1 The participant shall receive either the loss, he incurred because of the injury, or the insurance amount; whichever is less, and as per regulations. 11/2 The participant should not receive both the indemnity and the compensation from other parties for injury caused to him. 11/3 In Property Insurance, indemnity should be confined to what has been provided for in the regulations, and may comprise subsidiary losses that can be appropriately estimated according to the actual injury.
Insurance Surplus 12/1 The insurance surplus is part of the assets of the insurance account and should be disposed of according to what has been stated in item 5/5 of this Standard. 12/2 Distribution of the surplus or part thereof among the policyholders should be in one of the following forms, provided that the selected form is explicitly mentioned in the regulations: 685685 Shariah Standard No. (26): Islamic Insurance 12/2/1 Distribution of the surplus among the policyholders in proportion to their respective contributions, and regardless of whether the policyholder has received indemnity during the whether the policyholder has received indemnity during the financial period or not. 12/2/2 Distribution of the surplus among the policyholders who have not received indemnity during the financial period. 12/2/3 Distribution of the surplus among policyholders after deducting the amounts of indemnity they receive during the same financial period. 12/2/4 Distribution through any other method approved by the Shariah Supervisory Board.
Expiry of Insurance Policy The insurance policy expires in any of the following cases: 13/1 At the end of the period agreed upon in the insurance policy. In case of property insurance, it is permissible to stipulate that the contract is automatically renewable unless the participant informs the company, within a specific period before expiry of the contract, of his desire to cease contracts renewal. 13/2 Termination of the policy by the company or the participant, if the policy provides for the right of termination to each of the parties to contract. 13/3 Complete damage of the insured property (in case of property insurance), without nullifying the entitlement of the participant to the indemnity, subject to the contracts conditions. 13/4 Death of the insured person in case of persons (life) insurance, without nullifying the entitlement of the beneficiary to the in- surance benefits, subject to the contracts conditions.
Date of Issuance of the Standard This Standard was issued on 23 Rabi I, 1426 A.H., corresponding to 2 May 2005 A.D. 686686 Shariah Standard No. (26): Islamic Insurance Adoption of the Standard The Shariah standard on Islamic Insurance was adopted by the Shariah Board in its meeting No. (16) held in Al-Madinah Al-Munawwarah on 7-12 Jumada I, 1427 A.H., corresponding to 3-9 June 2006 A.D. 687687 Shariah Standard No. (26): Islamic Insurance Appendix (A) Brief History of the Preparation of the Standard The Shariah Board decided in its meeting No. (8) held on 28 Safar 4 Rabi I, 1423 A.H., corresponding to 11-16 May 2002 A.D., in Makkah Al- Mukarramah to issue a Shariah Standard on Islamic Insurance. On 12 Jumada I, 1424 A.H., 12 July 2003 A.D., the Shariah Standards Committee decided to commission a Shariah consultant to prepare a draft standard on Islamic Insurance. In its meeting No. (10) held on 2324 Jumada II, 1424 A.H., corresponding to 2324 July 2003 A.D., in Amman, the Hashemite Kingdom of Jordan, the Shariah Standards Committee (1) discussed the Shariah study and advised the consultant to incorporate the necessary changes, in the light of the discussions and observations of its members. The Shariah Standards Committee (1) once again discussed the draft of the Standard in its meeting No. (11) held on 2526 Safar 1425 A.H., corre- sponding to 15-6 April 2004 A.D., in the Kingdom of Bahrain and incor- porated further changes in it. The committee also requested the consultant to review the document on the light of the discussions and incorporate necessary changes. A third round of discussions on and amendments in the draft of the Standard also took place in meeting No. (12) of the Shariah Standards Committee (1) held on 28 Rabi II, 1425 A.H., corresponding to 16 June 2004 A.D. in Dubai, United Arab Emirates. The revised version of the Standard was then submitted to the Shariah Board in its meeting No. (13) held in Makkah Al-Mukarramah on 26 Shaban 1 Ramadan 1425 A.H., corresponding to 1015 October 2004 A.D. and further changes were incorporated in the document. 688688 Shariah Standard No. (26): Islamic Insurance In its meeting No. (14) held in Dubai, United Arab Emirates on 2124 Rabi I, 1426 A.H., corresponding to 30 April 2 May 2005 A.D., the Shariah Board discussed the draft of the Standard and decided, in the light of the discussions and comments of the members, to transfer it to the Shariah Standards Committee (1) for thorough study. The Shariah Standards Committee (1) studied the draft of the Standard in held in Kingdom of Bahrain on 45 Shaban 1426 A.H., No. (17) held in Kingdom of Bahrain on 45 Shaban 1426 A.H., its meeting its meeting No. (17) corresponding to 89 September 2005 A.D. The revised draft of the Standard was again submitted to the Shariah Board in its meeting No. (15) held in Makkah Al-Mukarramah, on 2226 Shaban 1426 A.H., corresponding to 2630 September 2005 A.D. The Board decided to send the document to concerned experts for review and comments before discussing it in a public hearing. AAOIFI held a public he AAOIFI held a aring in the Kingdom of Bahrain on 1 Safar public hearing in the Kingdom of Bahrain on 1 Safar 1427 A.H., corresponding to 1 March 2006 A.D. More than 30 participants representing central banks, Institutions, accounting firms, Shariah scholars, academics and other interested parties attended the session. Several comments and observations were posed, to which the members of the Shariah Standards Committees (1) and (2) duly responded. In its meeting held in the Kingdom of Bahrain on 1 Safar 1427 A.H., corresponding to 1 March 2006 A.D., the Drafting Committee discussed the comments and observations made in the public hearing and made the changes that it deemed necessary. In its meeting No. (16) In its meeting held in Al-Madinah Al-Munawwarah on 712 No. (16) held in Al-Madinah Al-Munawwarah on 712 Jumada I, 1427 A.H., corresponding to 39 June 2006 A.D., the Shariah Board discussed the amendments proposed by the Drafting Committee, incorporated some changes in the document and approved the Standard (unanimously for some clauses and with the majority for others), as indicated in the minutes of the Boards meetings. 689689 Shariah Standard No. (26): Islamic Insurance Appendix (B) The Shariah Basis for the Standard Commercial Insurance is prohibited because it involves Gharar (uncer- Commercial Insurance is prohibited because it involves Gharar (uncer- (compilers of the books Ashab Al-Sunan (compilers of the books tainty). In this regard Muslim, Ashab Al-Sunan tainty). In this regard Muslim, of Sunan) and others quoted Abu Hurayrah as having said: The Prophet of Sunan) and others quoted Abu Hurayrah as having said: The Prophet peace be upon him prohibited sales which involve Gharar.(2)(2) peace be upon him prohibited sales which involve Gharar The Fuqaha define Gharar in several ways, which -in brief- indicate that The Fuqaha define Gharar in several ways, which -in brief- indicate that it is a process that has unknown/unrevealed consequences and outco- mes.mes.(3)(3) Some contemporary scholars believe that Gharar is similar to betting and Some contemporary scholars believe that Gharar is similar to betting and gambling.(4)(4) gambling. Resolutions of Fiqh forums on insurance include the resolution of the Resolutions of Fiqh forums on insurance include the resolution of the Islamic Fiqh Academy in its first session held in 1398 A.H., which endorsed a preceding resolution on the subject issued by the Council of Eminent Shariah Scholars of the Kingdom of Saudi Arabia in its session No. (10) held in Riyadh on 4 April 1397 A.H. A third resolution on the subject was issued by the International Islamic Fiqh Academy - Resolution No. 9 (9/2). Permissibility of cooperative/mutual/social insurance stems from the fact Permissibility of cooperative/mutual/social insurance stems from the fact that it is based on cooperation and donation, rather than on Muawadah (exchange contract). It is well known among the Fuqaha (Maliki School) (2)(2) Sahih Muslim [2: 167]; Al-Muwatta Kitab: Al-Buyu [3: 1153]; [2: 217]; Sunan Ibn Majah [1: 203] and [2: 367 and 439]; Sunan Al-Bayhaqi [3: 1153]; Sunan Abu Dawud Sunan Ibn Majah [2: 739]; Al-Muwatta [2: 664]; Sunan Al-Bayhaqi [5: 226]; and Sunan Abu Dawud [2: 228] (H: 3367); [2: 228] (H: 3367); Sunan Al-Tirmidhi [2: 739]; Sunan Al-Tirmidhi [2: 664]; Musnad Al-Imam Musnad Al-Imam Musannaf [5: 226]; and Musannaf Sahih Muslim, , Kitab: Al-Buyu Sunan Al Nasai [2: 217]; Sunan Al Nasai [3: 532]; Sunan Al-Darimi [2: 167]; [3: 532]; Sunan Al-Darimi Ahmad [1: 203] and [2: 367 and 439]; Ahmad Ibn Abu Shaybah [8: 194], Section (2). Ibn Abu Shaybah [8: 194], Section (2). Al-Taj [4: 46]; Al-Taj See: Sharh Al-Inayah Maa Fath Al-Qadir [8: 127]; Matalib Uli Al- Matalib Uli Al- Wa Al-Iklil Wa Al-Iklil [4: 362]; Nuha (P. 224). See: Nazariyyat Al-Aqd (P. 224). See: Nuha [3: 25]; Al-Gharar Wa Atharahu Fi Al-Uqud by Al-Siddiq Al-Amin Al-Darir (published by Al-Gharar Wa Atharahu Fi Al-Uqud by Al-Siddiq Al-Amin Al-Darir (published by Saleh Kamil Center for University Thesis), (P. 54). See: Husayn Hamid, Al-Gharar [4: 362]; Fath Al-Aziz Bi-Hamish Al-Majmu Fath Al-Aziz Bi-Hamish Al-Majmu [8: 127]; Sharh Al-Inayah Maa Fath Al-Qadir [5: 192]; Al-Qawaid Al-Nuraniyyah (P. 116); [3: 25]; Al-Qawaid Al-Nuraniyyah (P. 116); Nazariyyat Al-Aqd [5: 192]; Tabyin Al-Haqaiq Tabyin Al-Haqaiq [4: 46]; (P. 72). Al-Gharar (P. 72). (4)(4) See: Husayn Hamid, (3)(3) See: 690690 Shariah Standard No. (26): Islamic Insurance that Gharar has no impact on donation contracts. This viewpoint is well supported by a number of Quranic verses and sayings of the Prophet (peace be upon him) which instruct Muslims to promote cooperation. Consequently, several resolutions were issued by Fiqh forums regar- Consequently, several resolutions were issued by Fiqh forums regar- ding permissibility of cooperative insurance. Such resolutions include, the resolution of the Islamic Research Academy of Al-Azhar Al-Sharif, the resolution of the Islamic Fiqh Academy of the World Muslim League referred to earlier, and the resolution of the International Islamic Fiqh Academy, which states that: The contract that respects the origins of Academy, which states that: The contract that respects the origins of Islamic dealings is the cooperative insurance Contract which is based The fact that cooperative insurance is on donation and cooperation. The fact that cooperative insurance is on donation and cooperation permissible, also does not seem to have encountered any dispute among contemporary Muslim Fuqaha.(5)(5) contemporary Muslim Fuqaha. Permissibility of cooperative insurance and non-permissibility of com- Permissibility of cooperative insurance and non-permissibility of com- mercial insurance is in fact due to the following differences: a) The conventional insurance contract is a financial Muawadah (exchange contract) that aims at making profit out of the insurance operations. Therefore, its permissibility should be judged in the light of the Shariah rulings on financial transactions. Consequently, such rulings prohibit the conventional insurance contract, which involves Gharar. b) In the Islamic insurance contract, the company assumes the role of the agent of the insurance account, whereas in the commercial insurance contract the company is an original party that signs the contract in its own name. c) The company in commercial insurance owns the premiums against its commitment to pay the insurance amount; whereas in Islamic insurance, it is the insurance account rather than the company that owns the contributions. d) In Islamic insurance the residual premiums and the returns on them, that remain after deduction of expenses and indemnity amounts, Fatawa of the Shariah Advisory Board of Al Rajhi Banking & Investment Company, (5)(5) Fatawa of the Shariah Advisory Board of Al Rajhi Banking & Investment Company, Fatwa No. (40). 691691 Shariah Standard No. (26): Islamic Insurance become the property of the policyholders account, and constitute a surplus, which can be distributed among the policyholders. This cannot be imagined in commercial insurance where the company owns and receives the premiums as soon as it signs the contract. In commercial insurance, the premiums constitute part of the revenue and profits of the company. e) In Islamic insurance, the returns on investment of the premium assets belong to the policyholders account, after deduction of the Mudarib share for the company, whereas such returns belong to the company in commercial insurance. f) Islamic insurance aims at achieving cooperation among the members of the society, rather than generating profits from the insurance operations, whereas commercial insurance is profit-oriented. g) The company in Islamic insurance earns profits through investment of its own funds and its share in Mudarabah, as it assumes the role of the Mudarib and the insurance account assumes the role of the Rab al-Mal (owner of the capital). h) In Islamic insurance, the insurer and the participant are in fact the same person although they differ in recognition, whereas the insurer and the participant are totally different in commercial insurance. i) The company in Islamic insurance adheres to the rules of Islamic Shariah and the Fatawa of its Shariah Supervisory Board, while in commercial insurance there are no such commitments. j) In Islamic insurance, the allocations from the insurance account, which remain there until the time of liquidation of the company, are spent on charity purposes, and do not go to shareholders, whereas in commercial insurance such amounts go to shareholders. The Shariah ruling that the Islamic insurance contract is an act of dona- The Shariah ruling that the Islamic insurance contract is an act of dona- tion that both parties are bound to honor, is measured by analogy to what is known in Fiqh as NihdNihd,(6)(6) or donation pledge. It has been narrated that or donation pledge. It has been narrated that is known in Fiqh as (6)(6) Al-Bukhari in his Sahih [15: 128] commented on Al-Bukhari in his Sahih , in which the members of (.since Muslims did not see any harm in NihdNihd, in which the members of (.since Muslims did not see any harm in [15: 128] commented on NihdNihd or where he said or NahdNahd where he said = 692692 Shariah Standard No. (26): Islamic Insurance Ali and Ibn Masud said: A gift, if specifically defined, is binding, whether received or not. It has also been narrated that Abu Bakr and Umar indi- cated that a gift does not become binding before receipt.(7)(7) Malik however cated that a gift does not become binding before receipt. Malik however reconciled the two viewpoints by indicating that Ali, Ibn Masud and the others seem to have focused on the fact that the contract as such is bin- ding, while Abu Bakr and Umar seem to have focused on the fact that the receipt of the gift is a prerequisite of finalizing the contract. The lat- ter viewpoint was justified by the desire to leave no room for an excuse that Umar explicitly mentioned.(8)(8) The obligatory nature of the donation that Umar explicitly mentioned. The obligatory nature of the donation contract can also be derived from the saying of the Prophet (peace be upon him) that: A person who withdraws his gift is like a dog that with- upon him) that: A person who withdraws his gift is like a dog that with- holds its vomit.(9)(9) holds its vomit. The basis of the Shariah ruling that the company should not guarantee The basis of the Shariah ruling that the company should not guarantee the insurance assets is that the company is an agent, and the Fuqaha unanimously agree that an agent should not guarantee the property except against misconduct, negligence or breach of the contract. The justification for stating the nine principles of Islamic insurance in the The justification for stating the nine principles of Islamic insurance in the articles of association of the company is the need to preserve the element of donation in the contract and emphasize it as a basic aspect of the company, and hence preserve the cooperative nature and permissibility of the insurance operation. Otherwise, the insurance operation becomes a Muawadah transaction, and therefore subject to impact of Gharar as mentioned earlier. In other words, emphasis on the nine principles is because they constitute the fundamental differences between Islamic were issued to insurance and commercial insurance. Several Fatawa were issued to insurance and commercial insurance. Several Fatawa Fath Al-Bari [5: 129], Ibn Hajar indicated that = of the group consume different amounts of the food to which they have equally contributed) and he narrated some sayings of the Prophet (peace be upon him) that support this practice. In was an [5: 129], Ibn Hajar indicated that NihdNihd was an support this practice. In Fath Al-Bari ancient practice of Muslim travelers who used to contribute equally to the stock of food they need during their journey, and leave each of them free to consume the portion of the food he needs. At the end of the journey, they distribute the food leftover among themselves, unless they decide to keep it for another journey. This is quite similar to the treatment of the surplus in Islamic Insurance. See: Al-Muwatta (7)(7) See: [2: 468]; and Nasb Al-Rayah [2: 534]. Bidayat Al-Mujtahid [2: 534]. (8)(8) Bidayat Al-Mujtahid Sahih Al-Bukhari [5: 190]; and (9)(9) Sahih Al-Bukhari [5: 190]; and Sahih Muslim Al-Muwatta [2: 468]; and (H: 1622]. Sahih Muslim (H: 1622]. [4: 122]. Nasb Al-Rayah [4: 122]. 693693 Shariah Standard No. (26): Islamic Insurance demonstrate these differences including, Fatwa No. (12/11) issued by the 12thth Seminar on Islamic Economics of the Al Baraka Group, Fatwa Seminar on Islamic Economics of the Al Baraka Group, Fatwa the 12 No. (42/3) issued by the Shariah Supervisory Board of the Al Rajhi Company, Fatwa of the Shariah Board of Faisal Islamic Bank and Fatwa (10) of the Islamic insurance Company of Jordan.(10) of the Islamic insurance Company of Jordan. The general framework of the contract and the nature of its conditions have The general framework of the contract and the nature of its conditions have been set up along the lines of binding contracts in Islamic jurisprudence, and the peculiar characteristics of the insurance contracts as far as the insured is concerned. The ruling that the insurer and the insured must fulfill their commitments is The ruling that the insurer and the insured must fulfill their commitments is based on the Shariah prerequisite of honoring contracts. Since the insurance contract is a binding contract, all its conditions should be honored unless they violate the rules of Islamic Shariah. Such reasoning is well supported by various Quranic Verses and sayings of the Prophet (peace be upon him) that explicitly instruct Muslims to honor their contracts and conditions. In this regard, Allah, the Almighty, says: (O You who believe! Fulfill (all) (O You who believe! Fulfill (all) In this regard, Allah, the Almighty, says: (11) The Prophet (peace be upon him) also says obligations...).(11) obligations...). Muslims are The Prophet (peace be upon him) also says Muslims are (12) at their conditions.(12) at their conditions. The company could manage the insurance account against fee or free The company could manage the insurance account against fee or free of charge because the relationship here is viewed as agency, which the Fuqaha unanimously approve, with or without remuneration. The Fatawa in this regard comprise those of the 12thth Seminar on Islamic Economics in this regard comprise those of the 12 Seminar on Islamic Economics of the Al Baraka Group (Fatwa No. (12/11), the resolution of the Islamic Fiqh Academy of the Muslim World League Makkah Al-Mukarramah (Fatwa No. 961), and Fatwa No. (51) of the Council of Eminent Scholars of Saudi Arabia. The basis of assigning the investment of the assets of the insurance fund to The basis of assigning the investment of the assets of the insurance fund to the company is the Mudarabah contract, which the Fuqaha unanimously declare as permissible. Arrangement of investment in this manner entails , Dallah Al Baraka Group, Dr. Abdul-Sattar Abu Ghuddah Fatawa Al-Tamin, Dallah Al Baraka Group, Dr. Abdul-Sattar Abu Ghuddah (10) See: (10) See: Fatawa Al-Tamin and Dr. Izzul-Din Khoja (eds.), (pp. 99-108). [Al-Maidah (The Table): 1]. (11) (11) [Al-Maidah (The Table): 1]. Related by Al-Bukhari in his Sahih (12) Related by Al-Bukhari in his (12) [4: 584]. Al-Tirmidhi deemed it a good, authentic Hadith. Sahih [4: 451]; and Al-Tirmidhi with Tuhfat Al-Ahwazi [4: 451]; and Al-Tirmidhi with Tuhfat Al-Ahwazi 694694 Shariah Standard No. (26): Islamic Insurance (13) Fatwa No. (12/11) of the 12 specification of a profit share for each party, and entitlement of the insurance fund to its respective share. The relevant Fatawa in this regard include the Fatwa of the Shariah Supervisory Board of Faisal Islamic Fatwa No. (12/11) of the 12thth Seminar on Islamic Economics Bank,(13) Bank, Seminar on Islamic Economics of the Al Baraka Group and the Shariah Standard No. (13): Mudarabah. The emphasis on honoring commitments in general including commitment The emphasis on honoring commitments in general including commitment of the company to furnish to the insurance account is based Qard Hasan to the insurance account is based of the company to furnish Qard Hasan on the Shariah requirement of honoring pledges that are binding to either of the two parties. This viewpoint to which some leading Fuqaha subscribe is well supported by Quran, Sunnah and reported Muslim practice, such (...Fulfill (all) obligations...) has been as the divine Quranic instruction: (...Fulfill (all) obligations...) as the divine Quranic instruction: has been taken by the Fuqaha to comprise any Shariah-accepted commitment of the Muslim. There are also several sayings of the Prophet (peace be upon him) which indicate that Muslims are bound to honor their contracts, covenants (14) Several resolutions of Shariah forums and Shariah Boards and pledges.(14) Several resolutions of Shariah forums and Shariah Boards and pledges. were also issued in this connection including, resolution No. 40 41 (25/3) (15) and the Fatwa of the Shariah of the International Islamic Fiqh Academy(15) of the International Islamic Fiqh Academy and the Fatwa of the Shariah (16) Supervisory Board of the Islamic Insurance Company of Jordan.(16) Supervisory Board of the Islamic Insurance Company of Jordan. The ruling that responsibility of providing the evidence lies with the The ruling that responsibility of providing the evidence lies with the participant depends on the general rules in the Quran, the Sunnah and the opinion of the Ulema that evidence should be established by the claimant. This has been indicated in several Fatawa including Fatwa No. (14/6) of the United Shariah Board of Al Baraka Group. Permissibility of the two types of Islamic insurance (mentioned in this Permissibility of the two types of Islamic insurance (mentioned in this Standard) rests on the various evidences of permissibility of Islamic insu- rance in general, as discussed earlier, and are supported by various Fatawa of Shariah Boards. Such Fatawa include Fatwa No. 2/9 of the 2ndnd Al Bara- of Shariah Boards. Such Fatawa include Fatwa No. 2/9 of the 2 Al Bara- ka Seminar on Islamic Economics, Fatwa No. 10/3/5 of the 10thth Al Baraka Al Baraka ka Seminar on Islamic Economics, Fatwa No. 10/3/5 of the 10 seminar on Islamic Economics, and other Fatwa issued by the Shariah (14) See: (14) (Principle of Consent in Mabda Al-Rida Fi Al-Uqud: Dirasah Muqaranh (Principle of Consent in See: Chapters on Mudarabah in books of various schools of Fiqh, and the term (13) See: Chapters on Mudarabah in books of various schools of Fiqh, and the term (13) Mudarabah in the Kuwaiti Encyclopedia. See: Mabda Al-Rida Fi Al-Uqud: Dirasah Muqaranh Contracts: A Comparative Study) and its references. See: Magazine of the International Islamic Fiqh Academy, Issue No. (5), (2/754 965). (15) See: Magazine of the International Islamic Fiqh Academy, Issue No. (5), (2/754 965). (15) , (P. 106). Fatawa Al-Tamin, (P. 106). (16) Fatawa Al-Tamin (16) 695695 Shariah Standard No. (26): Islamic Insurance Supervisory Boards of Dubai Islamic Bank, Kuwait Finance House, Qatar (17) Islamic Bank and the Islamic Insurance Company Jordan.(17) Islamic Bank and the Islamic Insurance Company Jordan. The rulings relating to the contract as such are based on the general The rulings relating to the contract as such are based on the general principles of contracts in Islamic Shariah, which emphasize avoidance of fraud and deceit and the need to observe the time limits indicated in the contracts. Shariah rulings on compensation have also been resorted to in this connection, in addition to the Fatawa and resolutions issued by various forums such as the Islamic Fiqh Academy of the Muslim World League, the Supreme Council of Ulema of Saudi Arabia and the Shariah (18) boards of Islamic banks and Islamic insurance companies.(18) boards of Islamic banks and Islamic insurance companies. The jurisdictions of the company are determined on the basis of its The jurisdictions of the company are determined on the basis of its articles of association, the various documents that govern the contractual relationship, the general principles of contracts and conditions, insurance conventions, and some Fatawa of Shariah boards. The rules that regulate the relationship between the company and the The rules that regulate the relationship between the company and the policyholders are based on the articles of association, which consider this relationship as an agency contract (remunerated or free of charge) for the management of the insurance operations, and Mudarabah for the investment of the insurance assets. Indemnity is based on the general Shariah directives emphasizing the Indemnity is based on the general Shariah directives emphasizing the (19) principle that one should neither tolerate harm nor cause it to others(19) principle that one should neither tolerate harm nor cause it to others as well as the general principles and rules of Fiqh that advocate fair, and at the same time, non-obsessive indemnification for injury. Furthermore, inferences on indemnity could also be drawn from the cooperative nature of this donation-oriented contract, in addition to some Fatawa such as Fatwa No. (3) of the 10thth Al Baraka Seminar on Islamic Economics, and Fatwa No. (3) of the 10 Al Baraka Seminar on Islamic Economics, and the various Fatawa of the Shariah boards of Islamic banks and Islamic (20) insurance companies.(20) insurance companies. (17) Fatawa Al-Tamin (17) (pp. 193206). Fatawa Al-Tamin (pp. 193206). ibid. (18) (18) ibid. This Hadith has been related by Malik in Al-Muwatta (19) This Hadith has been related by Malik in (19) in in Musnad Al-Imam Ahmad [2: 782]. , (P. 153). Fatawa Al-Tamin, (P. 153). (20) Fatawa Al-Tamin (20) Musnad Al-Imam Ahmad [1: 313] and [5: 527]; and Ibn Majah in his Kitab Al-Aqdiyah; Ahmad ; Ahmad Al-Hashiyah [1: 313] and [5: 527]; and Ibn Majah in his Al-Hashiyah Al-Muwatta, , Kitab Al-Aqdiyah 696696 Shariah Standard No. (26): Islamic Insurance Treatment of the insurance surplus is based on the cooperative nature of Treatment of the insurance surplus is based on the cooperative nature of [companions of the Prophet Sahabah [companions of the Prophet the contract and the practice of the Sahabah the contract and the practice of the (21) , as reported by Bukhari.(21) (peace be upon him)] with regard to (peace be upon him)] with regard to NihdNihd, as reported by Bukhari. Possibility of contract termination stems from the fact that the insurance Possibility of contract termination stems from the fact that the insurance contract is a time-specific contract, and therefore it expires at the end of its stipulated period just like Ijarah (hiring). The insurance contract also expires on the damage of the insured property (or death of the insured), as there will be no object of commitment. (21) Al-Bukhari in his (21) Sahih [15: 128] commented on [15: 128] commented on NihdNihd or where he said or NahdNahd where he said Al-Bukhari in his Sahih (.since Muslims did not see any harm in , in which the members of the group (.since Muslims did not see any harm in NihdNihd, in which the members of the group consume different amounts of the food to which they have equally contributed) and he narrated some sayings of the Prophet (peace be upon him) that support this was an ancient [5: 129], Ibn Hajar indicated that NihdNihd was an ancient practice. In Fath Al-Bari practice. In practice of Muslim travelers who used to contribute equally to the stock of food they need during their journey, and leave each of them free to consume the portion of the food he needs. At the end of the journey, they distribute the food leftover among themselves, unless they decide to keep it for another journey. This is quite similar to the treatment of the surplus in Islamic Insurance. Fath Al-Bari [5: 129], Ibn Hajar indicated that 697697 Shariah Standard No. (26): Islamic Insurance Appendix (C) Definitions Premium It is the amount of the contribution, which the participant donates, along with its related profits, for the benefit of the insurance scheme. Insurance Amount It is the amount paid by the company out of the insurance account at the occurrence of the risk insured against. Risk Insured Against It is the probable, legally acceptable, accident. Commercial Insurance It is a contract between an insured party and a technical insuring body, stipulating that the former pays the latter a specific number of financial installments or a lump sum amount, against the commitment of the latter to bear a risk that can be insured against, through payment of an estimated financial indemnity to the insured or the beneficiary, on the occurrence of the risk. [Clause No. (747) of the Egyptian law, Clause No. (773) of the Kuwaiti Law and Clause No. (983) of the Iraqi Law]. Cooperative Insurance A collective insurance contract is a contract whereby each participant undertakes to pay a specific amount of money as donation to indemnify any member of the group who encounters the risk insured against. Islamic Insurance It is a kind of cooperative insurance, which covers all types of risks, un- der the management of a specialized company that adheres to the rules and principles of Shariah. In this sense, Islamic insurance differs from coopera- 698698 Shariah Standard No. (26): Islamic Insurance tive insurance as the latter only covers a specific group of beneficiaries who might encounter risks, for instance, merchants, sailors and the like while Islamic insurance is available to the general public. Islamic insurance also differs from cooperative Insurance with regard to adherence to the rules and principles of Islamic Shariah as well as in some technical aspects per- taining to premiums. In cooperative insurance, premiums may be variable at the beginning; whereas in organized Islamic insurance, premiums are specific due to use of precise statistical studies. Mutual Insurance, the Alternate to Life Insurance It is the insurance that covers the risks of death, inability, injury or illness, for the individual or the group, through payment of the insurance amount to the participant or the beneficiary, as per the agreement. Surplus The Surplus comprises of residual premiums of the participants (the insured) in addition to the reserves and profits, after deducting all expenses and indemnity amounts (paid or payable during the same year). The residual amount, thus computed, is considered as surplus, rather than profit. Gharar It is what one cannot predict its unrevealed/unknown consequences. (22). Something that may occur/materialize or may not(22) Something that may occur/materialize or may not Participant The Participant is a person who accepts the cooperative insurance scheme, signs the insurance policy and undertakes to observe its conse- quent commitments. It may be referred as the insured, the insured for and the policyholder. Insurance Account It is the account established by the company by virtue of its articles of of association, to accommodate the premiums of the participants and the association, to accommodate the premiums of the participants and the returns thereon as well as the reserves. Such account has an independent (22) See: (22) See: Al-Gharar Wa Atharahu Fi Al-Uqud (P. 53). Al-Gharar Wa Atharahu Fi Al-Uqud (P. 53). 699699 Shariah Standard No. (26): Islamic Insurance financial liability towards its own claims and commitments, though it is represented by the company for its all affairs. This account is also known as the insurance fund, the policyholders account or the portfolio of the participants group. 700700 Shariah Standard No. (27) Indices Contents Subject ................................................................................................... Preface ................................................................................................... Preface ..................................................................... Statement of the Standard ..................................................................... Statement of the Standard ..............................................................................
Scope of the Standard ..............................................................................
Scope of the Standard ....................................
Definition and Main Applications of the Index....................................
Definition and Main Applications of the Index ...........................
Bases of Calculation and Characteristics of Indices ...........................
Bases of Calculation and Characteristics of Indices ........................................................................................
Types of Indices ........................................................................................
Types of Indices ...................................................
Permissible Methods of Using Indices ...................................................
Permissible Methods of Using Indices ..............................................
Impermissible Methods of Using Indices ..............................................
Impermissible Methods of Using Indices ...........................................................
Development of an Islamic Index ...........................................................
Development of an Islamic Index ............................................................
Date of Issuance of the Standard ............................................................
Date of Issuance of the Standard ...................................................................... Adoption of the Standard ...................................................................... Adoption of the Standard Appendices Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (b): The Shariah Basis for the Standard..................................... Appendix (b): The Shariah Basis for the Standard..................................... Appendix (c): Definitions.............................................................................. Appendix (c): Definitions.............................................................................. PagePage 705705 706706 707707 708708 709709 710710 711711 712712 714714 716716 703703 IN THE NAME OF ALLAH, THE ALL-MERCIFUL, THE MOST MERCIFUL All praise be to Allah, the Lord of all the worlds, and blessings and peace be upon our master, Muhammad, and his household and all his companions Preface The purpose of this standard is to present basic information about In- dices with special emphasis on their nature, functions, Shariah status of their various applications, and to what extent Islamic financial institutions (Institution/Institutions)(1)(1) may apply them. may apply them. (Institution/Institutions) (1) The word (Institution/Institutions) is used here to refer, in short, to Islamic financial institutions including Islamic Banks. 705705 Shariah Standard No. (27): Indices Statement of the Standard
Scope of the Standard This Standard covers definition of Indices, methods of their calculation, their main types, their various forms of applications, and the Shariah status of each of these forms. The Standard also sets out the Shariah rulings that govern Indices.
Definition and Main Applications of the Index 1/2 An Index is a statistically computed figure based on a selected package of financial papers or commodities dealt in organized or non-organized financial markets, or in both. Each paper/commodity is given a specific weight, according to its market value, and the total value is divided by a constant figure. Among the best-known indices at present are the Consumer Price Index, and the Dow Jones and FTSE indices in the financial markets. 2/2 An Index that is well designed to measure the market situation, indicates the general economic situation of the country, and may help in forecasting its future developments before any change takes place and, thus, facilitates investment decisions. An index may also provide a signal to investors about the future movement of the prices of financial papers, or demonstrate a certain downward or upward trend of such prices. Due to the inconsistency that might occur between one index and another, indices are used besides other analytical methods, as well as the experience and knowledge about the market situations and the predominant models of transactions. 2/3 The upward and downward movements of an index reveal the di- rections of the market, and hence the market is denoted as a rising or a declining market. 706706 Shariah Standard No. (27): Indices
Bases of Calculation and Characteristics of Indices 3/1 Calculation of indices is a process that depends on several aspects including past and current price forecasts, market projections, time intervals, upper and lower limits of dealing prices, and display charts. 3/2 Indices differ from each other in several aspects such as the components of the index or the type of data it attempts to summarize, the weight it assigns to each component, and the method of calculation thereof. There are, however, some common characteristics among all well- known indices in the capital and commodity markets, regardless of the data that each index attempts to analyze. Most important among these characteristics are accuracy, objectivity and transparency. Accuracy refers to proper specification of the components of the index, sources of its data input, time of obtaining the data, method of calculating the weights, and basis of rounding off the numbers. Objectivity entails presentation of the detailed calculations of the index to leave no room for difference of opinion with regard to determination of the value of the index on a specific date or at a specific place. Transparency entails pre-specification of the time, place, and method of announcing the readings of the index so that the process does not involve Jahalah involve (ignorance or uncertainty). Jahalah (ignorance or uncertainty). 3/3 There are some general principles that govern almost all indices, such as: 3/3/1 The absolute value of the index has no implication when pre- sented as a single figure. The value of the index, at a given point of time, becomes meaningful only when compared to the past and future values of the index. Only then, the trend and percentage of change may be observed. For instance, an increase of 9 points in the value of the index may represent 2% of its previous value. 3/3/2 The values of the index at different periods may be multiplied or divided by any constant figure (i.e., increasing or decreasing 707707 Shariah Standard No. (27): Indices the figures of the index by the same percentage like division of shares), without affecting the accuracy of its implications. That is to say, the implications of the index are confined to what it represents of the average upwards and downwards changes in the weights of its components from time to time.
Types of Indices Indices are classified according to different considerations: 4/14/1 With regard to their general or specific nature, indices may be clas- With regard to their general or specific nature, indices may be clas- sified into the following categories: General Indices that measure the market situation in general. General Indices that measure the market situation in general. Sectoral Indices that measure the market situation of a certain Sectoral Indices that measure the market situation of a certain sector or industry, such as the transport sector. 4/24/2 Indices that precede price movements may be classified, with regard Indices that precede price movements may be classified, with regard to central and area fluctuations, into the following categories: Centered Oscillating Indices, which measure price changes du- Centered Oscillating Indices, which measure price changes du- ring a specific period in the past, and indicate probable future events. Ranged Oscillating Indices (band) that fluctuate between two Ranged Oscillating Indices (band) that fluctuate between two areas, like overbuying or overselling.
Permissible Methods of Using Indices 5/1 It is permissible in Shariah to use indices to discern the magnitude of change in a certain market, or to judge the performance of specialized managers by comparing the returns they achieve to the indices. Indices may be used to form up an idea about a portfolio or to estimate its systematic risks instead of monitoring the performance and risks of each financial paper independently. Moreover, Indices may also be used for forecasting the future situation of the market and discovering the pattern of changes that the market may undergo. Therefore, using indices for guidance in operations that relate to real transactions is permissible in Shariah. 5/2 It is permissible to use indices as a benchmark for comparison of funds and investment bonds, or for correlating the remuneration of 708708 Shariah Standard No. (27): Indices the manager or the bonus of the agent to the investment, or the bonus the manager or the bonus of the agent to the investment, or the bonus of the Mudarib to the results of the Mudarabah. 5/3 It is permissible to use an index like LIBOR, or a certain share/ commodity price index, as a basis for determining the profit of a Murabahah pledge, provided that the contract is to be concluded on a specific profit that does not vary with further changes in the index. [see Shariah Standard No. (8) on Murabahah Item 4/6] 5/4 It is permissible to use the index to determine the portion of the variable (rent) that represents the return. [see Shariah Standard variable UjrahUjrah (rent) that represents the return. [see Shariah Standard No. (9) on Ijarah and Ijarah Muntahia Bittamleek para 5/2/3] 5/5 It is permissible that work rules, regulations and the arrange- ments, pertaining to money-based employment contracts, stipulate ments, pertaining to money-based employment contracts, stipulate a provision on wage indexation.Wage indexation here refers to periodical adjustment of wages according to changes in the price level, as determined by the concerned bodies. However, in case of accumulation of unpaid wage that takes the form of debt, Shariah rulings on debts should be observed. 5/6 It is permissible to link the deals to be undertaken by the Mudarib or the agent to a specific index, so that he can dispose of the commodity at the market price when the index reaches a certain reading, or purchase a certain amount of the commodity at a specific reading of the index. 5/7 It is permissible to connect the fulfillment of a binding pledge on the part of a buyer or a seller to the rate of increase or decrease of a specific index in comparison to the price of the commodity at a particular date, so that any further increase may be added to the price of the commodity. 5/8 It is permissible to link the amount of a donation to a charitable body, end. in case of delayed settlement, with a particular index, at one end. in case of delayed settlement, with a particular index, at one
Impermissible Methods of Using Indices 6/1 Shariah prohibits trading in indices or taking advantage of their changes in the financial markets, through payment or receipt of 709709 Shariah Standard No. (27): Indices money on the mere occurrence of certain readings of the index, and without selling or buying the real assets which the index represents or any other assets. Such dealing is prohibited even if it is practiced for the sake of hedging against potential risk. 6/2 It is prohibited in Shariah to conclude option contracts on indices. [see Shariah Standard No. (20) on Sale of Commodities in Organized Markets item 5/2] 6/3 It is also prohibited in Shariah to conclude contracts on the Index Contracts Multiplier. 6/4 It is also prohibited in Shariah to link a contract that should not be suspended, like selling, to a specific index. 6/5 It is prohibited in Shariah to connect the amount of a cash debt, at the time of lending, to the price index.
Development of an Islamic Index The following points should be observed while developing an Islamic Index: 7/1 Adherence to Shariah precepts, in addition to the technical controls relating to the components of the index, and its applications. 7/2 There should be a Shariah Supervisory Board for the Index, to ensure observation of the Shariah precepts in the components and applica- tions of the index, and to conduct periodical review and reporting relating thereto.
Date of Issuance of the Standard This Standard was issued on 12 Jumada I, 1427 A.H., corresponding to 39 June 2006 A.D. 710710 Shariah Standard No. (27): Indices Adoption of the Standard The Shariah standard on Indices was adopted by the Shariah Board in its meeting No. (16) held in Al-Madinah Al-Munawwarah on 712 Jumada I, 1427 A.H., corresponding to 39 June 2006 A.D. 711711 Shariah Standard No. (27): Indices Appendix (A) Brief History of the Preparation of the Standard The Shariah board decided in its meeting No. (8) held on 28 Safar 4 Rabi I, 1423 A.H., corresponding to 11-16 May 2002 A.D., in Makkah Al-Mukarramah, to issue a Shariah Standard on Indices. On 12 Jumada I, 1424 A.H., corresponding to 12 July 2003 A.D., the Shariah Standards Committee decided to commission a Shariah consultant to prepare a draft Standard on Indices. The Committee (2) discussed the draft Standard in its meeting No. (15) held in Manama, Kingdom of Bahrain, on 8 Jumada I, 1426 A.H., corresponding to 15 June 2005 A.D., and made necessary changes thereto in the light of the discussions and comments of its members. The Committee (2) once again discussed the draft Standard in its meeting No. (16) held in Manama, Kingdom of Bahrain, on 45 Shaban 1426 A.H., corresponding to 8-9 September 2005 A.D., and incorporated necessary changes therein in the light of the discussions and observations of the meeting. The revised draft of the Standard was submitted to the Shariah Board in its meeting No. (15) held in Makkah Al-Mukarramah on 2226 Shaban 1426 A.H., corresponding to 26-30 September 2005 A.D. The Shariah Board decided to send the draft Standard to specialized experts for review and comments before discussing it in a public hearing. AAOIFI held a public hearing in the Kingdom of Bahrain, on 1 Safar 1427 A.H., corresponding to 1 March 2006 A.D. More than 30 participants representing central banks, Institutions, accounting firms, Shariah scholars, academics and other interested parties attended the public hearing. Several 712712 Shariah Standard No. (27): Indices observations were made in the session to which members of the Shariah Standards Committees (1) and (2) duly responded. The draft Standard was presented to the Drafting Committee in a meeting held in Kingdom of Bahrain on 1 Safar 1427 A.H., corresponding to 1 March 2006 A.D., and several amendments were proposed in the meeting. The Shariah Board discussed in its meeting No. (16) held in Al-Madinah Al-Munawwarah, on 7-12 Jumada I, 1427 A.H., corresponding to 3-9 June 2006 A.D., the amendments proposed by the Drafting Committee and accepted some of them. The Shariah Board then approved the Standard, unanimously for some of its clauses and by majority for others, as indicated in the minutes of the Boards meetings. 713713 Shariah Standard No. (27): Indices Appendix (B) The Shariah Basis for the Standard Developing indices is permissible in Shariah because they constitute Developing indices is permissible in Shariah because they constitute a method of forecasting and a means of observing the state of circums- tances (inferences). Resorting to inferences is a well-recognized practice in judicature and financial transactions. Ibn Al-Qayyim in his book on Judicial Methods presented a number of proofs on permissibility of using inferences. Permissibility of using indices to forecast the market situation is derived Permissibility of using indices to forecast the market situation is derived from acceptability of using inferences for judgment. As indicated above, Shariah does not object to using inferences to make current or future judgment based on past events, or to initiate practical actions in the light of probable developments. Selling or buying indices is prohibited because it is nothing more than Selling or buying indices is prohibited because it is nothing more than payment or receipt of money for the mere existence of a certain reading or figure. Such an act constitutes a form of gambling and an illegal act of gaining money. Hence, prohibition of selling or buying indices has been well emphasized by the Resolution of the International Islamic Fiqh Academy which states that it is not permissible to sell or buy an index, because this constitutes pure gambling. It is an act of selling an imaginary object that never exists.(2)(2) object that never exists. Prohibition of concluding option contracts that are based on indices, or Prohibition of concluding option contracts that are based on indices, or on the index contracts multiplier, rests on the same reasons for prohibi- tion of trading in indices, in addition to prohibition of dealing in options themselves. Such transactions obviously deal with wills and intentions rather than with real commodities. Moreover, prohibition of dealing in options has been clearly stated in a resolution issued by the International Islamic Fiqh Academy.(3)(3) Islamic Fiqh Academy. Resolution No. 63 (1/7), Resolution of the Islamic Fiqh Academy (P. 127). (2)(2) Resolution No. 63 (1/7), Resolution of the Islamic Fiqh Academy (P. 127). Resolution No. 63 (1/7), Resolution of the Islamic Fiqh Academy (P. 127). (3)(3) Resolution No. 63 (1/7), Resolution of the Islamic Fiqh Academy (P. 127). 714714 Shariah Standard No. (27): Indices The justification for periodical adjustment of wages subject to changes in The justification for periodical adjustment of wages subject to changes in the level of prices is to pursue application of a fair wage policy, and protect the money income of the employees against deterioration of purchasing power due to inflation. It is permissible to provide for such a condition in the contract because conditions between contracting parties are permis- sible in principle, unless they lead to reversing what has been permitted or prohibited by Shariah. 715715 Shariah Standard No. (27): Indices Appendix (C) Definitions Index Multiplier A specific ratio added to the difference in the price of the index on expiry of the date of the transaction. Centered Oscillating Indices These are the indices that fluctuate around a given center or point. They measure price change in a past period, and are used for forecasting probable future events. Such indices precede market movements and measure the rate of price change during the period under study. Ranged Oscillating Indices These are indices that fluctuate between two specific ranges, such as the limit of overbuying and the limit of overselling. Benchmark It refers to any index that represents the performance of a whole industry or a particular activity. It can be used as a standard for measuring the per- formance of investment funds and investment units, or used as an indicator for fixing remuneration for management or bonus for the investment agent or the Mudarib. Hedging It is a method for mitigating investment risks (such as market risks) by using financial instruments available in the market to curb down the risks that may arise from severe price changes. Divider It is the total price of the two shares, divided by the average price before division. 716716 Shariah Standard No. (27): Indices Index Contracts Multiplier It is a decimal or simple number, multiplied by the nominal value of a contract that has been connected to the performance of a certain index, to calculate the value of the contract based on the performance of that index. 717717 Shariah Standard No. (28) Banking Services in Islamic Banks Contents Subject ................................................................................................... Preface ................................................................................................... Preface ..................................................................... Statement of the Standard ..................................................................... Statement of the Standard ..............................................................................
Scope of the Standard ..............................................................................
Scope of the Standard ...........................
Types of Banking Services and Their Shariah Status ...........................
Types of Banking Services and Their Shariah Status ...........................................................
Date of Issuance of the Standard ...........................................................
Date of Issuance of the Standard ...................................................................... Adoption of the Standard ...................................................................... Adoption of the Standard Appendices Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (b): The Shariah Basis for the Standard Appendix (b): The Shariah Basis for the Standard ........... ........................ ........... ........................ PagePage 723723 724724 727727 728728 729729 731731 721721 Shariah Standard No. (28): Banking Services in Islamic Banks IN THE NAME OF ALLAH, THE ALL-MERCIFUL, THE MOST MERCIFUL All praise be to Allah, the Lord of all the worlds, and blessings and peace be upon our master, Muhammad, and his household and all his companions Preface The purpose of this standard is to indicate banking services provided by Islamic financial Institutions (Institution/Institutions),(1)(1) and the Shariah Islamic financial Institutions (Institution/Institutions), and the Shariah opinion on the fees charged for such services. The word (Institution/Institutions) is used here to refer, in short, to Islamic financial (1)(1) The word (Institution/Institutions) is used here to refer, in short, to Islamic financial institutions including Islamic Banks. 723723 Shariah Standard No. (28): Banking Services in Islamic Banks Statement of the Standard
Scope of the Standard This standard covers the most important banking services that do not involve lending and borrowing, and which the Institutions render to their customers, directly or through other parties, with the aim of facilitating internal and external operations and activities performed by these customers. It does not cover loan and investment services, or other banking services for which separate Shariah standards have already been issued, such as trading in currencies, debit and credit cards, investment accounts, and investment Sukuk.
Types of Banking Services and Their Shariah Status Institutions may provide banking services against fees payable in lump sum or as a percentage share of the value of the service in question, as indicated in the following cases: 2/1 Custodian services Institutions may receive Shariah-accepted documents and financial papers from their customers as a custodian of such documents/ financial papers, and may charge fees for such services. 2/2 Contracting agency services A customer may use the institution as an agent for concluding contracts such as sale, purchase, and lease contracts, , against a fee contracts such as sale, purchase, and lease contracts against a fee payable to the institution. 2/3 Subscription arrangement services 2/3/1 The institution may act as an agent of the founding shareholders of a Shariah-accepted and technically licensed joint stock company, public issue, or issuing new in performing the various steps of the public issue, or issuing new in performing the various steps of the 724724 Shariah Standard No. (28): Banking Services in Islamic Banks shares to increase the capital of the company, and may receive fees for such services. However, the fees thus earned by the Institution should not comprise any remuneration for extending credit, if it happens to be part of the service. 2/3/2 The Institution may arrange, and receive fees for, engaging a third party to underwrite the subscription. The Institution may also underwrite the subscription itself, without charging any fees for the mere act of underwriting. However, the Institution may charge the actual expenses it incurs in providing other services like conducting studies or marketing the shares. [see Shariah Standard No. (5) on Guarantees, item 6/7] 2/4 Services of conducting studies and consultancies 2/4/1 The institution may conduct, against a fee or free of charge, feasibility studies or other studies relating to issuance of shares. 2/4/2 The institution may act as an agent of its customers, for a fee or free of charge, in performing services that relate to real estate properties (residential buildings, commercial blocks, offices, etc.) as well as movable assets. 2/5 Collection and payment services 2/5/1 The institution may accept requests of its customers to collect their dues with, or pay their commitments to other parties. For instance, it can perform collection of cheques, debt notes, and promissory notes from debtors, or vouchers of shares and Sukuk promissory notes from debtors, or vouchers of shares and Sukuk owned by the customers, and deposit the proceeds in their accounts. It can also make payments on behalf of its customers and charge their accounts. For all such services, the Institution may receive fees from the customers or their agents. 2/5/2 The institution may pay wages and salaries on behalf of its customers. 2/5/3 The institution may execute standing collection and payment orders. 725725 Shariah Standard No. (28): Banking Services in Islamic Banks 2/5/4 The institution should refrain from collection when it realiz- es that it involves an impermissible practice, or leads to dis- counting of a commercial paper. [see Shariah Standard No. (16) on Commercial Paper, item 5] 2/6 Accounts services 2/6/1 The institution may provide additional services to the owners of its investment or current accounts when they desire so, and charge fees for such services. 2/6/2 The institution may provide free services to the owners of its investment or current accounts, provided that the services rendered to the owners of the current accounts are not set as a a precondition or constitute a traditionally observed prereq- precondition or constitute a traditionally observed prereq- uisite for opening the account. [see Shariah Standard No. (19) on Loan (Qard), item 10/2] 2/7 Services of safe deposit vaults 2/7/1 The institution may provide the services of leasing safe deposit vaults to its customers. This is done through signing a contract according to which the Institution allocates a safe deposit vault within its premises for the customer to use against a specific fee. The deal here is based on Ijarah (hiring) contract that entitles the customer to the vaults usufruct. 2/7/2 The institution is responsible for ensuring the safety of the vault. However, it does not guarantee the safety of items kept in vault except in case of misconduct or negligence in keeping the vault. 2/8 Services of cards and their related bodies See Shariah Standard No. (2) on Debit Card, Charge Card and Credit Card.Card. 2/9 Zakah account services See Shariah Standard No. (35) on Zakah, item 2/2. 2/10 Suretyship services See Shariah Standard No. (5) on Guarantees, item 6 726726 Shariah Standard No. (28): Banking Services in Islamic Banks 2/11 Cheques services See Shariah Standard No. (16) on Commercial Papers, item 3/3 and item 7.
Date of Issuance of the Standard This Standard was issued on 12 Jumada I, 1427 A.H., corresponding to 8 June 2006 A.D. 727727 Shariah Standard No. (28): Banking Services in Islamic Banks Adoption of the Standard The Shariah standard on Banking Services in Islamic Banks was adopted by the Shariah Board in its meeting No. (16) held in Al-Madinah Al -Munawwarah on 712 Jumada I, 1427 A.H., corresponding to 3-8 June 2006 A.D. 728728 Shariah Standard No. (28): Banking Services in Islamic Banks Appendix (A) Brief History of the Preparation of the Standard The Shariah Board decided in its meeting No. (10) held on 27 Rabi I, 1424 A.H., corresponding to 38 May 2003 A.D., in Al-Madinah Al- Munawwarah to issue a Shariah Standard on Banking Services and Facilities in Islamic Banks. On 29 Safar 1425 A.H., corresponding to 19 April 2004 A.D., the Shariah Standards Committee (2) decided to commission a Shariah consultant to prepare a draft standard on Banking Services and Facilities in Islamic Banks. In the meeting of the Shariah Standards Committee (2) on 14-15 Safar 1426 A.H., corresponding to 24-25 March 2005 A.D., in the Kingdom of Bahrain, the committee discussed the study and advised the consultant to incorporate the necessary changes, in the light of the discussions and observations of the Committee members. In the meeting No. (17) of the Shariah Standards Committee (1) held on 8-9 Shaban 1426 A.H., corresponding to 8-9 September 2005 A.D., in the Kingdom Of Bahrain, the Committee discussed the draft standard and introduced necessary changes therein. The Shariah Board discussed, in its meeting No. (15) held on 2226 Shaban 1426 A.H., corresponding to 26-30 September 2005 A.D., in Makkah Al-Mukarramah, the draft of the Standard, and decided, in the light of the discussions and observations of the members, to send it to Shariah Standards Committee (1) for review. A joint committee comprising the members of Shariah Standards Com- mittees (1) and (2) discussed the Standard in a meeting held on 1 Safar 1427 and A.H., corresponding to 1 March 2006 A.D., in the Kingdom of Bahrain, and A.H., corresponding to 1 March 2006 A.D., in the Kingdom of Bahrain, incorporated necessary changes. 729729 Shariah Standard No. (28): Banking Services in Islamic Banks The revised draft of the Standard was submitted to the Shariah Board in its meeting No. (16) held in Al-Madinah Al-Munawwarah on 712 Jumada I, 1427 A.H., corresponding to 38 June, 2006 A.D. The Shariah Board made further changes in the document and decided to send it to the concerned experts for review and observations before discussing it in a public hearing. AAOIFI then held, in the Kingdom of Bahrain on 6 Rajab 1427 A.H., corresponding to 31 July, 2006, the public hearing which was attended by more than 30 participants representing central banks, Institutions, accounting firms, Shariah scholars, university teachers and other interested parties. Several observations were made in the session to which the members of the Shariah Standards Committees (1) and (2) duly responded. The Shariah Board adopted, in its meeting No. (17) held in Makkah Al- Mukarramah on 26 Shawwal 1 Dhul-Qadah, 1427 A.H., corresponding to 1823 November, 2006 A.D., the Standard (unanimously for some clauses and with the majority for others), as indicated in the minutes of the Boards meetings. 730730 Shariah Standard No. (28): Banking Services in Islamic Banks Appendix (B) The Shariah Basis for the Standard It is permissible for the Institutions to provide banking services that do It is permissible for the Institutions to provide banking services that do not involve interest-based lending and borrowing, because such services serve a permissible interest of the clients. Institutions may charge fees for providing banking services, because the Institutions may charge fees for providing banking services, because the fees so charged constitute a remuneration which the Institutions deserve for the tasks they perform, since it is permissible in Shariah to get reward for performing tasks that result in permissible benefits to others. The fee charged by the institutions may be a lump sum amount or a percen- The fee charged by the institutions may be a lump sum amount or a percen- tage of the value of the service, because when the percentage remuneration is calculated it becomes like the lump sum amount. 731731 Shariah Standard No. (29) Stipulations and Ethics of Fatwa in the Institutional Framework Contents Subject PagePage ................................................................................................... Preface ................................................................................................... Preface ..................................................................... Statement of the Standard ..................................................................... Statement of the Standard ..............................................................................
Scope of the Standard ..............................................................................
Scope of the Standard .................................
Definition of Fatwa and Istifta` (Seeking Fatwa) .................................
Definition of Fatwa and Istifta` (Seeking Fatwa) ....................................................
Shariah Ruling on Fatwa and Istifta`. ....................................................
Shariah Ruling on Fatwa and Istifta`. ........................................................................
Scope of Fatwa (Content) ........................................................................
Scope of Fatwa (Content)
Conditions on Mufti (Fatwa Issuers)
Conditions on Mufti ..................................................... (Fatwa Issuers) ..................................................... ............................................
Duties of the Institution That Seeks Fatwa ............................................
Duties of the Institution That Seeks Fatwa .................................................................
Methods and Means of Fatwa .................................................................
Methods and Means of Fatwa ..........................................................................................
Fatwa Controls ..........................................................................................
Fatwa Controls
Text of Fatwa............................................................................................. ...............................................................
Fatwa Manuscript (Document) ...............................................................
Fatwa Manuscript (Document) ..............................................................
Retreat From a Mistaken Fatwa ..............................................................
Retreat From a Mistaken Fatwa ..............................................
Morals of Fatwa (Ethics of Fatwa Issuers) ..............................................
Morals of Fatwa (Ethics of Fatwa Issuers) .............................................................
Date of Issuance of the Standard .............................................................
Date of Issuance of the Standard ...................................................................... Adoption of the Standard ...................................................................... Adoption of the Standard Appendices Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (b): The Shariah Basis for the Standard Appendix (b): ..................................... The Shariah Basis for the Standard ..................................... Appendix (c): Definitions Appendix (c): .............................................................................. Definitions .............................................................................. 737737 738738 739739 740740 741741 743743 744744 745745 746746 747747 749749 752752 735735 IN THE NAME OF ALLAH, THE ALL-MERCIFUL, THE MOST MERCIFUL All praise be to Allah, the Lord of all the worlds, and blessings and peace be upon our master, Muhammad, and his household and all his companions Preface The purpose of this standard is to indicate the meaning of Fatwa (Shariah opinion), elucidate the eligibility conditions for issuance thereof, and define its appropriate means and scope. The standard also aims to identify the observed methods of Fatwa presentation and explain how an erroneous Fatwa can be rectified. 737737 Shariah Standard No. (29): Stipulations and Ethics of Fatwa in the Institutional Framework Statement of the Standard
Scope of the Standard This standard covers the area of Fatwa because it is one of the tasks assigned to Shariah Supervisory Boards (Board/Boards) of the Islamic Financial Institutions (Institution/Institutions).(1)(1) Financial Institutions (Institution/Institutions).
Definition of Fatwa and Istifta (Seeking Fatwa) 2/1 The term Fatwa refers to a Shariah opinion presented to a person who seeks it with regard to an incidence that has already occurred (the Fatwa incidence) or is expected to occur. It does not refer to answering queries pertaining to hypothetical incidences. 2/2 Istifta refers to the act of seeking the Shariah opinion on an incidence that has already occurred or expected to occur.
Shariah Ruling on Fatwa and Istifta` 3/1 Originally, Fatwa is a collective duty that can be discharged of by any one of those who are able to do it. Fatwa could, however, become the personal duty of the individual if he happens to be the only one in the community who is eligible to issue it. 3/3 The board has to provide Fatwa to the Institution by virtue of their relationship. 3/4 It is the duty of the Institution to seek Fatwa on incidences that actually occur or are expected to occur. It should also seek Fatwa for every operation that it intends to pursue. 3/5 Although the seeker of the Fatwa is free to use his best efforts to determine the most appropriate source (both in terms of knowledge and integrity) from whom he will seek the Fatwa, yet according to The word (Institution/Institutions) is used here to refer, in short, to Islamic financial (1)(1) The word (Institution/Institutions) is used here to refer, in short, to Islamic financial institutions including Islamic Banks. 738738 Shariah Standard No. (29): Stipulations and Ethics of Fatwa in the Institutional Framework the rules and regulations, Institutions have to seek Fatwa from their own boards.
Scope of Fatwa (Content) Fatwa in Institutions is confined to operational financial rulings and issues pertaining to them such as some rulings on worshipping, as well as permissibility and prohibition in some concerns such as Zakah.
Conditions on Mufti (Fatwa Issuers) 5/1 A board member shall be well versed in Fiqh (Islamic Jurisprudence), well informed of the contributions of diligent Fiqh scholars, and has the ability to use the Shariah-accepted methods of deriving reasonable rulings on emerging issues. He shall also be known for his discernment, cautiousness and knowledge about the circumstances and traditions of people, and should always remain alert against the different means of human misbehavior. Competence in Fiqh is usually manifested by the vast reputation of the scholar or his distinguishable contributions especially in the area of financial transactions performed by institutions. 5/2 Issuing Fatwa to institutions does not require competence in all areas of Fiqh. Fatwa can be issued by a scholar who is competent only in the area of financial transactions performed by institutions. 5/3 The member of the Board shall have no personal interest in the matter for which the Institution seeks Fatwa.
Duties of the Institution That Seeks Fatwa 6/1 The Institution is obliged to follow the Fatwa once it is issued regardless of whether it meets the satisfaction of the management or regardless of whether it meets the satisfaction of the management or not. This obligation holds true when the Fatwa entails enforcement or prohibition of a certain act. When the Fatwa entails permissibility of the act in question, the institution has the right to refrain from following it, if it believes that for practical needs it has to do so. In this case, however, rejection of the board Fatwa should be reported to the General Assembly of the institution. 739739 Shariah Standard No. (29): Stipulations and Ethics of Fatwa in the Institutional Framework 6/2 Fatwa should be sought again if there are new developments that should be presented to the Board. New developments may include change or improvement of conception, occurrence of new circum- stances, or non-existence of some of the underlying reasons of the previous Fatwa. 6/3 The institution should not follow the Fatwas of other Shariah Advisory Boards except with permission of its own Board. 6/4 The institution should not demand Fatwa according to a specific Madhab (School of Fiqh) even if it is the official school in its host Madhab (School of Fiqh) even if it is the official school in its host country, or the school that official Fatwa bodies adhere to. However, attention should be given to situations where the legal or judiciary system in the country observes a specific school, and the issue in question may be taken to the courts in the future.
Methods and Means of Fatwa 7/1 Fatwa should basically be founded on what has been explicitly stated in the Quran and the Sunnah along with what has been supported ) or proved by Qiyas (analogical consensus of Fuqaha) or proved by Qiyas (analogical by Ijma (consensus of Fuqaha by Ijma ( deduction). After resorting to the preceding sources, the judgment of the Mufti (issuer of the Fatwa) with regard to the different viewpoints of the Fuqaha (scholars of Fiqh); i.e, Istihsan (Shariah approbation) and (public interest) may be considered as the Maslahah Mursalah (public interest) may be considered as the and Maslahah Mursalah basis for issuance of Fatwa. 7/2 Fatwa should not be based on a personal viewpoint that does not cater for the sources referred to in item (1/7) above, or contradict with the general texts of the Quran and the Sunnah that have explicit indications. Moreover, Fatwa shall also not fall in disparity with well-established Ijma or the general rules derived from the Quran and the Sunnah. 7/3 Absence of explicit directives in the Quran and Sunnah on a given issue, or non-existence of the issue in the prevailing Fiqh literature, do not justify refraining from seeking Fatwa on that issue. Fatwa in this case may be derived through Shariah-sanctioned rules and methods of deduction. 740740 Shariah Standard No. (29): Stipulations and Ethics of Fatwa in the Institutional Framework 7/4 The board may coordinate with the Institution to transfer the Fatwa, if necessary, to a board that is considered to be more reliable due, for instance, to its larger membership, or its inclusion of more specializations, such as Fiqh academies, AAOIFI Board and the Supreme Shariah boards. 7/5 Among the means that may be used for reaching the appropriate Shariah ruling on a given issue are the following: 7/5/1 Building detailed knowledge about the issue of the Fatwa through questioning the one who seeks it, consulting other boards, resorting to experts and specialized parties, and taking into consideration the prevailing norms and tradition. 7/5/2 Tracing the Shariah ruling on the issue in the different schools of Fiqh, and exerting due endeavors to ascertain if the issue encounters the existence of contradicting proofs, or it is an issue that has not been specifically dealt with in the Qur`an and the Sunnah or discussed by the Fuqaha. 7/5/3 Making use of collective Fatwas, such as the resolutions of the Islamic Fiqh Academy, other Shariah Advisory Boards, seminars, and conferences. 7/6 The board should issue Fatwa whenever the Institution approaches it for that purpose, except when it feels that the Institution may use the Fatwa for committing a impermissible action. In that case, the board may either refrain from issuing the Fatwa, or make it subject to certain restrictions. 7/7 Endeavors should be made for disseminating the Fatwas of the In- stitution and exchanging them with other Institutions and related bodies.
Fatwa Controls 8/1 Derivation of presumptive indications from the texts, or usage of unattested narrations about the Prophet (peace be upon him) should be avoided. Moreover, all the Sunnah texts used for supporting the Fatwa should be well-documented. 741741 Shariah Standard No. (29): Stipulations and Ethics of Fatwa in the Institutional Framework 8/2 Fatwa issuers, while issuing the Fatwa, shall signify keenness to quote and opinions of diligent Fuqaha from their accredited sources, Ijma and opinions of diligent Fuqaha from their accredited sources, Ijma as well as concentration on those opinions which have gained more accreditation in each School of Fiqh, and should resort to available Fiqh literature on principles of issuing Fatwa. 8/3 When the Fatwa offers the chance for choice between two permissible actions, preference shall be given to the easier. If choosing one of the two permissible actions would result in realization of a lawful interest while choosing the other would leave the door open for blight, leaving the door open for blight should be avoided, and efforts shall be exerted to resolve the repercussions that may subsequently result. 8/4 Fatwa issuers shall not always pursue Shariah exemptions to make matters easier for Institutions. A Shariah exemption should be sought only when it results from thorough examination of the issue and appropriate reasoning. Moreover, it has to be ensured that making use of the Shariah exemption does not embody a related act that the Fuqaha unanimously consider as prohibited, or lead to issuing different Fatwas for two identical incidences. Misuse of Shariah (fabrication). exemptions in this manner is known in Fiqh as TalfiqTalfiq (fabrication). exemptions in this manner is known in Fiqh as 8/5 Fatwa issuers shall not direct Institutions to impermissible tricks for escaping Shariah restrictions, or violating the objectives of Shariah legislation. 8/6 Fatwa shall not be issued hastily, declaring (for instance) prohibition of an act for the mere sense of condemnation that the one feels towards new habits and traditions, unless such habits and traditions contradict with the rules and principles of the Shariah. Similarly, declaring permissibility of an act shall not come for the mere sake of following rules and traditions. 8/7 It shall be made clear, when necessary, that declaring permissibility of an act is by no means amount to recommending that act or making a call for performing it. 742742 Shariah Standard No. (29): Stipulations and Ethics of Fatwa in the Institutional Framework
Text of Fatwa 9/1 The Fatwa shall be clearly stated so that it may not be misunderstood by the layman, or taken to mean different things to those who have bad intentions. 9/2 When there are more than one Fiqh opinion on the same issue, the board shall declare the specific opinion that it subscribes to. If the issue is controversial the board has to explain the specific bases of its choice. 9/2 When the Fatwa has more than one aspect all such aspects have to be clearly indicated. 9/3 In principle, mentioning the proof is not an underlying condition 9/3 In principle, mentioning the proof is not an underlying condition for issuing the Fatwa, and the Institution has no right to impose it as a condition for accepting it. However, the board has to refer to the bases of its Fatwa. 9/4 The Fatwa statement shall be precise, concise and free from any confusing details and preachy expressions that have nothing to do with serving the purpose. If, however, the subject requires detailed statement for the sake of public interest or so as to convince the regulatory and supervisory bodies, it would be better to add such expressions, in order to justify the ruling, indicate the goal behind it, and warn against falling into blights. 9/5 There is no harm to provide more information than what has been requested by the seeker of the Fatwa in order to leave no room for confusion, or to distinct the opinion from other similar opinions, or to serve a future need of the Fatwa seeker.
Fatwa Manuscript (Document) 10/1 In principle, Fatwa can be issued by uttering, signaling or acting, but for Institutions it should be written to become an evidence or a document that can be referred to. 10/2 Fatwa shall be started by the Verse of Basmalah 10/2 Fatwa shall be started by the Verse of (i.e., In the name of Basmalah (i.e., In the name of Allah, the Most Gracious, the Most Merciful), along with praise to Allah and blessings on Prophet Muhammad (peace be upon him). 743743 Shariah Standard No. (29): Stipulations and Ethics of Fatwa in the Institutional Framework At the end of the Fatwa, the same expressions could be repeated (Allah knows best) Allahu Alam (Allah knows best) or, in stead, expressions like Allahu Alam or, in stead, expressions like could be introduced to indicate closing up of the Fatwa statement. 10/3 Fatwa shall be clearly handwritten or typed, and each page of it shall be initialed. It should also carry the date of its issuance and the official stamp of its issuing source, if such stamp is available. 10/4 Clear linkage between the Fatwa request and the Fatwa statement should be indicated. Preferably, there shall be a precise summary of the question. 10/5 When the Fatwa is issued by the concerned board of the Institution, the content of the Fatwa shall be stated in the formal proceedings of the board meeting.
Retreat from a Mistaken Fatwa 11/1 The board has to retreat from its Fatwa if it is proved to be wrong on reviewing, or on examination by a higher body. In such case, the board has to inform the Institution so as to rectify the ruling and its consequent effects. The Institution on its part has to correct all the actions that had been based on the wrong Fatwa and refrain from adopting it any more. 11/2 The board, on its own initiative or on request of the institution, has the right to review a previous Fatwa even if such revision would lead to issuing a new Fatwa that contravenes the former one. In such case, the Institution has to follow the new Fatwa in the future and rectify the effects and repercussions of the old one.
Morals of Fatwa (Ethics of Fatwa Issuers) 12/1 Being slow and cautious in explaining the Fatwa, and avoiding over- courage in making Fatwa decisions. 12/2 Avoidance of issuing different Fatwas, on the same subject and the same issue, according to the source of the Fatwa request. 12/3 Fatwa issuer should avoid issuing Fatwa when he is mentally in- volved in a personal affair that leaves him no room for offering correct judgment. 744744 Shariah Standard No. (29): Stipulations and Ethics of Fatwa in the Institutional Framework 12/4 Keeping the secrets of the Institution and its employees, as well as the application mechanisms, which have been revealed to the board in the Fatwa process. Dealing with such secrets should not surpass the limits of illustrating the Fatwa, to indulge into unnecessary disclosure of information on technical means and procedures of application.
Date of Issuance of the Standard This Standard was issued on 1 Dhul-Qadah 1427 A.H., corresponding to 23 November 2006 A.D. 745745 Shariah Standard No. (29): Stipulations and Ethics of Fatwa in the Institutional Framework Adoption of the Standard The Shariah standard on Controls and Ethics of Fatwa in the Institutional Framework was adopted by the Shariah Board in its meeting No. (16) held in Al-Madinah Al-Munawwarah on 1 Dhul-Qadah 1427 A.H., corresponding to 23 November 2006 A.D. 746746 Shariah Standard No. (29): Stipulations and Ethics of Fatwa in the Institutional Framework Appendix (A) Brief History of the Preparation of the Standard The Shariah Board decided in its meeting No. (14) held in Dubai (U.A.E) on 2123 Rabi I, 1426 A.H., corresponding to 30 April 2 May 2005 A.D., to issue a Shariah Standard on Controls and Ethics of Fatwa in the Institutional Framework. On 29 Jumada I, 1426 A.H., corresponding to 6 July 2005 A.D., the Shariah Standards Committee decided to commission a Shariah consultant to prepare a study on Controls and Ethics of Fatwa in the Institutional Framework. The study was discussed in a meeting of a joint committee comprising Shariah Standards Committees (1) and (2) held in Makkah Al-Mukarramah on 89 Rabi I, 1427 A.H., corresponding to 67 April 2006 A.D., and the consultant was advised to incorporate necessary changes, in the light of the discussions and observations raised in the meeting. The revised draft of the Standard was submitted to the Shariah Board in its meeting No. (16) held in Al-Madinah Al-Munawwarah on 712 Jumada I, 1427 A.H., corresponding to 38 June 2006 A.D. Further changes were introduced in the draft and the board decided to send it to the concerned experts for review and observations before discussing it in a public hearing. AAOIFI then held, in the Kingdom of Bahrain on 6 Rajab 1427 A.H., corresponding to 31 July 2006 A.D., a public hearing which was attended by more than 30 participants representing central banks, institutions, accounting firms, Shariah scholars, university teachers and institutions, accounting firms, Shariah scholars, university teachers and other interested parties. Several observations were made in the session to other interested parties. Several observations were made in the session to (2) duly which the members of the Shariah Standards Committees (1) and (2) duly which the members of the Shariah Standards Committees (1) and responded. 747747 Shariah Standard No. (29): Stipulations and Ethics of Fatwa in the Institutional Framework In its meeting No. (17) held in Makkah Al-Mukarramah on 26 Shawwal 1 Dhul-Qadah, 1427 A.H., corresponding to 1823 November, 2006 A.D., the Shariah Board accepted the changes proposed by the participants in the public hearing and adopted the Standard (unanimously for some clauses and with the majority for others), as indicated in the minutes of the Boards meetings. 748748 Shariah Standard No. (29): Stipulations and Ethics of Fatwa in the Institutional Framework Appendix (B) The Shariah Basis for the Standard Fatwa is considered as a collective duty that can be discharged of by any Fatwa is considered as a collective duty that can be discharged of by any one of those who are able to do it, because it is one of the religious func- tions that serve public interest. Therefore, what is required is to have someone in the Muslim community who can issue Fatwa, rather than to have each and every individual of the community able to do so. Fatwa would become the duty of a specific individual or a group only if that would become the duty of a specific individual or a group only if that individual or group is the only one who can issue it. If Fatwa were to become the duty of every member of the society, things would be more complicated.(2)(2) complicated. It is the duty of the institutions to seek Fatwa because otherwise they It is the duty of the institutions to seek Fatwa because otherwise they would not be able to meet their commitments to observe the rules of the Islamic Shariah. Therefore, Institutions should approach the boards for obtaining Fatwa. Similarly, it is the duty of the board to issue Fatwa to the Institution due to the relationship that binds the two by virtue of the decision of the general assembly (equity owners) of the Institution. Acceptance of the Fatwa of a Shariah scholar whose knowledge is confined Acceptance of the Fatwa of a Shariah scholar whose knowledge is confined to only one branch of Fiqh, such as financial transactions in institutions, is based on the viewpoint that Ijtihad (reasoning) and Fatwa may be made partially.(3)(3) partially. Preventing the Institution to adopt the Fatwas of other boards, except Preventing the Institution to adopt the Fatwas of other boards, except when allowed by its own board to do so, stems from the need to bar the way to any tendency of fabrication or attempt to pursue Shariah exemptions without observing their relevant controls or their context and circumstances, an act which leads to adoption of irrelevant Fatwas. Permissibility of referring the Fatwa to a higher Shariah board or to a Fiqh Permissibility of referring the Fatwa to a higher Shariah board or to a Fiqh forum for reconsideration, or making use of collective Fatwa, rests on the (2)(2) Sifat Al-Fatwa Wa Al-Mufti Wa Al-Mustafti , Ibn Hamdan Al-Hanbali (P. 52) Sifat Al-Fatwa Wa Al-Mufti Wa Al-Mustafti, Ibn Hamdan Al-Hanbali (P. 52) ibid. (P. 28). (3)(3) ibid. (P. 28). 749749 Shariah Standard No. (29): Stipulations and Ethics of Fatwa in the Institutional Framework fact that an opinion that gains support from a large group of eligible scholars is likely to be more reliable. Moreover, collective Fatwa may facilitate more coordination, and avoidance of discrepancies in the Fatwas of the different boards on the same subject. Withdrawal or refraining from dissemination of a certain Fatwa for fear of Withdrawal or refraining from dissemination of a certain Fatwa for fear of being misused is based on the principle of which advocates Sadd al-Zarai which advocates being misused is based on the principle of Sadd al-Zarai the prohibition of a permissible act if it would (certainly or probably) lead to blight. Pursuing Shariah exemptions is prohibited because it leads to relaxation Pursuing Shariah exemptions is prohibited because it leads to relaxation of the rules of the Islamic Shariah and induce loss of keenness to observe them. Therefore, some Fuqaha hold that pursuing Shariah exemptions (rebellion against Allahs Obedience).(4)(4) amounts to amounts to FisqFisq (rebellion against Allahs Obedience). Choosing the easier ruling when two alternative options are available Choosing the easier ruling when two alternative options are available (Allah intends for you is supported by the Quran in Allahs Saying: (Allah intends for you is supported by the Quran in Allahs Saying: ease, and He does not want to make things difficult for you),(5)(5) and by ease, and He does not want to make things difficult for you), and by the Sunnah in the Prophetic Hadith stating: Make things easier not the Sunnah in the Prophetic Hadith stating: Make things easier not harder....(6)(6) All these directives are to be considered after reviewing the All these directives are to be considered after reviewing the harder.... specific proofs.(7)(7) specific proofs. The controls relating to the text of the Fatwa are meant to ensure that the The controls relating to the text of the Fatwa are meant to ensure that the Fatwa would achieve its goal without deviating to an invalid meaning. As indicted by Ibn Hamdan(8)(8) in his book indicted by Ibn Hamdan , drawing attention Sifat Al-Fatwa, drawing attention to these controls and what the ancestor Fuqaha had said about them is meant to ensure the appropriateness of the Fatwa. Permissibility of offering additional information with the Fatwa is shown Permissibility of offering additional information with the Fatwa is shown by the statement of the Prophet (peace be upon him) when he was asked Seawater is pure and sea car- (ablution): Seawater is pure and sea car- about using seawater for WuduWudu (ablution): about using seawater for casses are permissible.(9)(9) casses are permissible. in his book Sifat Al-Fatwa Sifat Al-Fatwa Wa Al-Mufti Wa by Ibn Al-Qayyim [1: 222]; and Sifat Al-Fatwa Wa Al-Mufti Wa (P. 32). by Ibn Hamdan (P. 32). (4)(4) Ilam Al-Muwaqqiin Ilam Al-Muwaqqiin by Ibn Al-Qayyim [1: 222]; and Al-Mustafti by Ibn Hamdan Al-Mustafti [Al-Baqarah (The Cow): 185] (5)(5) [Al-Baqarah (The Cow): 185] Sahih Al-Bukhari (H: 69); and (6)(6) Sahih Al-Bukhari Rasm Al-Mufti by Ibn Abidin (P. 11). (7)(7) Rasm Al-Mufti by Ibn Abidin (P. 11). by Ibn Hamdan (pp. 5866). Sifat Al-Fatwa Wa Al-Mufti Wa Al-Mustafti by Ibn Hamdan (pp. 5866). (8)(8) Sifat Al-Fatwa Wa Al-Mufti Wa Al-Mustafti (H: 386 and 388). Sunan Ibn Majah (H: 386 and 388). (9)(9) Sunan Ibn Majah (H: 69); and Sahih Muslim (H: 1734). Sahih Muslim (H: 1734). 750750 Shariah Standard No. (29): Stipulations and Ethics of Fatwa in the Institutional Framework The controls on the Fatwa document aim to preserve Fatwa from being The controls on the Fatwa document aim to preserve Fatwa from being (10) misused.(10) misused. The ruling that a wrong Fatwa should be rectified is supported by the The ruling that a wrong Fatwa should be rectified is supported by the incident when the Caliphate Umar in one case issued a Fatwa that denied some of the brothers the right of inheritance, and later on he issued ano- ther Fatwa that granted such brothers the inheritance right. Having done so he said: the former case was subject to my previous Fatwa, and the new (11) one is subject to the new Fatwa.(11) one is subject to the new Fatwa. Avoidance of hasty Fatwa should be observed because it was the prac- Avoidance of hasty Fatwa should be observed because it was the prac- tice of the (Companions of the Prophet) and the other leading Sahabah (Companions of the Prophet) and the other leading tice of the Sahabah Fuqaha who succeeded them. In issuing Fatwa, one should not feel shy to say: I do not know, or to postpone the Fatwa until he is in a position to (12) answer it properly.(12) answer it properly. (10) See more elaborations on (10) See more elaborations on Sifat Al-Fatwa Wa Al-Mufti Wa Al-Mustafti (P. 63). by Al-Subki (with elaborations by Al-Mahalli) [2: 391]. Jama Al-Jawami by Al-Subki (with elaborations by Al-Mahalli) [2: 391]. by Ibn Hamdan (pp. 6-11). Sifat Al-Fatwa Wa Al-Mufti Wa Al-Mustafti by Ibn Hamdan (pp. 6-11). (11) Jama Al-Jawami (11) (12) Sifat Al-Fatwa Wa Al-Mufti Wa Al-Mustafti (12) by Ibn Hamdan Sifat Al-Fatwa Wa Al-Mufti Wa Al-Mustafti by Ibn Hamdan 751751 Shariah Standard No. (29): Stipulations and Ethics of Fatwa in the Institutional Framework Appendix (C) Definitions Judgment entails the issuance of a verdict which is binding to the two Judgment entails the issuance of a verdict which is binding to the two litigants. In this sense, Fatwa differs from judgment as the latter entails offering a Shariah ruling without enforcing commitment towards it. Fatwa also differs from education, because the latter is not restricted to a specific incident. Therefore, Fatwa is quite distinct from an initiation to teach Shariah rulings, or a mere act of seeking knowledge about hypothetical incidences. 752752 Shariah Standard No. (30) Monetization (Tawarruq) Contents Subject ................................................................................................... Preface ................................................................................................... Preface ..................................................................... Statement of the Standard ..................................................................... Statement of the Standard ..............................................................................
Scope of the Standard ..............................................................................
Scope of the Standard
Definition of Monetization and Its Distinction from Bay Al-Inah
Definition of Monetization and Its Distinction from Bay Al-Inah .. .. ..............................................
Mutawarriq (Monetization Beneficiary) ..............................................
Mutawarriq (Monetization Beneficiary) ................................................
Controls on Monetization Transactions ................................................
Controls on Monetization Transactions
Controls on Monetization When the Institution Is the Beneficiary .. ..
Controls on Monetization When the Institution Is the Beneficiary ............................................................
Date of Issuance of the Standard ............................................................
Date of Issuance of the Standard ...................................................................... Adoption of the Standard ...................................................................... Adoption of the Standard Appendices Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (b): The Shariah Basis for the Standard Appendix (b): The Shariah Basis for the Standard ........... ......................... ........... ......................... PagePage 757757 758758 760760 761761 762762 764764 755755 IN THE NAME OF ALLAH, THE ALL-MERCIFUL, THE MOST MERCIFUL All praise be to Allah, the Lord of all the worlds, and blessings and peace be upon our master, Muhammad, and his household and all his companions Preface The purpose of this standard is to indicate the essence of Monetization and explain the Shariah conditions for its validity, as well as the controls pertaining to its application in Islamic financial Institutions (Institution/ Institutions).(1)(1) Institutions). (1) The word (Institution/Institutions) is used here to refer, in short, to Islamic financial institutions including Islamic Banks. 757757 Shariah Standard No. (30): Monetization (Tawarruq) Statement of the Standard
Scope of the Standard This Standard covers the different applications of monetization, whether the beneficiary is the customer or the institution. Bay Al-Inah
Definition of Monetization and Its Distinction from Bay Al-Inah
Definition of Monetization and Its Distinction from Monetization refers to the process of purchasing a commodity for a de- ferred price determined through Musawamah (Bargaining) or Murabahah (Mark-up Sale), and selling it to a third party for a spot price so as to obtain cash. Whereas Inah refers to the process of purchasing the commodity for a deferred price, and selling it for a lower spot price to the same party from whom the commodity was purchased.
Mutawarriq (Monetization Beneficiary) 3/1 The Monetization beneficiary may be a customer who purchases the commodity from the Institution and sells it to a third party to obtain liquidity. It may also be the Institution itself when it purchases the commodity from the customer or another Institution and sells it to a third party to obtain liquidity. The controls for both cases are shown in items (4) and (5) below. 3/2 The institution should not perform Monetization for the benefit of conventional banks when it discovers that such banks are going to use the liquidity for interest-based lending instead of Shariah- compliant operations.
Controls on Monetization Transactions 4/1 The requirements of the contract for purchasing the commodity on deferred payment bases should be fulfilled, for both Musawamah and Murabahah transactions, with due consideration to Shariah Standard 758758 Shariah Standard No. (30): Monetization (Tawarruq) No. (8) on Murabahah. There shall also be a real commodity that the seller owns before selling it. If the process is to involve a binding promise, it shall be from only one party. As regards the commodity sold, it shall not be gold or silver or any type of currency. 4/2 The commodity sold shall be well identified so as to become distinct from the other assets of the seller. This may be done by separating the commodity from the other assets of the seller, or recording the numbers of its identifying documents such as storing certificates. [see Shariah Standard No. (20) on Sale of Commodities in Organized Markets, item 4/2/2] 4/3 If the commodity is not made available at the time of signing the contract, the client shall be given a full description or a sample that indicates the quantity of the commodity and the place of its storage, so that his act of purchasing the commodity becomes real rather than fictitious. In this sense, using local commodities for Monetization is more preferable. 4/4 The commodity shall be actually or constructively received by the buyer, and there remains no further condition or procedure for receiving it. 4/5 The commodity (object of Monetization) must be sold to a party other than the one from whom it was purchased on deferred payment basis (third party), so as to avoid Inah which is strictly prohibited. Moreover, the commodity shall not return back to the seller by virtue of prior agreement or collusion between the two parties, or according to tradition. 4/6 The contract for purchasing the commodity on deferred payment basis, and the contract for selling it for a spot price shall not be linked together in such a way that the client looses his right to receive the commodity. Such linking of the two contracts is prohibited whether it is made through stipulation in the documents, acceptance as a normal tradition, or incorporation in the procedures. 759759 Shariah Standard No. (30): Monetization (Tawarruq) 4/7 The client shall not delegate the Institution or its agent to sell, on his his 4/7 The client shall not delegate the Institution or its agent to sell, on behalf, a commodity that he purchased from the same Institution and, similarly, the Institution shall not accept such delegation. If, however, the regulations do not permit the client to sell the commodity except through the same Institution, he may delegate the Institution to do so after he, actually or constructively, receives the commodity. 4/8 The Institution should not arrange proxy of a third party to sell, on behalf of the client, the commodity that the client purchased from the Institution. 4/9 The client shall not sell the commodity except by himself or through an agent other than the Institution, and shall duly observe the other stipulations. 4/10 The Institution shall provide the client with the information that he or his appointed agent may need for selling the commodity.
Controls on Monetization When the Institution Is the Beneficiary 5/1 Monetization is not a mode of investment or financing. It has been permitted when there is a need for it, subject to specific terms and conditions. Therefore, the Institutions shall not use Monetization as a means of mobilizing liquidity for their operations, and exert no effort for fund mobilization through other modes such as Mudarabah, investment agency, Sukuk, investments funds, and the like. The Institution shall resort to monetization only when it faces the danger of a liquidity shortage that could interrupt the flow of its operations and cause losses for its clients. 5/2 The institutions shall avoid proxy in selling the Monetization commodity, even if proxy is to be arranged with a third party. In other words, Institutions shall use their own bodies for selling the monetization commodity, though using brokers for this purpose is permissible.
Date of Issuance of the Standard This Standard was issued 1 Dhul-Qadah 1427 A.H., corresponding to 13 Dhul-Qadah 1427 A.H., corresponding to 13 This Standard was issued 1 November 2006 A.D. 760760 Shariah Standard No. (30): Monetization (Tawarruq) Adoption of the Standard The Shariah standard on Monetization was adopted by the Shariah Board in its meeting No. (17) held in Makkah Al Mukarramah on 26 Shawwal 1 Dhal-Qadah 1427 A.H., corresponding to 18-23 November 2006 A.D. 761761 Shariah Standard No. (30): Monetization (Tawarruq) Appendix (A) Brief History of the Preparation of the Standard The Shariah Board decided in its meeting No. (7) held on 9-13 Ramadan 1422 A.H., corresponding to 24-28 November 2001 A.D., in Makkah Al Mukarramah, to issue a Shariah Standard on Monetization, as practiced by banks. On 17 Shaban 1423 A.H., corresponding to 3 October 2005 A.D., the Shariah Standards Committee (2) decided to commission a Shariah consultant to prepare an exposure draft on Monetization. On 6 Rabi I, 1426 A.H., corresponding to 15 April 2005 A.D., the Shariah Standards Committee (2) decided to commission another Shariah consultant to redraft the Monetization Standard in the typical format of the other Shariah Standards. The Committee (2) discussed the exposure draft in its meeting No. (15) held in Manama, Kingdom of Bahrain on 8 Jumada I, 1426 A.H., corresponding to 15 June 2005 A.D., and introduced necessary changes in the light of the comments and observations of the members. A joint committee comprising members from Shariah Standards Com- mittees (1) and (2) discussed the exposure draft in a meeting held in the Kingdom of Bahrain on 1 Safar 1427 A.H., corresponding to 1 March 2006 A.D., and introduced further changes in the light of the comments and observations of its members. In its meeting No. (16) held in Al-Madinah Al-Munawwarah on 7-12 Jumada I, 1427 A.H., corresponding to 3-8 June 2006 A.D., the Shariah Board discussed the amendments suggested by the joint meeting of the two Shariah Committees and accepted what it deemed appropriate. 762762 Shariah Standard No. (30): Monetization (Tawarruq) AAOIFI then held a public hearing in the Kingdom of Bahrain on 6 Rajab 1427 A.H., corresponding to 31 July 2006 A.D. The public hearing was attended by more than 30 participants representing central banks, Institutions, accounting firms, Shariah scholars, university teachers and other interested parties. Several observations were made in the public hearing to which the members of the Shariah Standards Committees (1) and (2) duly responded. In its meeting No. (17) held in Makkah Al-Mukarramah on 26 Shawwal 1 Dhul-Qadah 1427 A.H., corresponding to 18-23 November 2006 A.D., the Shariah Board discussed the changes proposed by the participants in the public hearing, accepted some of them, and adopted the Standard (unanimously for some clauses and with the majority for others), as indicated in the minutes of the Boards meetings. 763763 Shariah Standard No. (30): Monetization (Tawarruq) Appendix (B) The Shariah Basis for the Standard Differentiation between Monetization and Inah with regard to permis- Differentiation between Monetization and Inah with regard to permis- sibility and prohibition stems from the fact that, contrary to the former, the latter is a trick for practicing Riba (usury). Inah takes place between two parties who are in fact a borrower and a lender. The lender sells the commodity to the borrower for a deferred price and buys it back from him for a less price payable on spot. The majority of the Fuqaha subscribe to prohibition of Inah and permissibility of monetization, ex- cept Ibn Taymiyyah and Ibn Al-Qayyim who consider monetization as prohibited or worthy of aversion. Permissibility of constructive receipt of the commodity has already been Permissibility of constructive receipt of the commodity has already been catered for in the Shariah Standard No. (18) on Possession (Qabd) and the Shariah Standard No. (1) on Trading in Currencies. Permissibility of monetization transactions that observe the Shariah controls Permissibility of monetization transactions that observe the Shariah controls indicated in this Standard can be traced in the texts of the Quran and the Sunnah that permit sale transactions. It has also been confirmed by the Sunnah that permit sale transactions. It has also been confirmed by two resolutions issued by the Islamic Fiqh Academy of the Muslim World League,(2)(2) and the Standing Committee of the Supreme Board of Shariah League, and the Standing Committee of the Supreme Board of Shariah Scholars of the Kingdom of Saudi Arabia (Fatwa No. 19297), as well as the Fatwas of several Shariah Supervisory Boards. Therefore, monetization is it, as it is usual- an exit for avoiding Riba rather than a trick for performing it, as it is usual- an exit for avoiding Riba rather than a trick for performing (2)(2) Resolution of the 15 Resolution of the 15thth Session which imposes no condition other than that Monetization Session which imposes no condition other than that Monetization should not be performed like Inah. Also, the Resolution of the 17thth Session which should not be performed like Inah. Also, the Resolution of the 17 Session which comprises other conditions (well-observed in this standard) most important of which is non-commitment of the bank to become the agent of the client in selling the commodity which makes Monetization similar to Inah using the same words of the Resolution - and non-violation of the condition relating to receipt of the commodity: (the Resolution here did not impose actual receipt only, similar to what it did in its 11thth Session where here did not impose actual receipt only, similar to what it did in its 11 Session where it considered legal receipt to be sufficient in currency exchange, which requires more controls than sale transactions). 764764 Shariah Standard No. (30): Monetization (Tawarruq) ly practiced by those who do not want to be involved in interest-based bor- rowing. It has been reported by Abdullah Ibn Al-Mubarak(3)(3) that Aishah that Aishah rowing. It has been reported by Abdullah Ibn Al-Mubarak (may Allah be pleased with her) practiced it. Prohibition of joining together the contract for purchasing the commodity Prohibition of joining together the contract for purchasing the commodity and the contract for selling it is justified by the fact that joining them together would impose a commitment on the client to sell the commodity together would impose a commitment on the client to sell the commodity right away. Hence, such immediate transfer of the ownership of the commodity may not enable the client to receive it. This is again the same reason for prohibition of agency-related commitments. Permissibly of resorting to agency of the Institution when the client, by Permissibly of resorting to agency of the Institution when the client, by virtue of law, cannot sell the commodity directly, is meant to safeguard the deal from being nullified by the law. The ruling that the Institution shall provide detailed information about The ruling that the Institution shall provide detailed information about the commodity to the client aims at preventing fictitious transactions and helping the client to obtain liquidity. Such requirement holds true whether the commodity in question is a commodity, a car, shares of a company, international goods, or local goods. The latter are more suitable for monetization due to the easiness of ensuring their existence, and the chance available to the client to actually hold them if he so desires. The ruling that the Institution shall provide the client with a full description The ruling that the Institution shall provide the client with a full description or a sample of the commodity is to ensure that the latters act of purchasing the commodity is actual rather than fictitious. Monetization (where the client or the Institution is beneficiary) shall be Monetization (where the client or the Institution is beneficiary) shall be subjected to strict controls and restrictions so that institutions fulfill the main objectives underlying their presence and the interest of customers to make dealings with them. Principally, institutions have to show strict commitment towards using Principally, institutions have to show strict commitment towards using modes of investment and financing such as the various forms of Musharakah (Partnership) and exchange of goods, usufructs and services that conform to the very nature and basic activities of Islamic banking. Hence, imposition (3)(3) Al-Azhari Al-Shafii, Al-Zahir (P. 216); and Al-Azhari Al-Shafii, Al-Zahir permissibility of Monetization see also Al-Mardawi, Al-Insaf permissibility of Monetization see also Al-Mardawi, Al-Mughni [4: 127]; Al-Sarakhsi, QinaQina [2: 447] and [3: 185]; [3: 416]. Al-Rawdah [3: 416]. and Al-Nawawi, Al-Rawdah and Al-Nawawi, (P. 216); and Al-Faiq Fi Ghrib Al-Hadith Al-Insaf [4: 250]; Al-Fa`iq Fi Ghrib Al-Hadith [2: 108]. For [2: 108]. For [4: 250]; Kashshaf Al- Kashshaf Al- , [11: 211]; Al-Mabsut, [11: 211]; [2: 447] and [3: 185]; Al-Mughni [4: 127]; Al-Sarakhsi, Al-Mabsut 765765 Shariah Standard No. (30): Monetization (Tawarruq) of controls and restrictions on monetization would curb any tendency for expanding monetization to the extent that jeopardizes the extensive use of the original modes of investment and financing. Therefore, Institutions shall not use monetization except in the limited scope defined in this Standard. They shall also restrict the use of monetization to the cases of clients whose transactions cannot be disposed of through other modes of financing and investment such as Musharakah, Mudarabah, Ijarah, Istisnaa and the like. Monetization may also be used as a means for helping the clients to dispose of their previous interest-based debts, after ensuring that they have developed genuine intention not to deal in usurious transactions any more. 766766 Shariah Standard No. (31) Controls on Gharar in Financial Transactions Contents Subject ................................................................................................... Preface ................................................................................................... Preface ..................................................................... Statement of the Standard ..................................................................... Statement of the Standard ..............................................................................
Scope of the Standard ..............................................................................
Scope of the Standard ..............................................................
Definition and Types of Gharar ..............................................................
Definition and Types of Gharar ........................................................................
Shariah Status of Gharar ........................................................................
Shariah Status of Gharar ...............................
Controls on Gharar Which Violates Transactions ...............................
Controls on Gharar Which Violates Transactions
Scope of Gharar in Exchange-Based Contracts (Uqud al-Muawadat
Scope of Gharar in Exchange-Based Contracts (Uqud al-Muawadat)
Impact of Gharar on Documentation Contracts ..................................
Impact of Gharar on Documentation Contracts ..................................
Impact of Gharar Which Stems from the Conditions of the Con- ............................................................................................................ tract ............................................................................................................ tract ............................................................
Date of Issuance of the Standard ............................................................
Date of Issuance of the Standard ...................................................................... Adoption of the Standard ...................................................................... Adoption of the Standard Appendices Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (b): The Shariah Basis for the Standard Appendix (b): The Shariah Basis for the Standard ........... ......................... ........... ......................... Appendix (c): Definitions Appendix (c): Definitions .................................................... ......................... .................................................... ......................... PagePage 771771 772772 774774 779779 780780 781781 782782 784784 788788 769769 IN THE NAME OF ALLAH, THE ALL-MERCIFUL, THE MOST MERCIFUL All praise be to Allah, the Lord of all the worlds, and blessings and peace be upon our master, Muhammad, and his household and all his companions Preface This standard aims at defining Gharar (uncertainty), indicating its types and impacts and emphasizing controls that need to be applied when Gharar is to the extent which nullifies transactions. 771771 Shariah Standard No. (31): Controls on Gharar in Financial Transactions Statement of the Standard
Scope of the Standard This standard covers the impact of excessive, medium and minor Gharar on transactions performed by Islamic financial institutions (Institution/ Institutions).(1)(1) In this respect the standard will set out the Shariah Institutions). In this respect the standard will set out the Shariah rulings pertaining to the case when Gharar is involved in exchange- based ) including Uqud al-Muawadat) including based contracts/commutative contracts ( partnerships, and the case when Gharar is involved in donation contracts/ non-commutative contracts ( ). The standard will also al-Tabarruat). The standard will also non-commutative contracts (Uqud make special reference to the case when Gharar is involved in a contracts condition. contracts/commutative contracts (Uqud al-Muawadat Uqud al-Tabarruat
Definition and Types of Gharar 2/1 Gharar is a state of uncertainty that exists when the process of con- cluding a transaction involves an unknown aspect. In other words, Gharar refers to the status of results that may or may not materialize. 2/2 Degree-wise, Gharar can be excessive, medium or minor. As regards its effect on the transaction, Gharar can be to the extent which nullifies the contract or it may not be so.
Shariah Status of Gharar It is impermissible in Shariah to conclude a contract or stipulate a condition that involves a degree of Gharar which could jeopardize the fulfillment of the contracts stipulations. The degree of Gharar for this purpose is judged as per item (4) below.
Controls on Gharar Which Violates Transactions Gharar violates the transaction when it satisfies the following four condi- tions: The word (Institution/Institutions) is used here to refer, in short, to Islamic financial (1)(1) The word (Institution/Institutions) is used here to refer, in short, to Islamic financial institutions including Islamic Banks. 772772 Shariah Standard No. (31): Controls on Gharar in Financial Transactions a) If it is involved in an exchange-based contract or any contract of that nature. b) If it is excessive in degree. c) If it relates to the primary subject matter of the contract. d) If it is not justified by a Shariah-recognizable necessity. 4/1 First Condition: When Gharar is in an exchange-based contract or a similar contract: This includes, for instance, sale, lease and partnership contracts, whereas Gharar does not affect donation contracts such as gift and will contracts. In an exchange-based contract Gharar can be either in the form or subject matter of the contract. 4/2 Second Condition: When Gharar is excessive 4/2/1 Gharar is excessive when it becomes a dominating and distinctive aspect of the contract, and is capable of leading to dispute. However, assessment of Gharar for such purpose could differ according to place and time, and has to be determined in the light of normal practice (Urf). Examples of excessive Gharar include selling of fruits before production, signing a lease contract for an unspecified period, and sale of a Salam commodity that is not usually available on date of delivery. Gharar in any of these forms sets the contract null and void. 4/2/2 Minor Gharar is the degree of Gharar that a contract could hardly avoid, and is not sufficient to generate dispute. This includes transactions like sale of a house to a buyer who has not seen its foundation, or leasing the house for one month while months differ in length. Such type of Gharar does not affect the contract. 4/2/3 Medium Gharar falls between excessive and minor and its ex- amples are: sale of underground commodities or commodities that cannot be known unless broken, or leasing of fruit trees. 773773 Shariah Standard No. (31): Controls on Gharar in Financial Transactions Medium Gharar can also exist in contracts like Jualah (payment of a specific reward for a task if accomplished), guardianship, companies and fixed-term Mudarabah. Medium Gharar does not affect the contract. 4/3 Third Condition: When Gharar relates to the primary object of the contract If Gharar relates to the primary subject matter of the transaction, it sets the contract null and void, as when unripe fruits are sold (apart from the trees and without a stipulation for awaiting harvesting). If, instead, Gharar is in a corollary ( ) of the primary subject matter, instead, Gharar is in a corollary (TabiTabi) of the primary subject matter, it has no effect on the contract. The example here is selling the unripe fruits along with the trees, or selling the nonexistent part of the plants along with the part that already exists. A further example of Gharar in a corollary is a fetus sold along with the pregnant sheep, or milk in the udder of a sold sheep. 4/4 Fourth Condition: When no Shariah-recognizable need has neces- sitated Gharar in the contract Need in this context (which could be public or private) refers to the situation when refraining from commitment of impermissible Gharar leads to severe hardship, though may not amount to mortality. Need should also be inevitable; i e, there should be no permissible way of accomplishing the task, except through the contract that involves excessive Gharar. Commercial insurance, in the absence of Takaful (solidarity insurance) can be cited here as a fitting example. (Uqud al-Muawadat)
Scope of Gharar in Exchange-Based Contracts (Uqud al-Muawadat)
Scope of Gharar in Exchange-Based Contracts Gharar in this type of contracts could be in the form, object or terms of Gharar in this type of contracts could be in the form, object or terms of the contract. 5/1 Excessive Gharar in the form of the contract Gharar is said to be in the form of the contract when it relates to offer and acceptance rather than to the object of the contract. Practical types of such Gharar comprise the following: 774774 Shariah Standard No. (31): Controls on Gharar in Financial Transactions Bayatayn Fi Bayah) 5/1/1 Combining two sales in one sale (Bayatayn Fi Bayah 5/1/1 Combining two sales in one sale ( Combining two sales in one sale nullifies the contract, and the examples of that is selling a good for one thousand pounds in cash or two thousands on deferred payment, without concluding any of the two deals. 5/1/2 Sales in which the deal is finalized subject to random selection of the sold object Sales become void when the sold item is randomly selected. One example of such type of sale is (sale by stone Bay al-Hasah (sale by stone One example of such type of sale is Bay al-Hasah throwing), in which the seller throws a stone and the buyer has to accept the item on which the stone falls. Another example is Bay al-Munabadhah (throwing of the sold commodity), where Bay al-Munabadhah (throwing of the sold commodity), where the seller throws to the buyer one of the commodities he wants to sell. Such sale could also be conducted by using a programmed machine to determine the sold good irrespective of the choices of the seller and the buyer. 5/2 Gharar in the object of the contract 5/2/1 Gharar in sold or leased objects and the like 5/2/1/1 Gharar which results from ignorance of the essence of the sold commodity nullifies the contract. This type of Gharar takes place when, for instance, a sale contract is concluded without indicating what the sold commodity is. Ignorance of the essence of the sold commodity would consequently result in ignorance of the type and characteristics of that commodity. 5/2/1/2 Gharar which stems from ignorance of the type of the sold commodity nullifies the contract, as when a car is sold without specifying its type, or when an amount of currency is sold (through a currency exchange contract) without indicating the type of that currency or having a generally accepted tradition for its determination. 775775 Shariah Standard No. (31): Controls on Gharar in Financial Transactions 5/2/1/3 Gharar which results from lack of knowledge of the sold commodity in particular (non-specification of the commodity) nullifies the contract. The example of this is sale of a non-specified car from a number of cars in a car showroom, or sale of a piece of land in a residential area without the option of specification. 5/2/1/4 Gharar due to ignorance of the specific characteristics of the sold commodity (for commodities that usually differ in nature) nullifies the contract. This happens when a nonexistent commodity is sold without de- scribing it. 5/2/1/5 Gharar due to ignorance of the amount of the sold commodity, such as (sale of an unknown Bay al-Juzaf (sale of an unknown commodity, such as Bay al-Juzaf quantity), nullifies the contract, except when there exist the conditions that make Gharar forgivable. Such conditions include: viewing the sold commodity at the time of sale, or when estimation is possible in the case of the commodity in question, or if what really matters for that specific commodity is the quantity as a whole rather than the individual components. In such cases, Gharar does not nullify the contract. 5/2/2 Gharar in the price or rent of the contracts object Gharar could arise when, for instance, a commodity is sold without mentioning the price, or when the price is left to be determined by one of the two parties of the contract, or by a third party. Another example here is the case of somebody purchasing a commodity for an amount of money in a bundle or in his pocket. A third example is purchasing the commodity by using a currency which the buyer ignores its issuer and has no indication that could help him to know it. In all these cases, Gharar nullifies the sale contract. However, there are some cases where Gharar in the price is permitted, as - for instance - when the sale contract is concluded 776776 Shariah Standard No. (31): Controls on Gharar in Financial Transactions at the market price on the day of purchase, or at the price to be set by the market on the day of purchase, or at the price people usually sell at. Sale with forgivable Gharar in price could also include , in which the Bay al- Istjrar, in which the purchasing commodities through Bay al- Istjrar purchasing commodities through buyer obtains the goods regularly from the seller for a price to be determined subject to the price that people normally sell at, or subject to an index, and even after consumption of the goods in question. A similar sale contract is that which comprises selling, at unit price, of a quantity of the commodity which the buyer can see, yet does not know its exact amount or total value. That is to say, one could sell a quantity of grains at the price per kilogram, or he could rent a car at a rent per mile, so that the payable amount of rent is determined after reaching the target destination. Furthermore, such sales may include concluding a lease contract at the rent normally paid for similar property, or for a variable rent to be indicated by a specialized index. In all these preceding cases, the contract does not become null and void. 5/3 Gharar relating to ignorance of the contracts period 5/3/1 The contract becomes null and void when its duration is not stipulated. If, however, Gharar is removed by knowledge of the contracts duration, or abandonment of the duration, at the time of contracting, the contract becomes valid. 5/3/2 Gharar can be forgiven in postponement of the price until known seasons such as season of harvesting. In this case, the two parties should observe the normal date of the season rather than the event of harvesting. 5/4 Gharar pertaining to failure in delivery Gharar which relates to failure in delivery nullifies the contract. Ex- it is amples of such Gharar include selling of fish in the water, unless it is amples of such Gharar include selling of fish in the water, unless 777777 Shariah Standard No. (31): Controls on Gharar in Financial Transactions found in a confined place and does not require fishing. Such type of Gharar can also be seen in the sale (without option) of a commodity to be imported from abroad, and one is not sure whether a license for its importation would be obtained or not. 5/5 Gharar relating to sale of non-owned commodities Gharar relating to sale of a non-owned commodity nullifies the sale contract. It refers to the case when the seller does not (personally) have the commodity at the time of signing the contract, and has to purchase it from the market. Salam and Istisnaa are exceptional cases here (subject to their respective conditions). 5/6 Gharar that results from sale of non-held commodities A person shall not sell a commodity (whether it is a real estate or movable property) that he does not guarantee through actual or con- structive holding. In the absence of actual or constructive holding, it will not be possible to determine the party that possesses (and hence guarantee) the sold object. Therefore, selling a commodity that one does not own nullifies the sale contract. Actual holding in this context refers to receiving the good in hand, or receipt of the exact quantity in case of commodities measured in terms of volume or so. If the deal in question pertains to a Juzaf commodity (a commodity of an unknown quantity) holding would require shifting the commodity to another location. Holding in all cases, other than the preceding ones, shall be judged as per normal practice. As regards constructive holding, it indicates the act of releasing the commodity and facilitating the process of its holding. 5/7 Gharar resulting from sale of nonexistent commodities It is impermissible to sell a commodity that neither existents at present, nor does its existence in the future is ensured. Muawamah sale (sale of fruits to be delivered over several years) is a good example of such transactions. 778778 Shariah Standard No. (31): Controls on Gharar in Financial Transactions 5/8 Gharar which results from lack of viewing the sold commodity Bay al-Ayn al-Ghaibah) (Bay al-Ayn al-Ghaibah 5/8/1 It is impermissible to sell a commodity without enabling the buyer to view it or obtain its full description. Nevertheless, a commodity can be sold on the basis of mere description, whether description is to be made by the seller or someone else. Description should include all those characteristics which could affect the price. The buyer should then conclude the deal if the commodity is exactly as described, otherwise he is free to conclude the deal or not. 5/8/2 It is permissible to sell an asset that the buyer has seen sometime before the time of signing the contract, provided that the asset has undergone no change since that time. 5/8/3 A sale can be concluded on the basis of a model that indicates the characteristics of the sold commodity.
Impact of Gharar on Documentation Contracts 6/1 Impact of Gharar on Rahn (Mortgage) contracts Rahn (Mortgage) can permissibly involve a degree of Gharar that is not allowed in sale. For instance, a lost car or a farm that has not yet reached the stage of giving yield can be the object of a mortgage contract. Nonetheless, such property cannot be sold for settlement of the debt, unless the lost car is found or the farm has reached the stage of giving yield. [see Shariah Standard No. (5) on Guarantees] 6/2 Impact of Gharar on suretyship (Kafalah) contracts Suretyship (Kafalah) can also involve a degree of Gharar that is not Suretyship (Kafalah) can also involve a degree of Gharar that is not can be conditional (provided that the Suretyship can be conditional (provided that the permitted in sale. Suretyship permitted in sale. condition does not contradict with the stipulations of the contract); or it can be for an unknown period; or it may relate to a future obligation. [see Shariah Standard No. (5) on Guarantees] 6/3 Impact of Gharar on agency (Wakalah) contracts Agency (Wakalah) is permissible with Gharar, if there are indications or traditions that can be used for specifying its subject matter. For 779779 Shariah Standard No. (31): Controls on Gharar in Financial Transactions instance, agency can be conditional, or its subject matter can be identified through some of its forms. This shall, however, hold true when agency is free of charge, otherwise it shall be treated like Ijarah (hiring) and, thus, affected by Gharar. It is also permissible to make general agency contracts. [see Shariah Standard No. (23) on Agency and the Act of an Uncommissioned Agent (Fodooli)]
Impact of Gharar Which Stems from the Conditions of the Contract The condition which results in Gharar in the form or subject matter of the contract: A contract becomes null and void if it contains a condition that causes Gharar in its form, as when it contains an option without time limit. A contract can also become null and void for involving Gharar in its subject matter, as in the case of which refers to partial Bay al-Thunya which refers to partial subject matter, as in the case of Bay al-Thunya sale of a property, while retaining the remaining part as an exception (e.g., selling a multistory building with the exception of one floor without specifying it). Such sale is permissible only if the retained part of the property is specified.
Date of Issuance of the Standard This Standard was issued on 26 Shaban 1428 A.H., corresponding to 9 September 2007 A.D. 780780 Shariah Standard No. (31): Controls on Gharar in Financial Transactions Adoption of the Standard The Shariah Board adopted the Standard on Controls on Gharar in Financial Transactions in its meeting No. (19) held on 26-30 Shaban 1428 A.H., corresponding to 8-12 September 2007 A.D., in Makkah Al- Mukarramah, Kingdom of Saudi Arabia. 781781 Shariah Standard No. (31): Controls on Gharar in Financial Transactions Appendix (A) Brief History of the Preparation of the Standard In its meeting No. (14) held on 21-23 Rabi I, 1426 A.H., corresponding to 30 April 2 May 2005 A.D., in Dubai (U.A.E.), the Shariah Board decided to issue a Shariah Standard on Controls on Gharar in Financial Transactions. On 20 Jumada II, 1426 A.H., corresponding to 26 July 2005 A.D., the Shariah Standards Committee decided to commission a consultant to pre- pare a study on Controls on Gharar in Financial Transactions. The study was discussed in a joint meeting of the Shariah Standards Committees (1) and (2), held in Makkah Al-Mukarramah on 8-9 Rabi I, 1427 A.H., corresponding to 6-7 April 2006 A.D. The joint committee then advised the consultant to introduce the necessary changes in the Standard, in the light of the discussions and observations of the meeting. The revised draft of the Standard was discussed in another joint meeting of the Shariah Standards Committees (1) and (2), held in Al-Madinah Al- Munawarah, on 7-12 Jumadah I, 1427 A.H., corresponding to 3-8 June 2006 A.D. The consultant was again advised to introduce changes in the Standard as per the discussions and observations of the meeting. In its meeting No. (17) held in Makkah Al-Mukarramah, on 27 Shawwal 1 Dhul-Qadah 1427 A.H., corresponding to 18-23 November 2006 A.D., the Shariah Board discussed the changes in the Standard which had been made by the joint meeting of Shariah Standards Committees (1) and (2), and introduced changes that it deemed necessary. The Secretarial General of AAOIFI held a public hearing in the Kingdom of Bahrain on 18 Safar 1428 A.H., corresponding to 8 March 2007 A.D. 782782 Shariah Standard No. (31): Controls on Gharar in Financial Transactions More than 30 participants attended the session as representatives of central banks, institutions, and accounting firms. The session was also attended by Shariah scholars, university teachers and other interested parties. Several observations were made in the session, and duly responded to by the members of the Shariah Standards Committees (1) and (2). In its meeting No. (19) held in Makkah Al-Mukarramah during 26 Shaban 1 Ramadan 1428 A.H., corresponding to 8-12 September 2007 A.D., the Shariah Board discussed the amendments that had been suggested in the public hearing, introduced changes that it deemed necessary and adopted the Standard. 783783 Shariah Standard No. (31): Controls on Gharar in Financial Transactions Appendix (B) The Shariah Basis for the Standard Gharar is divided into excessive, medium and minor, because there is Gharar is divided into excessive, medium and minor, because there is a degree of Gharar which contracts could hardly avoid, whereas there is an excessive degree of Gharar that could become a distinguishing aspect of the contract, such as (aleatory sale). In order Bay al-Gharar (aleatory sale). In order aspect of the contract, such as Bay al-Gharar to specify the two extreme limits of Gharar (excessive and minor) there should be a midpoint of Gharar (medium Gharar). Regarding controls on excessive Gharar, Abu Al-Walid Al-Baji said: It is the degree of on excessive Gharar, Abu Al-Walid Al-Baji said: It is the degree of Gharar which becomes so dominant in the contract, that the contract is described in terms of it.(2)(2) described in terms of it. Prohibition of concluding a contract or making a condition that involves Prohibition of concluding a contract or making a condition that involves Gharar is based on the Hadith (Prophetic tradition) which states: The Gharar is based on the Hadith (Prophetic tradition) which states: The Prophet (peace be upon him) has forbidden aleatory sale.(3)(3) Al-Nawawi said: Al-Nawawi said: Prophet (peace be upon him) has forbidden aleatory sale This Hadith is a great origin of Shariah injunctions on sales and covers an unlimited number of issues.(4)(4) unlimited number of issues. Assessing excessive Gharar in terms of the four conditions mentioned in Assessing excessive Gharar in terms of the four conditions mentioned in this Standard is justified as follows:
If Gharar is in an exchange-based contract: Involvement of Gharar in exchange-based contracts would lead to unlawful acquisition of the wealth of other people, whereas it is not so in donation contracts. No dispute would arise in the case of donation contracts, since the recipient of the donation would incur no loss.
If Gharar is excessive: This is due to the consensus of the Shariah scholars on the impact of excessive Gharar on contracts. They have derived this conclusion from cases in which, due to involvement of excessive Gharar, contracts have been nullified by Hadiths (Prophetic traditions). (2)(2) Al-Muntaqa (3)(3) Related by Muslim in his Al-Muntaqa by Al-Baji [1: 41]. by Al-Baji [1: 41]. Related by Muslim in his Sahih by Al-Bukhari as a heading of a chapter in his Sahih by Al-Bukhari as a heading of a chapter in his [10: 156]. Muslim [10: 156]. Al-Nawawi comments, in Muslim (4)(4) Al-Nawawi comments, in [3: 156] with comments by Al-Nawawi et al; and used Sahih [3: 156] with comments by Al-Nawawi et al; and used Sahih: : Umdat Al-Qari [11: 264]. Umdat Al-Qari [11: 264]. 784784 Shariah Standard No. (31): Controls on Gharar in Financial Transactions

If Gharar is in the primary subject matter of the contract rather than (Fiqh Principle): What Qaidah (Fiqh Principle): What in a corollary: This is based on the Qaidah in a corollary: This is based on the can be forgiven in corollaries is not so elsewhere. [item (45) of Qwaid can be forgiven in corollaries is not so elsewhere. [item (45) of Qwaid Al-Majallah] Al-Majallah
If it is not justified by a Shariah-recognizable need: This is because Shariah has come for the sake of relieving people from hardship, as Allah, the Almighty, states: (..and has not laid upon you in religion (..and has not laid upon you in religion Allah, the Almighty, states: any hardship).(5)(5) This holds true whether the need is public or private, any hardship) This holds true whether the need is public or private, as per the Fiqh Principle which states: Need, whether public or private, enjoys the same status of necessity. [Qwaid Al-Majallah enjoys the same status of necessity. [ , item (33)] Qwaid Al-Majallah, item (33)] A contract which contains Gharar in its form is null and void because it A contract which contains Gharar in its form is null and void because it will remain unconcluded. Gharar in this case tends to make finalization of the contract probable rather than definite. This has been derived from a number of similar cases on which strict prohibiting texts are available, such as the types of sales referred to in the Standard as well as other cases indicated in Fiqh sources.(6)(6) indicated in Fiqh sources. The contract is null and void when its subject matter involves Gharar in The contract is null and void when its subject matter involves Gharar in its kind, nature, type or characteristics, because Gharar in these aspects is excessive and there are Shariah texts which prohibit similar sales. Moreover, such cases involve a great deal of Jahalah (ignorance) and, thus, may lead to dispute. Jahalah here cannot be resolved by offering the buyer the option of viewing for instance. The basis for nullity of a contract that involves Gharar in the amount of The basis for nullity of a contract that involves Gharar in the amount of its subject matter is the consensus of the Shariah scholars on denial of ignorance of the amount, whether of the commodity sold or the price. It is also because ignorance of the amount leads to dispute that hinders deli- very and receipt.(7)(7) Permissibility of the cases which satisfy the conditions Permissibility of the cases which satisfy the conditions very and receipt. mentioned in this Standard (5/2/1/5 and 5/2), is due to the fact that such conditions make Gharar forgivable. (5)(5) [Al-Hajj (The Pilgrimage): 78]. [Al-Hajj (The Pilgrimage): 78]. Bidayat Al-Majtahid [2: 153]; (6)(6) Bidayat Al-Majtahid Al-Kabir Al-Kabir by Al-Dardir [3: 2]; 221]; Al-Mughni 221]; Hashiyat Ibn Abidin [4: 28]; and (7)(7) Hashiyat Ibn Abidin Al-Mughni [4: 207]; and [2: 153]; Fath Al-Qadir by Al-Dardir [3: 2]; Al-Muqaddimat [5: 196]; Al-Mjmu Fath Al-Qadir [5: 196]; Al-Sharh [9: 340]; Al-Sharh Al-Mjmu [9: 340]; Al-Muqaddimat by Ibn Rushd (The Grand Father) [2: by Ibn Rushd (The Grand Father) [2: [2: 293]. Al-Bahr Al-Zakhkhar [2: 293]. [4: 207]; and Al-Bahr Al-Zakhkhar [5: 158]. Al-Badai [5: 158]. [4: 28]; and Al-Badai 785785 Shariah Standard No. (31): Controls on Gharar in Financial Transactions Invalidity of the contract when its duration is unknown rests on the fact Invalidity of the contract when its duration is unknown rests on the fact that it could generate dispute. Prohibition has been reported about a sale contract known as , which denotes a type of sale Bay Habal al-Habalah, which denotes a type of sale contract known as Bay Habal al-Habalah in which the price is postponed until the fetus of the camel is born and has given birth to another camel. The Qur`an has also indicated that (O you who believe! when indebtedness should have a specific duration: (O you who believe! when indebtedness should have a specific duration: you contract a debt for a fixed period, write it down).(8)(8) you contract a debt for a fixed period, write it down). The nullity of the contract due to Gharar that relates to failure in delivery The nullity of the contract due to Gharar that relates to failure in delivery can be justified in terms of the excessive degree of Gharar it involves. A sale contract is meant to safeguard the rights of both parties (the seller and the buyer). If, instead, the seller is to get the price, while the buyer is unable to get the sold object, this will violate the very objective of the contract. impermissibility of the act of someone selling what he does not own impermissibility of the act of someone selling what he does not own The Prophet, peace and blessings be stems from the Hadith which states: The Prophet, peace and blessings be stems from the Hadith which states: upon him, has forbidden people from selling things that they do not own.(9)(9) upon him, has forbidden people from selling things that they do not own Prohibition of selling non-possessed property is also due to the excessive Gharar that failure in delivery could comprise. Gharar relating to failure in delivery is, in fact, the reason behind prohibition of selling a property which the seller does not hold, even legally. This has been derived from (10) in this connection. Moreover banning sale of non-possessed a Hadith(10) in this connection. Moreover banning sale of non-possessed a Hadith property comes under the Fiqh Principle which states: Any property that neither existent at present nor does its existence in the future is ensured should not be sold. In this regard also, many scholars have explicitly mentioned that sale of nonexistent property falls under Bay al-Gharar (11) (aleatory sale).(11) (aleatory sale). The Shariah basis of the details mentioned in this standard about sale of The Shariah basis of the details mentioned in this standard about sale of a nonexistent asset is the degree of Gharar involved therein. Gharar in this type of sale can be avoided only if the asset in question is well des- [Al-Baqarah (The Cow): 282]. (8)(8) [Al-Baqarah (The Cow): 282]. Related by Al-Tirmidhi in Al-Sunan (9)(9) Related by Al-Tirmidhi in Related by Muslim in his Sahih (10) Related by Muslim in his (10) do not sell it until you hold it do not sell it until you hold it. Nayl Al-Awtar [5: 244]; Muhadhdhab [9: 258]; and Muhadhdhab (11) Nayl Al-Awtar (11) Al-Sunan [1: 159]. [1: 159]. Sahih (1529) in the following words If you purchase food, (1529) in the following words If you purchase food, [5: 244]; Al-Bahr Al-Zakhkhar Al-Bahr Al-Zakhkhar [3: 381]; by Al-Shirazi. Al-Muhadhdhab by Al-Shirazi. [9: 258]; and Al-Muhadhdhab Al-Majmu Sharh Al- [3: 381]; Al-Majmu Sharh Al- 786786 Shariah Standard No. (31): Controls on Gharar in Financial Transactions cribed; otherwise absence of viewing may hinder the conclusion of the contract. The Hanafi scholars argue that the buyer should have the option of viewing so that the risk of Gharar can be avoided. The ruling that Gharar does not affect Rahn contracts is based on the The ruling that Gharar does not affect Rahn contracts is based on the fact that the Rahn (Mortgage) contract is not meant in itself, since it is a corollary contract signed for documentation. Similarly, the ruling that Gharar does not affect agency in the strict Sha- Similarly, the ruling that Gharar does not affect agency in the strict Sha- riah sense is based on the same reasons mentioned in the case of mortgage, besides the fact that agency is primarily based on donation. suretyship is a corollary Suretyship is permissible with Gharar because is a corollary is permissible with Gharar because suretyship contract based on delegation of the right of disposal. However, if suretyship contract based on delegation of the right of disposal. However, if suretyship is paid for, it becomes an exchange-based contract and, thus, affected by Gharar. Nullity of a contract which involves Gharar in any of its conditions origi- Nullity of a contract which involves Gharar in any of its conditions origi- nates from what has been discussed above about aleatory contracts. Suretyship 787787 Shariah Standard No. (31): Controls on Gharar in Financial Transactions Appendix (C) Definitions Ghurur and Taghrir (Deception) The difference between Gharar, and (Ghurur or Taghrir) is that the latter results from a statement, or an act, or a position which a person re- sort to for the sake of deceiving others, whereas Gharar does not involve any deception. Jahalah (Ignorance) The difference between Gharar and Jahalah is that Jahalah refers to lack of knowledge about the details of something, in spite of knowledge about its occurrence. In this sense, Gharar is more comprehensive than Jahalah. Therefore, all things that are unknown involve Gharar, whereas not all things that involve Gharar are unknown. Qimar (Gambling), Murahanah (Betting) and Gharar Gharar is similar to Qimar and Murahanah in that it entails a result which could be accomplished or not. However, Gharar does not resemble Qimar and Murahanah in constituting a means that each party uses for acquiring money from the other party. Therefore, Qimar is more specific than Gharar, because not all Gharar is Qimar. Definition of the Mudaf (Postponed) Idafah (postponement), refers to delay of the contracts effectiveness to a specific time in the future, and hence Idafah does not involve uncertainty like Gharar. 788788 Shariah Standard No. (32) Arbitration Contents Subject PagePage ................................................................................................... Preface ................................................................................................... Preface ..................................................................... Statement of the Standard ..................................................................... Statement of the Standard ..............................................................................

Scope of the Standard ..............................................................................
Scope of the Standard
Definition of Arbitration .........................................................................
Definition of Arbitration ......................................................................... Forms of Resorting to Arbitration and Arbitration Parties. .....
1. Forms of Resorting to Arbitration and Arbitration Parties. ..... ...................................................................
Permissibility of Arbitration ...................................................................
Permissibility of Arbitration ..................................................................
Shariah Status of Arbitration ..................................................................
Shariah Status of Arbitration
1. Basic Elements of Arbitration Basic Elements of Arbitration ............................................................ ............................................................
Scope of Arbitration (What Should Be Resolved Through Arbitration in Shariah) ................................................................................................. in Shariah) ................................................................................................. Characteristics and Appointment of the Arbitrator ....................
1. Characteristics and Appointment of the Arbitrator ....................
Arbitration Document.............................................................................
Methods of Judgment, Procedures and Proving in Arbitration .......
Methods of Judgment, Procedures and Proving in Arbitration ....... Issuance of the Arbitration Verdict .................................................
1. Issuance of the Arbitration Verdict .................................................
Communication and Validity of the Arbitration Decision ...............
Communication and Validity of the Arbitration Decision ...............
1. Implementation of the Verdict (the Form of Implementation), Implementation of the Verdict (the Form of Implementation), or Its Revocation ..................................................................................... or Its Revocation ..................................................................................... Arbitration Expenses and the Arbitrators Fees ........................... ........................... Date of Issuance of the Standard ..................................................... ..................................................... ...................................................................... Adoption of the Standard ...................................................................... Adoption of the Standard
1. Arbitration Expenses and the Arbitrators Fees
1. Date of Issuance of the Standard Appendices Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (b): The Shariah Basis for the Standard Appendix (b): The Shariah Basis for the Standard ........... .......................... ........... .......................... Appendix (c): Definitions Appendix (c): Definitions .................................................... ......................... .................................................... ......................... 793793 794794 795795 796796 797797 798798 799799 801801 802802 803803 804804 806806 807807 791791 IN THE NAME OF ALLAH, THE ALL-MERCIFUL, THE MOST MERCIFUL All praise be to Allah, the Lord of all the worlds, and blessings and peace be upon our master, Muhammad, and his household and all his companions Preface This Standard aims to define Arbitration and indicate its conditions and scope. It also discusses the Shariah status of arbitrators, arbitration document and verdicts, methods of initiating and implementing arbitration, and how arbitration is implemented in Islamic financial institutions (Institution/ Institutions).(1)(1) Institutions). The word (Institution/Institutions) is used here to refer, in short, to Islamic financial (1)(1) The word (Institution/Institutions) is used here to refer, in short, to Islamic financial institutions including Islamic Banks. 793793 Shariah Standard No. (32): Arbitration Statement of the Standard
Scope of the Standard This standard covers arbitration as practiced in financial transactions and other activities and relationships which take place among institutions, other activities and relationships which take place among institutions, or between Institutions and their clients or employees or other parties; whether inside or outside the host country of the institution.
Definition of Arbitration 2/1 Arbitration is an agreement between two parties or more to designate an external party for resolving a dispute between them through of a binding verdict. issuance of a binding verdict. issuance 2/2 Arbitration in this standard refers to (Islamic Arbitration) which observes the rules and conditions of Shariah.
Forms of Resorting to Arbitration and Arbitration Parties 3/1 Arbitration can be sought through agreement of the two parties at the time of dispute, or in fulfillment of a previous agreement between them to seek arbitration instead of resorting to law. Arbitration can also be legally imposed on the two parties. 3/2 Seeking Islamic arbitration should be stipulated in the agreements in which the two parties cannot be forced to resort to laws that contradict with Shariah. 3/3 Arbitration parties are the two (or more) conflicting parties who seek arbitration.
Permissibility of Arbitration Arbitration is permissible whether it is sought by two natural or legal persons, or by a natural person and a legal person. 794794 Shariah Standard No. (32): Arbitration
Shariah Status of Arbitration 5/1 Arbitration is binding in the following cases: a) When it is stipulated as a condition in the contract b) When the two parties agree on seeking arbitration on dispute, and pledge to observe its verdicts. 5/2 Arbitration is not binding for an arbitrator who is not entitled to remuneration. Such an arbitrator can terminate himself after accepting the task. If the arbitrator is paid for his job, arbitration accepting the task. If the arbitrator is paid for his job, arbitration becomes binding for him. In this latter case, if the arbitrator terminates himself after accepting the task, he should bear any actual harm that may result from his act. [see Shariah Standard No. (34) on Hiring of Persons]
Basic Elements of Arbitration 6/1 The basic element of arbitration is its form, which refers to the process of exchange of offer and acceptance between the two parties seeking arbitration, and the arbitrator. 6/2 Valid arbitration has to fulfill the following requirements: 6/2/1 Existence of dispute between two parties or more, around a per- missible right. 6/2/2 Agreement between the two parties on arbitration, and their mutual consent on accepting the verdicts of the arbitrator. 6/2/3 Acceptance of the arbitrator to do the arbitration task.
Scope of Arbitration (What Should Be Resolved Through Arbitration in Shariah) 7/1 Arbitration is permissible in whatever a party is entitled to relinquish his right in. 7/2 Arbitration is impermissible in the following cases: 7/2/1 What constitutes a right of Allah, Glory be to Him, such as Hudud (Shariah penalties). 795795 Shariah Standard No. (32): Arbitration 7/2/2 Cases that entail proving or disproving of a verdict that con- cerns a third party. 7/3 When the arbitrator issues a verdict on an issue that should not be resolved through arbitration; his verdict is null and void.
Characteristics and Appointment of the Arbitrator 8/1 An Arbitrator shall have the full eligibility for performing his task. 8/2 In principle, an arbitrator shall be a Muslim. However, a non-Muslim arbitrator could be appointed when acute need so requires, in order to arrive at a Shariah-accepted verdict (in this regard, item 11/1 below shall be observed). 8/3 It is permissible to appoint one arbitrator or more, and preferably the number of arbitrators is to be odd, otherwise, the two parties (the seekers of arbitration) may appoint a chairman for the arbitration panel, whose vote shall be the casting vote when other votes are equal. 8/4 Each of the dispute parties may appoint one arbitrator, and the ap- pointed arbitrators may appoint a final arbitrator if they are permit- to do so by the disputing parties. ted to do so by the disputing parties. ted 8/5 When any of the two parties refrains from appointing an arbitrator from his own side as per the contract, the other party has the right to resort to the judiciary for appointing an arbitrator to represent the refraining party, provided that the arbitration condition in the contract does not specify another way for appointing such arbitrator. 8/6 The arbitrator has no right to appoint an alternate arbitrator to replace him, without the permission of the party that appointed him, because he has been accepted as an arbitrator in person. However, the arbi- trator could have this right if arbitration is assigned to an Institution or an arbitration committee whose members are appointed with due consideration for its declared conditions of selection. 8/7 An agent or a Mudarib does not have the right of accepting arbitration, except with the consent of the principal for the agent and the owners of 796796 Shariah Standard No. (32): Arbitration the capital for the Mudarib, or on the basis of a clause in the Mudarabah conditions such as conditions in investment accounts. No one should become part of the arbitration on behalf of an institution that has a legal personality except its official representative.
Arbitration Document 9/1 The arbitration document originates from agreement of the two parties of the dispute on arbitration, and acceptance of the arbitrator to perform the task, and is called (the arbitration contract) or (the arbitration agreement). 9/2 The arbitration document should include the names of the two parties of the dispute, the name of the arbitrator, the overall subject of dispute, the date specified for arbitration and the fees payable to the arbitrator if any. 9/3 The arbitration condition is the commitment of the two parties of the arbitration contract or agreement to resolve their disputes through arbitration. If such condition is stipulated in any agreement or contract, there will remain no need for agreement on arbitration at the time of dispute. 9/4 The arbitrator should apply the rulings of Shariah. If he is obliged to apply a certain law, he should still not violate the rulings of Shariah. 9/5 The two parties of the arbitration have the right to impose any permissible limitation on the arbitration so as to serve a permissible purpose of their own. Permissible limitations may include, for instance: issuance of the verdict within a specific time limit or in view of a certain School of Fiqh or a certain law that does not contradict the Shariah; or consultation with exerts specified in name or by description. In the latter case, however, the arbitrator is not bound to accept the viewpoints of the experts. 9/6 When the period specified for arbitration expires without issuance of the verdict, the arbitrator becomes terminated, unless the two parties agree on extending the period. The arbitration period starts at the 797797 Shariah Standard No. (32): Arbitration time when the arbitration document has been signed by all the parties seeking arbitration, and ends up at the time when the arbitration verdict has been signed by all these parties. 9/7 It is permissible to conclude a verbal arbitration contract, however, Institutions should document the arbitration verdict in writing. 9/8 Acceptance of arbitration does not require attestation in the arbitration document, though such attestation is preferable.
Methods of Judgment, Procedures and Proving in Arbitration 10/1 The arbitrator is free to use any legally accepted method of judgment, such as confession, evidence (attestation), oath taking, or refraining such as confession, evidence (attestation), oath taking, or refraining from oath (Nukul), while he should not make judgment on the basis of his own opinion. When the arbitrator rejects an attestation, his rejection should not constitute a reason for denial of that attestation in other arbitrations or in the judiciary, unless the same attestation is also rejected by the judiciary. 10/2 The arbitrator has the right to request all the documents and proofs relating to the dispute, or copies of such documents verified in comparison to originals. He has to show such documents to the two parties so as to seek their opinions on them. The arbitrator has also the right to request verbal or written statements from the two parties of the dispute or the witnesses, and to consult experts if needed. 10/3 The Arbitrator is neither required to follow the procedural rules of the judiciary, nor is he obliged to observe laws, unless such laws are part of public order. 10/4 The arbitrator is not supposed to stick to the legally stipulated rules of evidence. Instead, he has the right to make use of any other evidence, provided that the acceptance of that evidence does not contradict with the rules of Shariah. 10/5 The arbitration verdict is issued by consensus or majority and in the case of equal votes the party which includes the chairman is considered to have the casting vote, unless some other arrangements are proposed in the arbitration document or the rules of the arbitrating entity. 798798 Shariah Standard No. (32): Arbitration
Issuance of the Arbitration Verdict 11/1 A valid arbitration decision should lead to a verdict that conform to the rules of Shariah. 11/2 The final arbitration decision should resolve all points of dispute and lead to fair specification of the rights of the arbitration parties. When arbitration ends up with partial resolution of the points of dispute, arbitration is incomplete since it has not enabled the disputing parties to avoid resorting to legal suing. In this case, the disputing parties have the right to demand a further decision from the arbitrator so as to resolve the remaining points of dispute. 11/3 Arbitration should not go beyond the subject matter of dispute, because tackling of any further issue does not fall within the man- date of the arbitrator, unless the two parties of the dispute agree to add it. 11/4 The arbitrator has the right, subject to his own discretion or on request of the disputing parties, to issue a commentary on the arbitration decision, or introduce corrections for any material mistakes that might be involved therein. 11/5 The arbitrator can issue his decision in a number of preparatory or partial decisions, or identify the responsibility without estimating indemnification. 11/6 It is preferable that the Shariah or basis of the arbitration de- cision be mentioned (reasoning), yet this does not constitute a condition for valid arbitration, unless the law so requires. 11/7 In principle the arbitration decision is to be issued in a session attended by the arbitrators if they are many (or most of them, after invitation). It can also be issued by circulation among members after being prepared by the final arbitrator, or the chairman of the arbitration panel, or any other authorized member. In the case of issuance by circulation, consensus among members should be reached. 799799 Shariah Standard No. (32): Arbitration 11/8 The arbitration decision is to be issued under the signature of all members of the arbitration panel (when they are many) including those who raise objections against it, and objecting members should be allowed to state their objections on the document. The arbitration decision may also be issued under the signature of most of the members, after indicating the reasons that made some members refrain from signing. Nevertheless, the decision has to be issued at the knowledge of all members as per the minutes of the session convened for that purpose. 11/9 The arbitration decision includes: the text of the verdict; names, identities and addresses of the two parties of the dispute; reference to the date and number of the arbitration document; summary of the subject matter of dispute; claims of the two parties of the dispute and the supporting documents; names of witnesses and experts and the supporting documents; names of witnesses and experts whose help was sought if any; names of arbitrators, date and place of issuing the verdict; signatures of arbitrators; signatures of the parties of dispute if possible; and reasons of the decision reached unless the arbitration document comprises exemption from such reasoning and there is no legal condition to that effect. 11/10 The arbitration decision should not necessarily be issued in the presence of the two parties of the dispute, although it is better to be so for shortening the procedure of communicating it to them. 11/11 It would be better to include in the conclusion of the arbitration decision a request or a recommendation to the judiciary or the concerned legal authorities to use every permissible means for its implementation. 11/12 The arbitration decision should not necessarily meet the consent of the two parties of the dispute. It should spontaneously be binding to them, unless it is revoked for being counter to the rules of Shariah or public order. 11/12 The arbitration decision can be issued on the basis of reconciliation as prescribed by Shariah or on the basis of consensual agreement. 800800 Shariah Standard No. (32): Arbitration
Communication and Validity of the Arbitration Decision 12/1 The arbitration decision shall be communicated to the two parties of the dispute through the normal procedures, unless a specific way of communication is identified in the arbitration document or by any other legal authority. 12/2 The validity of the arbitration decision does not require attestation of witnesses on communication of the decision to the two parties of the dispute or the consent of these parties to it, although such attestation is recommendable for avoiding conflict. 12/3 The validity of the arbitration decision does not require its official registration or submission to the concerned court, yet this has to be done if it is required for legitimizing the implementation of the decision. In that case, the date specified for finalization of such procedure should be observed. 12/4 If the arbitration decision is written in more than one language, the language to be adopted in case of dispute should be specified. 12/5 A signed copy of the arbitration decision shall be handed over to each of the two parties of the dispute, while each one of the arbitrators (if many) shall retain a signed copy as well.
Implementation of the Verdict (the Form of Implementation), or Its Revocation 13/1 In principle, the two parties of the dispute should implement the arbitration verdict willingly. In case one party refrains from doing so, the other party has the right to present the verdict to judiciary for execution. Therefore, arbitration should not be resorted to if its verdict cannot be implemented. 13/2 For legitimizing the execution of the arbitration verdict, it is permissible to approach courts that do not observe the rules of Shariah. 13/3 The arbitrator does not have the right to retreat from his verdict, unless when he declares that he has committed a mistake in it. 801801 Shariah Standard No. (32): Arbitration However, in case of committing a mistake, the arbitrator can cancel or amend his verdict in view of the rules of the Islamic Shariah and in the way that would ensure justice.
Arbitration Expenses and the Arbitrators Fees 14/1 It is permissible for the arbitrator, if he is not a volunteer or a government employee designated for doing arbitration, to receive fees for the task. The amount or percentage of such fees should be indicated in the conditions of arbitration in case of Institutional arbitration, or agreed upon in the arbitration document. 14/2 When the arbitration process leads to incurring of any expenses, such as transportation expenses for the arbitrator, witnesses and experts, or typing expenses, or fees payable to the arbitrator, the arbitration decision must specify the party that should bear them. It should be noted here that the expenses pertaining to the application of any of the disputing parties should be borne by that party alone, whereas common expenses are to be shared by the dispute parties, unless it is proved that one party has been deliberately intending to cause harm to the other through such expenses. In this latter case, the party that has been intending to cause harm should bear such expenses. All these preceding points hold true in the absence of a prior agreement which assigns the payment of the expenses to a specific party or to the condemned party.
Date of Issuance of the Standard This Standard was issued on 30 Shaban 1428 A.H., corresponding to 12 September 2007 A.D. 802802 Shariah Standard No. (32): Arbitration Adoption of the Standard The Shariah Board adopted the Standard on Arbitration in its meeting No. (19) held on 26-30 Shaban 1428 A.H., corresponding to 8-12 September No. (19) held on 26-30 Shaban 1428 A.H., corresponding to 8-12 September 2007 A.D., in Makkah Al-Mukarramah, Kingdom of Saudi Arabia. 803803 Shariah Standard No. (32): Arbitration Appendix (A) Brief History of the Preparation of the Standard On 12 Rajab 1427 A.H., corresponding to 6 August 2006 A.D., the Shariah Board decided to issue a standard on Arbitration. On 21 Shaban 1427 A.H., corresponding to 14 September 2006 A.D., a joint meeting of the Shariah Standards Committees (1) and (2) was held in the Kingdom of Bahrain, and discussed the study. The meeting requested the consultant to introduce necessary amendments in the light of the discussions and observations of the joint committee members. The meeting discussed also the Standard on Arbitration which was ready in the same session, and introduced necessary changes in it, in the light of the same session, and introduced necessary changes in it, in the light of the discussions that took place. In its meeting No. (17) held in Makkah Al-Mukarramah, on 27 Shawwal 1 Dhul-Qadah 1427 A.H., corresponding to 18-23 November 2006 A.D., the Shariah Board discussed the changes in the standard which had been made by the joint meeting of Shariah Standards Committees (1) and (2), and introduced changes that it deemed necessary. The Secretarial General of AAOIFI held a public hearing in the King- dom of Bahrain on 18 Safar 1428 A.H., corresponding to 8 March 2007 A.D. More than 30 participants attended the session as representatives of central banks, institutions, and accounting firms. The session was also attended by Shariah scholars, university teachers and other inter- ested parties. Several observations were made in the session, and duly responded to by the members of the Shariah Standards Committees (1) and (2). 804804 Shariah Standard No. (32): Arbitration In its meeting No. (19) held in Makkah Al-Mukarramah, on 26 Shaban 1 Ramadan 1428 A.H., corresponding to 8-12 September 2007 A.D., the Shariah Board discussed the amendments that had been suggested in the public hearing, introduced changes that it deemed necessary and adopted the Standard. 805805 Shariah Standard No. (32): Arbitration Appendix (B) The Shariah Basis for the Standard In one sense, arbitration seems like agency on behalf of the two parties, In one sense, arbitration seems like agency on behalf of the two parties, although it also seems to involve private custodianship in another sense. According to Shariah arbitration could take place verbally, yet it is prefe- According to Shariah arbitration could take place verbally, yet it is prefe- rable for Institutions in particular to document it in writing. In order to be legally accepted, arbitration needs to be written and signed by the arbitrators and the parties of the dispute. In principle, selection of arbitrators should be subject to the same Shariah In principle, selection of arbitrators should be subject to the same Shariah conditions for selection of judges including non-partiality. In case of neces- sity, some of these conditions could be dropped such as the condition that the arbitrator should be a Muslim. Nevertheless, a non-Muslim arbitrator should not issue a verdict that contradicts with Shariah. 806806 Shariah Standard No. (32): Arbitration Appendix (C) Definitions Sulh (Reconciliation) It refers to a request of relinquishment of what the arbitrators consider to be the right of one of the two parties of the dispute. Such request shall not be made to a party who is an agent, unless he is delegated to do reconciliation. Preferably, the issuance of a reconciliation decision is to be based on a clear clause in the arbitration document indicating that arbitrators have the right to pursue reconciliation. Consensual Settlement It refers to the case when the two parties of the dispute agree, outside the arbitration task, on a settlement which they both accept, and request the arbitrators to issue a decision based on that settlement. The arbitrators in this case shall concur to the request of the two parties, unless the proposed settlement is impermissible, or contrary to public order. Arbitration Document It is a document signed by the two parties to pursue arbitration on a dis- pute which has arisen between them. Arbitration Agreement It is a prior condition or a contract stipulating resort to arbitration when dispute arises. Material Mistakes It refers to unintentional mistakes in names or numbers, when proofs or documents indicate the aspects which need correction. Institutional Arbitration It is the selection of an Institution that comprises competent arbitrators to resolve the dispute. In this case, there is no need for designating the arbitrator in name. 807807 Shariah Standard No. (33) WaqfWaqf Contents Subject PagePage ................................................................................................. Preface ................................................................................................. Preface ................................................................... Statement of the Standard ................................................................... Statement of the Standard
Scope of the Standard ...........................................................................
Scope of the Standard ...........................................................................
Definition, Shariah Rulings, Rationale of Permissibility and Types .................................................................................................... of Waqf .................................................................................................... of Waqf .....................................................................
Basic Elements of Waqf ........................................................................
Basic Elements of Waqf ... .................................................................................
Condition in Waqf .................................................................................
Condition in Waqf ..............................................
Supervision and Management of Waqf ..............................................
Supervision and Management of Waqf
Controls on Leasing of Waqf Assets ....................................................
Controls on Leasing of Waqf Assets ....................................................
Application of Modes of Investment for Development of Waqf ................................................................................. Income and Assets ................................................................................. Income and Assets ...........
Maintenance, Renovation and Replacement of Waqf Assets ...........
Maintenance, Renovation and Replacement of Waqf Assets
1. Istibdal (Exchange) of Waqf Assets........................................................ Istibdal (Exchange) of Waqf Assets........................................................ ..........................................................
Date of Issuance of the Standard ..........................................................
Date of Issuance of the Standard .................................................................... Adoption of the Standard .................................................................... Adoption of the Standard Appendices Appendix (a): Brief History of the Preparation of the Standard Appendix (a): ........... Brief History of the Preparation of the Standard ........... Appendix (b): The Shariah Basis for the Standard Appendix (b): .................................. The Shariah Basis for the Standard .................................. Appendix (c): Definitions Appendix (c): ........................................................................... Definitions ........................................................................... 813813 814814 815815 819819 820820 823823 824824 825825 826826 827827 828828 829829 831831 836836 811811 IN THE NAME OF ALLAH, THE ALL-MERCIFUL, THE MOST MERCIFUL All praise be to Allah, the Lord of all the worlds, and blessings and peace be upon our master, Muhammad, and his household and all his companions Preface This standard aims at indicating the basic Shariah rulings on Waqf, which constitute the basis for practical application in this area. The standard also indicates the role of Islamic financial Institutions (Institution/Institutions)(1)(1) indicates the role of Islamic financial Institutions (Institution/Institutions) in supervision, management and investment of Waqf properties. The word (Institution/Institutions) is used here to refer, in short, to Islamic financial (1)(1) The word (Institution/Institutions) is used here to refer, in short, to Islamic financial institutions including Islamic Banks. 813813 Shariah Standard No. (33): Waqf Statement of the Standard
Scope of the Standard This standard presents the definition of Waqf and discusses its types, Shariah rulings, basic elements, and the conditions that pertain to each of these elements. It also covers the conditions required in the Waqf and the Waqif (donor), and illustrates the appropriate methods for Waqf utilization, investment, supervision and management. Furthermore, the standard covers the crucial role that Islamic financial Institutions could play in the development of Waqf, and the appropriate methods of Waqf investment. This standard, however, does not cover other philanthropic Institutions such as Irsad (allocation of public property for public utilities) and financial trusts which resemble Waqf in some aspects.
Definition, Shariah Rulings, Rationale of Permissibility and Types of WaqfWaqf 2/1 Definition of Waqf In Arabic language the word Waqf or Habs means preventing some- ing thing from movement. In Shariah terminology, Waqf refers to making thing from movement. In Shariah terminology, Waqf refers to mak a property invulnerable to any disposition that leads to transfer of ownership, and donating the usufruct of that property to beneficia- ries. 2/2 Shariah status of Waqf Waqf is permissible in Shariah, as has been emphasized by the Sunnah (Prophetic traditions) and Ijma ( ). Waqf consensus of Fuqaha). Waqf Sunnah (Prophetic traditions) and Ijma (consensus of Fuqaha is also a binding commitment, and, therefore, declaring a property as Waqf would spontaneously deprive its donating owner the right of ownership. 814814 Shariah Standard No. (33): Waqf 2/3 Permissible types of Waqf There are several types Waqf of which most important is the ), the family Waqf (al-Waqf al- al-Waqf al- ) and self-dedicated al-Waqf al-Mushtarak) and self-dedicated ), the joint Waqf (al-Waqf al-Mushtarak al-Waqf al-Khayri), the family Waqf ( charitable Waqf ( charitable Waqf (al-Waqf al-Khayri AhliAhli), the joint Waqf ( Waqf (Waqf (al-Waqf Ala al-Nafs al-Waqf Ala al-Nafs).). 2/3/1 Waqf is said to be charitable when its income/usufruct is dedi- cated for a charitable purpose. 2/3/2 A family Waqf is the Waqf in which the income/usufruct is reserved for specifically described persons, usually family members and relatives. The income/usufruct of such Waqf goes to a charitable purpose when none of these persons is existent. 2/3/3 Joint Waqf refers to the case in which the property is donated to family as well as charitable purposes, and the income/usufruct here is shared accordingly. 2/3/4 In case of self-dedicated Waqf the donor retains the income/ usufruct of the donated property for himself as long as he is alive, and indicates the charitable purpose which shall be entitled to the income/usufruct of the Waqf after his death.
Basic Elements of Waqf The basic elements of Waqf include: The form of donation, the Waqif (the donor) and the donated property. 3/1 The form of the Waqf 3/1/1 The form of the Waqf comprises offer only, as it does not necessitate acceptance. When a legally competent beneficiary rejects a Waqf that has been earmarked for him, his rejection has to be concurred to, yet the Waqf shall still remain valid. In this case the Waqf- or the share of the rejecting beneficiary if beneficiaries are many - should go to charitable purposes. 3/1/2 Formation of Waqf can take place verbally, in writing, or in any form of disposition which is normally considered as indi- cating it. 815815 Shariah Standard No. (33): Waqf 3/1/3 Waqf can be declared as effective starting from a future date, as when the donor declares his property to become Waqf starting from next year. 3/1/4 In principle Waqf should be eternal. Nevertheless temporary Waqf is also permissible when the donor desires to get back his property after a specific period. 3/2 The Waqif (donor) 3/2/1 The Waqif can be a natural or a legal person. If the Waqif is is 3/2/1 The Waqif can be a natural or a legal person. If the Waqif a legal person, the Waqf decision should be made by the general assembly and not the board of directors. 3/2/2 The Waqif must be legally eligible for disposing of his property. 3/2/3 The Waqf decision of a person whose legal competence is restricted because of irrationality is invalid, except when he declares his property as Waqf for himself as long as he is alive. The validity of the Waqf decision of a person whose legal competence is restricted because of indebtedness depends on confirmation by his creditors. When the creditors refrain from confirming the Waqf of the indebted person, the Waqf becomes invalid. 3/3 The beneficiary 3/3/1 The Waqf should not be made for an impermissible purpose, although it may not be for a charitable purpose since the very beginning of its inception. 3/3/2 It is permissible to make Waqf for the benefit of non-Muslims, provided that the cause to be served does not involve a sin. It is also permissible to make Waqf for the benefit of the rich. 3/3/3 The Waqf beneficiary need not be present at the time of declaring the Waqf. 3/3/4 When the beneficiary/beneficiaries of the Waqf is/are no longer existent, the benefits of the Waqf should go to charity purposes. 816816 Shariah Standard No. (33): Waqf 3/4 The Waqf property 3/4/1 The Waqf property should fulfill the following conditions: a) It shall be a Shariah-accepted property b) It shall be known c) The Waqif shall be the sole owner of the property in which nobody else should have a right of disposition at the time of establishing the Waqf. If the Waqif himself has the option of disposing of the property, the Waqf shall become valid, and the option is spontaneously cancelled. 3/4/2 The Waqf has a legal personality and financial liability which make it capable of giving and accepting commitment. The legal personality of the Waqf is quite separate from the personality of its manager. 3/4/3 Types of Waqf properties 3/4/3/1 Waqf is permissible in real estate along with permanent furniture and fittings. 3/4/3/1 Waqf is permissible in movable assets, whether such movable assets are part of a real estate or independent. 3/4/3/2 Waqf is permissible in money. The income generated from utilization of the money is to be spent, while re- taining the principal amount. Utilization may include, for instance, Shariah-based lending as well as permis- sible and safe investments like Mudarabah where the profit share owned by the Waqf goes to beneficiaries. 3/4/3/4 Waqf is permissible in Shariah-accepted shares and Sukuk. In this case, the income earned by these shares or Sukuk is to be spent on the Waqf beneficiaries. In case of liquidation the Shariah rulings on Istibdal In case of liquidation the Shariah rulings on Istibdal (exchange of Waqf property) should be applied. 3/4/4 Waqf in common property 3/4/4/1 Waqf can be a common property, whether such property property in this is divisible or not. The whole common property in this is divisible or not. The whole common 817817 Shariah Standard No. (33): Waqf case (not shares or Sukuk), can be leased and the Waqf gets its respective share of the rent. Alternatively, the share of the Waqf in the common property can be leased, so that the usufruct can property can be leased, so that the usufruct can be be utilized through time-based and place-based Muhaya`h (succession), while the rental income goes to the beneficiaries of the Waqf. 3/4/4/2 When the Waqf superintendent or the Waqf partner asks for the division of an indivisible Waqf, the refraining party should be forced to accept selling. The income obtained from selling the Waqf in this manner should be used for purchasing a Waqf property of the same kind. If such request for division is made in case of a divisible Waqf, the refraining party should be forced to accept division. 3/4/5 Waqf as a floor in a building, and easement eights (Irtifaq 3/4/5 Waqf as a floor in a building, and easement eights ( or Irtifaq or Taalli) Taalli Waqf can be a floor in a building. It can also enjoy easement Haqq al-Irtifaq) in a building that has not yet been rights ( ) in a building that has not yet been rights (Haqq al-Irtifaq constructed. In this case the Waqf can enjoy the right of Taalli constructed. In this case the Waqf can enjoy the right of Taalli (transcendence) when the upper floor is declared as Waqf while the owner of the lower floor is unable to perform construction. The lower floor in such case can be built at the cost of the Waqf (on permission of the concerned authorities) and the cost reimbursed to the Waqf from the income generated through its leasing. 3/4/6 Waqf as a usufructs Waqf can be a usufruct of an asset which the Waqif acquires through rent. The Waqif can lease the asset once again, and the proceeds go to the Waqf beneficiaries. The Waqf, in this case, is to be made temporary according to the period of the original 818818 Shariah Standard No. (33): Waqf rent. Waqf can take place in this manner when the owner of the property does not deprive the lessee the right of subleasing.
Condition in Waqf 4/1 Conditions pertaining to the Waqf contract 4/1/1 The Waqif has the right to make his Waqf subject to all condi- tions which do not contradict with Shariah, and his conditions shall be as enforceable as Shariah conditions. The conditions of every Waqif must be understood with due consideration to the prevailing norms in his environment. Such conditions may in- clude, for example, designating a certain superintendent for the Waqf and specifying his remuneration package. The designated superintendent could be an individual, a group of people, or institution. an an institution. 4/1/2 Regarding the form of the Waqf, the Waqif can make a condition that his debts should be settled from the Waqf income; after his death, or he may stipulate a condition that the income of his Waqf should go to him first as long as he is alive, then to his family, and finally to charitable purposes. Another condition of the Waqif could be that the Waqf income has to be spent first on any member of his family who becomes poor, and then on charity purposes. 4/1/3 A condition stipulated by the Waqif is invalid when it comprises an impermissible element, or when it violates the Shariah rulings on Waqf or cause harm to the Waqf property. In such cases the condition should be rejected and the Waqf shall remain valid. Examples of invalid conditions include: absolute forbiddance of Istibdal (exchange) of the Waqf, or forbiddance of the dismissal Istibdal (exchange) of the Waqf, or forbiddance of the dismissal of the Waqf superintendent for any reason. A condition stipulated by the Waqif also becomes invalid when it tends to hinder the interests of the Waqf, or jeopardize the process of benefiting from it. The example of this is a condition which requires starting - at all times - with distribution of the 819819 Shariah Standard No. (33): Waqf Waqf income among the beneficiaries, even if the Waqf is in need of maintenance or renovation. 4/1/4 When the Waqif stipulates a condition that the Waqf should be benefited from through residence, the Waqf can be benefited from either in that manner, or through leasing, and vice versa.
Supervision and Management of Waqf 5/1 Controls on supervision and management of Waqf Supervision and management of Waqf should observe the Shariah rulings on Waqf, then the conditions of the Waqif which do not contradict with Shariah or hinder the interests of the Waqf as perceived by the judiciary. 5/2 Tasks of the Waqf superintendent The Waqf Superintendent should perform the following tasks, among others: 5/2/1 Management, maintenance and development of the Waqf. 5/2/2 Leasing of the assets or usufructs of the Waqf (through oper- ating-lease contracts), and leasing of the Waqf lands. 5/2/3 Development of the Waqf properties either directly in Shariah- sanctioned methods of investment, or through Islamic financial institutions. 5/2/4 Increasing the Waqf money by investing it through Mudarabah and other similar forms. 5/2/5 Changing the operational form of the Waqf assets with the aim of maximizing the benefit that results to the Waqf and its beneficiaries. This may include, for instance, converting a residential building into a commercial building, or construct- ing buildings for rent on an agricultural land, provided that this would satisfy the demand of the people, generate more income for the Waqf and is done with the permission of the concerned authorities. 820820 Shariah Standard No. (33): Waqf 5/2/6 Defending the rights of the Waqf, ensuring its sustainability, payment of fees to agents in case of law suits filed against the Waqf, and payment of expenses for documentation of the assets and the rights of the Waqf. 5/2/7 Settlement of the debts of the Waqf. 5/2/8 Payment of the entitlements of beneficiaries 5/2/9 Replacement of the Waqf either by selling it for a cash amount and purchasing a new asset, or exchanging it with a new asset, subject to the conditions of Istibdal subject to the conditions of (exchange). [see item 9] Istibdal (exchange). [see item 9] 5/2/10 Safeguarding the Waqf properties against occupation or seizure by others. 5/2/11 Using solidarity insurance to safeguard the Waqf assets, whenever possible. 5/2/12 Preparation of the Waqf accounts, and submission of statements and reports on them to the concerned authorities. 5/3 What shall not be done by the Waqf Superintendent The Waqf superintendent shall not do the following: 5/3/1 Neglecting the conditions of the Waqif. 5/3/2 Leasing the Waqf to himself or to one of his dependant sons - even if such leasing is at more than the normal rent except through the judiciary. He should not also lease the Waqf to one of his direct relatives (Usul and Frua) or to his spouse, for less than the normal rent of similar property. In this case, minor injustice (Ghabn) is not forgivable, although it is forgivable in leasing to nonrelatives. 5/3/3 Using the Waqf income for increasing the Waqf properties, except when this is done in fulfillment of a condition stipulated by the Waqif. 5/3/4 Mortgaging the Waqf assets for a debt to be obtained for the Waqf or the beneficiaries. 821821 Shariah Standard No. (33): Waqf 5/3/5 Lending the Waqf assets, and if he does so, the borrower has to pay the normal rent for similar assets. 5/3/6 Borrowing for the Waqf, except in fulfillment of a condition stipulated by the Waqif, or on permission of the legal authorities, and in case of necessity. In borrowing for the Waqf the following should be observed: 5/3/6/1 Establishing a debt obligation on the Waqf is permis- sible through permissible means of borrowing, or deferred payment purchase, or any other permissible mode of financing. Establishing the debt through any of these modes has to be for the sake of maintaining and developing the Waqf, as per a condition stipulated by the Waqif, or on permission of the legal authori- ties, and due to necessity. In establishing the debt, due consideration shall also be given to the ability of the Waqf to bear such debt and sufficiency of its income for repayment. These restricted forms of establishing debt obligations on the Waqf do not include the case when the Waqf superintendent pays a certain amount of money from his own sources for an interest which concerns the Waqf, and the Waqf has sufficient in- come to be resorted to for settlement of such debt. 5/3/6/2 Cases which justify borrowing for the Waqf, when borrowing is not sanctioned by a condition stipulated by the Waqif: a) Need for maintenance or necessary development of the Waqf and absence of sufficient Waqf income for that. b) Payment of financial commitments if any when b) Payment of financial commitments if any when the Waqf does not have sufficient funds. c) Inability to pay the wages of the employees working in the Waqf or those who serve its purposes, and fear from endangering the benefits of the Waqf. 822822 Shariah Standard No. (33): Waqf 5/3/6/3 Borrowing should not be for the sake of spending on the beneficiaries of the Waqf. 5/4 Spending the excess income of the Waqf of a mosque In principle the income of the Waqf of a specific mosque is to be spent on its own interests. If there is still an excess amount of income which has not been spent, it is permissible to transfer such amount to another mosque that does not have enough income to cover its expenses, or the cost of its maintenance and renovation. 5/5 Judicial supervision on Waqf management 5/5/1 By virtue of public guardianship, the judiciary has the authority of overseeing the supervision and management of the Waqf, preservation of its assets, and development of its sources. The judiciary has also the right of investigating the overall status of the Waqf, looking into any complaints raised against the Waqf superintendent or any other party, and subjecting the Waqf superintendent to disciplinary action.
Controls on Leasing of Waqf Assets 6/1 In principle, a long period of leasing should not be the normal practice for Waqf assets, except for obvious interest, and provided that a variable rent, linked to an accurate and well known index, is going to be sought. [see Shariah Standard No. (9) on Ijarah and Ijarah Muntahia Bittamleek, item 5/2/3] 6/2 The normal rent of similar property as a condition Waqf assets or usufructs should not be leased at less than the rent of similar property. When leasing at a lower rent is inevitable it should be considered in view of the actual necessity, and hence, excessive ) can be accepted. If there happen to be Ghabn Fahish) can be accepted. If there happen to be injustice (Ghabn Fahish injustice ( a new tenant who can pay the rent of similar property, the Waqf superintendent has the right to terminate the previous contract, unless the old tenant accepts the rent increment. If the normal rent for the Waqf in question has risen because of developing the Waqf 823823 Shariah Standard No. (33): Waqf land and constructing a new building on it at the cost of the Waqf, the tenant is obliged to accept rent increment. If land development and construction of the building is done at the cost of the tenant, he is not bound to accept the rent increment. 6/3 Some permissible forms of Waqf leasing 6/3/1 Signing a lease contract with the aim of keeping the Waqf land in the hands of the tenant as long as he pays the normal rent for similar property as it changes according to circumstances. This type of contract is known as ( ) and is subject to the This type of contract is known as (HikrHikr) and is subject to the following conditions: 6/3/1/1 The Waqf has no income to be used for its development. 6/3/1/2 There is no person who is willing to have fixed-term rent and make advance payment so as to be spent on developing the Waqf. 6/3/1/3 Istibdal 6/3/1/3 (exchange) of the Waqf is not possible Istibdal (exchange) of the Waqf is not possible 6/3/2 Haqq al-Qarar 6/3/2 known as (Kardar (right to stay) which a tenant deserves when Haqq al-Qarar (right to stay) which a tenant deserves when he he pays at the time of signing the lease contract a lump sum pays at the time of signing the lease contract a lump sum amount, ) for development of the Waqf, and Kardar) for development of the Waqf, and amount, known as ( a rent which is below the rent of similar property. This form of Waqf leasing is permissible when dictated by necessity, and if there is no tenant who is willing to pay the normal rent for similar property along with a lump sum amount for development of the Waqf. In some countries, this contractual form is known as ( Waqf. In some countries, this contractual form is known as (al-al- KhuluKhulu).).
Application of Modes of Investment for Development of Waqf Income and Assets 7/1 It is permissible to invest Waqf income, in the following cases: 1- As per a condition stipulated by the Waqif. 2- During the waiting period (prior to identification of beneficiaries). 3- Excess income, after payment to beneficiaries. 824824 Shariah Standard No. (33): Waqf Investment in these cases should be through permissible methods such as Mudarabah, Musharakah, Murabahah, Ijarah, and Salam, and in low risk investments. 7/2 For development of the Waqf land, the following is permissible: 7/2/1 Application of the Istisnaa through B.O.T. contracts. [see Shariah Standard No. (11) on Istisnaa and Parallel Istisnaa, item 3/2/1] 7/2/2 Application of diminishing Musharakah, where the Waqf and the financing partner construct the building through joint financing (excluding the Waqf land), and the Waqf gradually owns the building. [see Shariah Standard No. (12) on Sharikah (Musharakh) and Modern Corporations, item 5/8] 7/2/3 Application of Ijarah Muntahia Bittamleek for a specifically described property to be delivered in the future. In this case, the Waqf land is leased to the financier who constructs a building on it and delivers it to the Waqf to execute the lease contract. At the end of the contracting period, the Waqf becomes the owner of the building. [see Shariah Standard No. (9) on Ijarah and Ijarah Muntahia Bittamleek, item 3/5] 7/3 All appropriate means should be adopted for development of Awqaf, with due consideration to Shariah rulings on Waqf and the conditions stipulated by the Waqifs, as well as present day requirements. 7/4 Help in this regard should be sought from Islamic financial institu- tions, specialized in Waqf investments.
Maintenance, Renovation and Replacement of Waqf Assets 8/1 Maintenance and renovation of Waqf assets, and allocation of reserves for that purpose 8/1/1 Spending on maintenance, reparation and renovation of the Waqf assets should precede distribution of the Waqf income among beneficiaries. In this connection, due consideration shall maintenance. be given to the technical schedules of periodical maintenance. be given to the technical schedules of periodical 825825 Shariah Standard No. (33): Waqf Maintenance and reparation of Waqf assets also do not require a prior condition to be stipulated by the Waqif. 8/1/2 Maintenance and renovation requirements (maintenance reserve) shall be retained from the Waqf income every year even if the Waqif has not stipulated such a condition. The reserve, thus deducted, can be invested in a safe and easy to liquidate form of investment, and the returns be added to the principal amount. The beneficiaries shall have no right on the maintenance reserve, unless part of it turns out to be in excess of actual needs. 8/1/3 In the absence of sufficient amounts for maintenance and renovation of a leased Waqf asset, the Waqf superintendent has the right to allow the tenant to make such maintenance and renovation, against having the priority to continue as a tenant of the Waqf asset until getting full repayment of his debt. 8/1/4 Solidarity insurance shall be used for maintenance or renova- tion of the Waqf assets. 8/2 Making allocations for replacement of Waqf assets It is permissible to deduct from the Waqf income (after distribution to beneficiaries) periodical amounts commensurate to the economic lifetime of the depreciating Waqf assets, so as to use the accumulated amount for replacement of these assets (depreciation allowance).
1. Istibdal (Exchange) of Waqf Assets Istibdal (Exchange) of Waqf Assets 9/1 9/1 Istibdal refers to the process of selling the Waqf asset and purchasing Istibdal refers to the process of selling the Waqf asset and purchasing a new one instead, so as to maximize the interest of the Waqf. 9/2 9/2 Istibdal can take place according to a condition stipulated by the Istibdal can take place according to a condition stipulated by the Waqif, or when the Waqf becomes ruined (even if prevented by the Waqif). , in such cases, takes place by selling the Waqf Istibdal, in such cases, takes place by selling the Waqf the Waqif). Istibdal property and purchasing a new one instead, so as to maintain the Waqf as it was before. 826826 Shariah Standard No. (33): Waqf Istibdal is also permissible when there is no way of benefiting from Istibdal is also permissible when there is no way of benefiting from the Waqf (e.g., the Waqf has become in a deserted area), or because of fear from seizure of the Waqf by others, or when benefiting from the Waqf becomes extremely difficult. 9/3 9/3 Istibdal should be subject to the following conditions: Istibdal should be subject to the following conditions: 9/3/1 The Waqf must have reached the stage of generating no income, while there is no money for its development. 9/3/2 There should be no excessive injustice in the sale price. 9/3/3 Istibdal 9/3/3 should meet the satisfaction and interest of the Waqf. Istibdal should meet the satisfaction and interest of the Waqf. 9/3/4 Istibdal 9/3/4 should be permitted by the judiciary. Istibdal should be permitted by the judiciary. 9/3/5 If the Waqf is a real estate it should also be exchanged for a real estate. When there is no risk of misuse, a real estate Waqf can be sold for cash, and the money kept with the judiciary until a new real estate is purchased.
Date of Issuance of the Standard This Standard was issued on 28 Jumada II, 1429 A.H., corresponding to 2 July 2008 A.D. 827827 Shariah Standard No. (33): Waqf Adoption of the Standard The Shariah Board adopted the Standard on Waqf in its meeting No. (21) held on 24-28 Jumada II, 1429 A.H., corresponding to 28 June 2 July 2008 A.D., in Dar Al-Taqwa Hotel, Al-Madinah Al-Munawwarah, Kingdom of Saudi Arabia. 828828 Shariah Standard No. (33): Waqf Appendix (A) Brief History of the Preparation of the Standard On 5 Rabi I, 1427 A.H., corresponding to 4 April 2006 A.D., the Secretariat General decided to assign to a Shariah consultant the preparation of a study on Waqf. On 8-9 Rabi I, 1427 A.H., corresponding to 6-7 April 2006 A.D., a joint meeting of the Shariah Standards Committees (1) and (2) was held in Makkah Al-Mukarramah, and discussed the study. The meeting requested the consultant to introduce necessary amendments in the light of the discussions and observations of the joint committee members. On 19 Shawwal 1427 A.H., corresponding to 10 November 2006 A.D., the Shariah Standards Committee (2) held a meeting in Manama (Kingdom of Bahrain) in which it discussed the draft of the standard and requested the consultant to introduce necessary amendments in the light of the discussions and observations of the meeting. In its meeting No. (17) In its meeting held in Makkah Al-Mukarramah on 26 Shawwal No. (17) held in Makkah Al-Mukarramah on 26 Shawwal 1 Dhul-Qadah 1427 A.H., corresponding to 18-23 November 2006 A.D., the Shariah Board discussed the changes in the Standard which had been made by the joint meeting of Shariah Standards Committees (1) and (2), and introduced changes that it deemed necessary. The Secretarial General of AAOIFI held a public hearing in the Kingdom of Bahrain on 18 Safar 1428 A.H., corresponding to 8 March 2007 A.D. More than 30 participants attended the session as representatives of central banks, Institutions, and accounting firms. The session was also attended by Shariah scholars, university teachers and other interested parties. Several observations were made in the session, and duly responded to by the members of the Shariah Standards Committees (1) and (2). 829829 Shariah Standard No. (33): Waqf In its meeting No. (19) held in Makkah Al-Mukarramah on 26 Shaban 1 Ramadan 1428 A.H., corresponding to 8-12 September 2007 A.D., the Shariah Board discussed the amendments that had been suggested in the public hearing, introduced changes that it deemed necessary and adopted the Standard. 830830 Shariah Standard No. (33): Waqf Appendix (B) The Shariah Basis for the Standard The basis for considering Waqf (in principle) as a permissible and re- The basis for considering Waqf (in principle) as a permissible and re- commendable practice (Mandub) is the Quranic Verses which instruct people to do good and spend on charitable causes, and also the Hadith (Prophetic tradition) which indicates: When a person dies his rightful (Prophetic tradition) which indicates: When a person dies his rightful deeds will stop except in three respects: An ongoing charity Sadaqah Ja- riyah.... Waqf is considered to be the ongoing charity referred to in the riyah.... Waqf is considered to be the ongoing charity referred to in the Hadith, because the beneficiary does not own the Waqf asset, and accor- dingly, cannot dispose of it. Moreover, there is the Hadith about the piece of land in Khybar which Umar donated as Waqf, when the Prophet (peace be upon him) advised him to do so. Again, permissibility of Waqf is supported by the practice of the Sahabah (Prophets Companions) like Uthman and Abu Talhah, in addition to Ijma ( ). Waqf for charitable purposes can also be consensus of Fuqaha). Waqf for charitable purposes can also be Ijma (consensus of Fuqaha justified through Qiyas (analogical deduction) in comparison to Waqf for mosques. Enforceability of the Waqf when it is indicated by a donor in his will, stems from the fact that according to Shariah a will should be executed, and its alteration or cancelation is strictly prohibited. or Dhurri Waqf ahli or Family Waqf ( Family Waqf (Waqf ahli ) is permissible on the basis of the Ha- Dhurri) is permissible on the basis of the Ha- dith about Umars Waqf, and because family Waqf is, in fact, a charitable Waqf since it will finally become so. Acceptance of the Waqf is not a condition for its validity when the Acceptance of the Waqf is not a condition for its validity when the beneficiary is not specified, because acceptance cannot be expected in this case. In case of a specific beneficiary, acceptance can be obtained from him even if implicitly when he keeps silent. The ruling that when the beneficiary rejects the Waqf his rights in the Waqf shall be dropped, whereas the Waqf should still remain valid, is based on the viewpoint of 831831 Shariah Standard No. (33): Waqf the Hanafi School of fiqh. The justification here is that the beneficiary can drop his own rights in the Waqf, but he cannot nullify the Waqf itself. Waqf inception can be subject to any form of disposition which traditio- Waqf inception can be subject to any form of disposition which traditio- nally indicates it, because traditions are usually recognizable, when they do not contradict with Shariah rulings. Permissibility of temporary Waqf is based on the viewpoints of the Maliki Permissibility of temporary Waqf is based on the viewpoints of the Maliki and the Imami Schools of Fiqh, in addition to what has been reported about the viewpoint of Abu Yusuf of the Hanafi School. Such viewpoint is based on the fact that a temporary Waqf can also fulfill its charitable objectives and result in two benefits: one of them is the benefit generated from Waqf throughout its specified period, and the other is the benefit to the Waqif since he may need his property in the future. Moreover, permissibility of temporary Waqf could encourage Waqf practicing, and, hence, contribute to fulfillment of the present need for charitable institutions. Permissibility of declaring Waqf as effective starting from a future date Permissibility of declaring Waqf as effective starting from a future date can be viewed in terms of analogy between Waqf and Wasiyyah can be viewed in terms of analogy between Waqf and The ruling that the Waqif should have full legal competence is based on The ruling that the Waqif should have full legal competence is based on the fact that Waqf in its very essence is a donation ( ), and there- Tabarru), and there- the fact that Waqf in its very essence is a donation (Tabarru fore, the Waqif should have full legal competence. Prohibition of Waqf by a person who is legally restricted for irrationality, Prohibition of Waqf by a person who is legally restricted for irrationality, aims at safeguarding his creditors, his own self, and his dependants. There is no harm, however, when the irrational person declares the Waqf for himself. As regards the Waqf by a person who is suffering a fatal illness, it should be subject to the rulings applicable to the will of such person. Permissibility of retreating from Waqf, unless it is a mosque, is the Ha- Permissibility of retreating from Waqf, unless it is a mosque, is the Ha- dith that has been narrated by Abdullah Ibn Umar and Umars Hadith, as well as Qiyas (analogical deduction) to Ariyah (a lent thing). The basis of the ruling that Waqf should not be for an impermissible purpose The basis of the ruling that Waqf should not be for an impermissible purpose while it can be for non-charitable purposes, is that Waqf is a donation (Tabarru ), and therefore, the only Shariah condition to be observed in it is Tabarru), and therefore, the only Shariah condition to be observed in it is permissibility of the purpose for which the donation is made. This viewpoint belongs to the Maliki School, whereas the Hanafi School is of the opinion that the Waqf purpose should be charitable. (will). Wasiyyah (will). 832832 Shariah Standard No. (33): Waqf The ruling that Waqf can be made for a person who is nonexistent at the The ruling that Waqf can be made for a person who is nonexistent at the time of establishing the Waqf, is based on the Hadiths narrated about Waqf for progeny, and on the fact that Waqf is an ongoing charity and therefore it should include those who will exist in the future. Waqf is said to have a legal personality and financial liability which are quite Waqf is said to have a legal personality and financial liability which are quite independent from those of its superintendent, because Waqf can give and take commitments. When, for instance, the Waqf superintendent borrows money for the Waqf, the debt obligation does not fall on him but rather on the Waqf itself. Similarly, when the beneficiary fails to fulfill his obligation towards the Waqf, he becomes indebted to the Waqf, rather than to the Waqf superintendent. Therefore, in this case, the Waqf superintendent has no right to relief the debtor from the debt. The ruling that Waqf donation should not exceed one third of the donors The ruling that Waqf donation should not exceed one third of the donors wealth, is based on the analogy between Waqf and (will), where Wasiyyah (will), where wealth, is based on the analogy between Waqf and Wasiyyah part of the wealth should be left to the inheritors of the deceased (the obligatory entitlement as per Shariah). This has been explicitly referred to in the Egyptian Law of Awqaf. Permissibility of making Waqf in the form of moveable property, regardless Permissibility of making Waqf in the form of moveable property, regardless of its nature and even if such property is not survivable, is based on the ruling practice during the era of the Prophet (peace and blessings be upon him) and the orthodox caliphs with respect to making Waqfs for mosques. The majority of Fiqh scholars also support this viewpoint; whereas the Hanafi scholars hold that Waqf of moveable property is permissible only when it is the normal practice. Money can be donated as a Waqf because this is the original form of Waqf, Money can be donated as a Waqf because this is the original form of Waqf, as emphasized by Muhammad Ibn Abdullah Al-Ansari the companion of Imam Zafar and supported by Ibn Taymiyyah. Shares and Sukuk come under this type of Waqf. A usufruct can be donated as Waqf, because it is wealth, and hence it A usufruct can be donated as Waqf, because it is wealth, and hence it should be subject to the general rules of Waqf. The fact that a usufruct is temporary does not affect this ruling since Waqf can also be temporary as has been indicated earlier. The ruling that permissible conditions of the Waqif shall be observed The ruling that permissible conditions of the Waqif shall be observed (including the ten conditions), is based on the Hadith which states: 833833 Shariah Standard No. (33): Waqf Muslims are bound to the conditions they make . In the last part of it, Muslims are bound to the conditions they make. In the last part of it, this Hadith implies that the donors condition which has to be observed should not be in contradiction with the Shariah except a condition that should not be in contradiction with the Shariah except a condition that permits what has been prohibited or prohibits what has been permitted (by Shariah). The basis for appointing a superintendent for the Waqf is the Hadith The basis for appointing a superintendent for the Waqf is the Hadith which indicates that: There is no misdemeanor (Junah) on the one who is which indicates that: There is no misdemeanor (Junah) on the one who is in charge of it , and because interest necessitates the presence of someone in charge of it, and because interest necessitates the presence of someone who takes care of the investments of the Waqf assets, collection of the Waqf s income and distributing it among beneficiaries. The Waqf superintendent has to observe the conditions of the Waqif be- The Waqf superintendent has to observe the conditions of the Waqif be- ), and therefore, it can be subject to Tabarru), and therefore, it can be subject to cause Waqf is a donation (Tabarru cause Waqf is a donation ( conditions according to Shariah. As regards observation of the rules of Shariah, the reason is obvious. The basis for depriving the Waqf superintendent the right of leasing The basis for depriving the Waqf superintendent the right of leasing the Waqf to himself or his son (without resorting to legal authorities) is the fear from favoritism which is part of human nature, and therefore prohibition of such leasing arrangement would minimize the chance for neglecting the interest of the Waqf. The ruling that a Waqf property shall not be lent is based on the fact that The ruling that a Waqf property shall not be lent is based on the fact that lending the property will reduce the chances for its investment. Borrowing for the Waqf is restricted to the case of acute need, and not Borrowing for the Waqf is restricted to the case of acute need, and not allowed for spending on the beneficiaries, because borrowing is meant to safeguard the Waqf against the harm of being useless, whereas refraining from payment to beneficiaries when there is no Waqf income does not involve such harm. Permissibility of combining Waqf resources is based on the fact that it Permissibility of combining Waqf resources is based on the fact that it could lead to the benefit of the Waqf, and that all Waqf properties are devoted for the Sake of Allah, Glory be to Him. However, appropriate allocation to the different beneficiaries of the combined Waqf assets should be duly observed so as not to cause harm to such beneficiaries. opinion) The General Council of Fatwa of Kuwait issued a Fatwa (Shariah opinion) The General Council of Fatwa of Kuwait issued a Fatwa (Shariah permitting transference of the excess income of a mosque to other permitting transference of the excess income of a mosque to other mosques. The condition pertaining to the need for judiciary supervision on the Waqf The condition pertaining to the need for judiciary supervision on the Waqf is based on the desire to ensure the achievement of the interests of the 834834 Shariah Standard No. (33): Waqf stakeholders, and perform the role of (a Shariah regulatory body). Hisbah (a Shariah regulatory body). stakeholders, and perform the role of Hisbah The first person who arranged judiciary supervision on the Waqf was Tawbah Ibn Namir, the judge of Egypt in the early Islamic era. The ruling that Waqf assets should not be leased for less than the normal The ruling that Waqf assets should not be leased for less than the normal rent of similar assets (while minor injustice could be accepted) is based on the desire to avoid favoritism and waste of Waqf income. This viewpoint enjoys unanimous agreement of Muslim Fiqh scholars. The viewpoint regarding termination of the contract when the normal rent of similar property increases and the Waqf tenant refuses rent increment belongs to the Hanafi School, contrary to the Maliki and Shafii Schools who hold that the contract should not be terminated if the lease contract is for a specific period. Permissibility of the forms of Waqf leasing which have been indicated in Permissibility of the forms of Waqf leasing which have been indicated in Fiqh references is based on the desire to preserve the interests of the Waqf as well as the interests of all its tenants, without causing injustice to any party or neglecting the interest of the Waqf property. Permissibility of application of modern financing techniques which have Permissibility of application of modern financing techniques which have been developed by Institutions rests on the fact that such forms are in conformity with the usual forms of land leasing and cultivation. Such modern forms could even generate more income than the traditional ones, and achieve the goals of preservation and security of the Waqf assets. Permissibility of making a reserve fund for maintenance and renovation Permissibility of making a reserve fund for maintenance and renovation of the Waqf is based on the desire to preserve the Waqf assets and their ability to generate income, as has been emphasized by a number of Fiqh scholars. Istibdal (exchange of the Waqf asset) is permissible because it achieves (exchange of the Waqf asset) is permissible because it achieves the interest of the Waqf, through its development and maximization of its income. Istibdal 835835 Shariah Standard No. (33): Waqf Appendix (C) Definitions Waqf Waqf Making a property invulnerable to any disposition, and donating its income for charitable causes. The term Waqf is also used to describe the property donated in this manner. Waqf Ahli (Family Waqf) The income of the donated assets or usufructs goes in this case to the Waqif himself, his children, a certain number of people, or a specific entity, for a specific period. Waqf Khayri (Charitable Waqf) The income of the donated assets or usufructs goes to charitable purposes without specifying a certain entity or a specific group of people as beneficiaries. The Waqf could be eternal or temporary. Waqf Assets The property used for generating income, while it cannot be disposed of. Hikr or Tahkir or Tahkir A lease contract according to which the Waqf land is kept in the hands of the tenant to build on it or cultivate it as long as he pays the normal rent for can also take place through utilization of the Tahkir can also take place through utilization of the such property. HikrHikr or such property. Waqf land by leasing it for a specific purpose without specifying the period, and thus, the tenant obtains the right to stay, subject to a valid contract. can take place implicitly when the land is Tahkir can take place implicitly when the land is A third form of HikrHikr or A third form of leased for a specific period, and then the tenant build on it or cultivate it after obtaining the permission for that. In this latter case, when the lease period expires, and the tenant wishes to stay and pay the rent equivalent to that of similar property, he can be allowed to do so, in order not to cause harm to or Tahkir 836836 Shariah Standard No. (33): Waqf or Tahkir Tahkir is an alternative to is an alternative to Istibdal Istibdal (exchange of the Waqf land), him. (exchange of the Waqf land), him. HikrHikr or right when the latter is not possible. These two methods constitute a financial right when the latter is not possible. These two methods constitute a financial which cannot be inherited. Irsad or Takhsis (Allocation) refers to the case when the government authorities allocate a pub- Irsad refers to the case when the government authorities allocate a pub- Irsad licly owned piece of land for public utilities such as schools, hospitals and charitable activities. This is not considered as Waqf because, in this case, the land is allocated by someone who does not own it. Haq Al-Qrar (Right to Stay) Preference right to build on or cultivate the Waqf land. A certain type , and is Kadak, and is of this contractual arrangement is sometimes known as Kadak of this contractual arrangement is sometimes known as applicable to leasing of shops and factories. 837837 Shariah Standard No. (34) Hiring of Persons Contents Subject ................................................................................................... Preface ................................................................................................... Preface ..................................................................... Statement of the Standard ..................................................................... Statement of the Standard ..............................................................................
Scope of the Standard ..............................................................................
Scope of the Standard Definition of the Term Hiring of Persons...............................................
1. Definition of the Term Hiring of Persons............................................... ..........................................................................
Pledge to Hire a Service ..........................................................................
Pledge to Hire a Service .......................................
Concluding a Contract for Hiring of Persons .......................................
Concluding a Contract for Hiring of Persons .........................................................
Subject Matter of Hiring Contract .........................................................
Subject Matter of Hiring Contract ...........................
Guarantees for Provision of the Pay and the Service ...........................
Guarantees for Provision of the Pay and the Service ..............................
Commitments of the Employee and the Employer ..............................
Commitments of the Employee and the Employer
Emergencies, Termination, Expiry and Renewal of Hiring Contracts .. ..
Emergencies, Termination, Expiry and Renewal of Hiring Contracts
Date of Issuance of the Standard............................................................ ...................................................................... Adoption of the Standard ...................................................................... Adoption of the Standard Appendices Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (a): Brief History of the Preparation of the Standard.............. Appendix (b): The Shariah Basis for the Standard Appendix (b): ......................... ........... ......................... The Shariah Basis for the Standard ........... PagePage 843843 844844 845845 847847 850850 851851 852852 853853 854854 855855 857857 841841 IN THE NAME OF ALLAH, THE ALL-MERCIFUL, THE MOST MERCIFUL All praise be to Allah, the Lord of all the worlds, and blessings and peace be upon our master, Muhammad, and his household and all his companions Preface This Standard aims to indicate the Shariah rulings on hiring of persons in its two distinct forms which include: hiring in the sense of obtaining the ), as well as hiring in the sense of Ajir Khas), as well as hiring in the sense of services of a private employee (Ajir Khas services of a private employee ( obtaining the services of a shared employee ( ). The service Ajir Mushtarak). The service obtaining the services of a shared employee (Ajir Mushtarak could also be either a defined task, or a future service which needs to be specified through detailed terms of reference. The standard also covers the relevant controls that Islamic financial institutions (Institution/Institutions)(1)(1) relevant controls that Islamic financial institutions (Institution/Institutions) should observe when the institution is the employee and when it is the employer. The word (Institution/Institutions) is used here to refer, in short, to Islamic financial (1)(1) The word (Institution/Institutions) is used here to refer, in short, to Islamic financial institutions including Islamic Banks. 843843 Shariah Standard No. (34): Hiring of Persons Statement of the Standard
Scope of the Standard This standard covers hiring of the service/work of persons between the institution and other institutions or individuals. The standard covers the cases when the institution is the employee and when it is the employer. However, the standard does not cover other contracts such as Mudarabah, investment agency, Musaqat, Muzaraah, Mugharasah, and Istisnaa.
Definition of the Term Hiring of Persons It refers to the contract through which a service/work of a natural or a legal person is obtained against a specific amount of pay. The service thus ob- tained could be specific or a future one that needs to be specified through detailed terms of reference, such as educational, health and consultancy services.
Pledge to Hire a Service 3/1 There is no Shariah prohibition against having a framework agreement to regulate the process of hiring between the institution and the client. Such agreement may comprise the general conditions which govern the relationship between the two parties, whereas there should be a separate hiring contract for each operation, signed by both parties. Under such framework agreement the two parties may also perform operations through exchange offer and acceptance with due reference to the general conditions stipulated in the agreement. 3/2 The institution has the right to ask the client who pledges to hire its services to pay a specific amount to be retained by the institution as a guarantee for the seriousness of the client in executing his pledge and honoring any commitments that may result from it. In case of withdrawal from the part of the client the deduction from this guarantee amount should not exceed the actual harm caused to the 844844 Shariah Standard No. (34): Hiring of Persons institution. The guarantee amount can either be kept as a deposit with the institution without being disposed of, or invested on behalf of the client through Islamic Mudarabah or investment agency, or frozen in a current account owned by the client and guaranteed by the institution. The institution and the client may also agree at the time of signing the contract to consider the guarantee amount as a a prepaid installment of the cost payable by the client. [see Shariah prepaid installment of the cost payable by the client. [see Shariah Standard No. (9) on Ijarah and Ijarah Muntahia Bittamleek, item 2/3]2/3]
Concluding a Contract for Hiring of Persons 4/1 A contract for hiring of persons can take place in any form that normally indicates it. It can be concluded verbally, in writing or through modern means of communication. 4/2 The two parties of the contract (the employer and the employee) 4/2 The two parties of the contract (the employer and the employee) should be legally competent (capable of awarding and accepting agency), otherwise the contract cannot be concluded. 4/3 A private employee, who works for and under the supervision of a a single employer, has no right to work, at the same time, for anyone single employer, has no right to work, at the same time, for anyone else, except on permission of his former employer. Unlike a private employee a shared employee who works for more than one person and who is not supposed to work for a specific person at a specific time, is not subject to such restriction. 4/4 The private employee should be informed about the hiring period and the type of work he is supposed to do in general, while the shared employee should be informed about the work, its type, and specifications. The specific period within which the work has to be done could also be added, and in that case the employee has to do the work within that specific period. When no specific period for doing the work is referred to in the contract, resort should be to normal practice. 4/5 A private employee is not responsible for damage, unless it is due to his own transgression, negligence, or breach of a stipulated condition. 845845 Shariah Standard No. (34): Hiring of Persons 4/6 A shared employee is absolutely responsible for damage, unless it is caused by an evitable factor. This, however, does not hold true in the case of an investment agent who is permitted to utilize the money. Unlike the shared employee who has to guarantee what he is paid to work on, the investment agent does not guarantee, except in case of transgression or negligence. 4/7 The contract for hiring of persons is a binding contract, which none of the two parties can terminate or amend without the consent of the other, except in case of contract breaching, or due to an emergent excuse, or because of inevitable circumstances. 4/8 For a private employee, the beginning of the hiring period should be specified. The hiring period should start at the time of signing the contract, except when the two parties agree on a specific date for its beginning. Hiring in the latter case is known as (deferred hiring), or hiring that has to be executed in the future. 4/9 When a private employee fails to report to work on the date specified in the hiring contract he shall be entitled to no pay for the period between the specified and actual dates of work commencement (the pay for the absence period should be deducted from his total pay). The employer in this case shall have the right to terminate the contract, unless the two parties agree on a compensatory period at the end of the contract period. 4/10 For a shared employee, a certain period for performing the work may be specified. When the shared employee fails to do the work during that period, the employer has the right to terminate the contract or a new period can be agreed upon. 4/11 There is no Shariah prohibition for any of the two types of employees (private and shared) to receive Arboun (Earnest Money) at the time of signing the contract. If the hiring contract is implemented, the amount of earnest money should become a prepaid part of the employees pay, otherwise the earnest money should go to the employee. However, when the contract is not executed the employee 846846 Shariah Standard No. (34): Hiring of Persons is preferably supposed to take from such is preferably supposed to take from such earnest money portion which compensates the actual harm caused to him. only the earnest money only the
Subject Matter of Hiring Contract The subject matter of the hiring contract is the service/work and the pay. 5/1 Rulings pertaining to the service/work 5/1/1 The service/work of the employee which constitutes a subject matter of the contract should be well known, accomplishable and permissible in Shariah. 5/1/2 It is permissible to determine service in terms of a specific work to be done or a specific period of service, or in terms of both. If the employee is able to do all the work within the specified period, he becomes entitled to the whole pay. If he is able to do only part of it during the period, his entitlement to the pay will depend on two probable outcomes. If the part of the work he has done during the period is in fact useless and cannot be benefited from the employee shall become entitled to no pay. If the accomplished part of the work is useful and can be benefited from, and the employer is unwilling to extend the period, the employee shall become entitled to the amount normally paid for similar work (Ajr al-Mithl similar work ( Ajr al-Mithl).). 5/1/3 When a person is hired for doing a specific service/work, the employer has no right to hire out the service/work of such person to a sub-employer, unless the contract permits sub- hiring, or this has been agreed upon by the two parties. If the hired service/work is specifically defined and has to be delivered in the future, the employer in this case has the right to hire out to someone else an identical service/work (Parallel hiring). [see Shariah Standard No. (17) on Investment Sukuk, item 5/2/10] 5/1/4 The employer should stick to utilizing the work/service of the hired person as per the permissible conditions that have been agreed upon. 847847 Shariah Standard No. (34): Hiring of Persons 5/1/5 When the hiring contract relates to a specific service, the employee (the institution) should own the service and have the ability to deliver it. Hence, it is impermissible for the institution to sign a contract with the client before it possesses the service and becomes in a position to perform actual or constructive delivery. 5/1/6 Hiring can be for performing a future service that is well described and specified to the extent which leaves no room for ambiguity and dispute. In that case the employer does not have to own the required service before signing the contract. Consequently, an agreement may be reached for performing the service at a specific time in the future, with due consideration to the ability of the employee to own the service and become able to deliver it on time, by himself or through someone else. The pay for the service here should not necessarily be made in advance, unless the contract is a Salam or Salaf contract. If the employee happens to deliver a service that does not conform to what has been agreed upon, the employer has the right to reject it and insist on having a service that conforms to specifications. 5/2 Rulings pertaining to the pay 5/2/1 The pay, whether in cash, or in-kind or in the form of a service, should be well known to the extent that leaves no room for dispute. It can be either fixed or variable according to a method which is well known to the two parties. 5/2/2 The pay can be determined for the work as a whole so that the employee becomes entitled to it after doing all the work, or it can be determined in installments and the employee becomes entitled to each installment at the relevant stage of the work done. The pay can also be determined on the basis of a specific period, after which the employee becomes entitled to it, or such period can be divided into sub-periods and the pay determined accordingly. Furthermore, the pay can be determined on the basis of both the work and the period, 848848 Shariah Standard No. (34): Hiring of Persons and the employee becomes entitled to it when he performs the work within the specified period. [see item 5/2/9] 5/2/3 The pay becomes obligatory when the two parties sign the contract, and payable on delivery of the service/work or making it available (when the employee puts himself at the disposal of the employer even if the employer has not yet assigned a task to him). After signing the contract, there is no Shariah prohibition against forwarding the pay as a lump sum amount, or in installments. 5/2/4 The pay can be variable, yet the amount of pay for the first period should be known. Following the first period, it is permissible to use an accurate indicator for predetermination of the pay for the successive periods. However, such indicator should be known to both parties and mutually agreed upon, for avoidance of dispute. This indicator which replaces the specifically determined pay for the period should have an upper and a lower limit. 5/2/5 It is permissible, on the consent of the two parties, to amend the pay of future periods (the periods in which benefiting from the service has not yet taken place), whereas the unpaid amounts of pay that relate to past periods become a debt ob- gation owed by the employer, and hence it is impermissible liligation owed by the employer, and hence it is impermissible to stipulate a condition for increasing such amounts (resched- uling). 5/2/6 The pay can be determined as a percentage of the output (e.g., 10%) or a part of the thing to be made. 5/2/7 It is permissible to stipulate in the contract that in case of default by the employer in the settlement of any installment, or when he refrains from doing so without a reasonable excuse and after a sufficient period of notification; all other installments shall become due and eligible for premature settlement. However, the employee in this case does not own the prepaid installments finally until he completes the work of the whole hiring period. [see Shariah Standard No. (8) on Murabahah, item 5/1] 849849 Shariah Standard No. (34): Hiring of Persons 5/2/8 It is impermissible to make a condition which leads to any increment in the pay agreed upon, in case of default by the employer. Nevertheless, the contract may include a pledge by the employer to donate, in case of default, a percentage of the pay for charitable purposes. Such donation should entirely go to charitable purposes, under the supervision of the Shariah Board of the institution. 5/2/9 It is permissible to agree upon more than one rate of pay, as when the two parties agree that if the work is done within a certain period the pay will be this much, and if it is done in another (shorter) period the pay will increase to that much. Similarly, two different rates of pay can also be linked to two different places, types, or specializations, of the work to be done.
Guarantees for Provision of the Pay and the Service 6/1 The employee has the right to obtain the permissible guarantees in their different forms so as to document his eligibility for receiving the pay. Likewise, the employer has also the right to obtain such guarantees for receiving indemnity in case of any transgression or negligence or breach of the contract from the part of the employ- ee. The ruling here is, in fact, similar to that on documentation and collateralization (Rahn), (Kafalah) transfer of right suretyship (Kafalah) transfer of right and collateralization (Rahn), suretyship (Hawalat al-Haqq ) and set-off (Maqassah). [see Shariah Standard Hawalat al-Haqq) and set-off (Maqassah). [see Shariah Standard No. (5) on Guarantees, item 2/3] 6/2 It is permissible to state in the contract that the pay has to be made in advance, deferred, or in installments. In case of premature termination of a contract in which the pay has already been made in advance, the two parties should resort to settlement. When the employee accepts any period of delay for a pay that has to be settled in advance, such acceptance should be considered as a respite which the employee has willingly granted to the employer, and hence it can by no means be considered as a right of the latter. Due attention shall be given here to item 5/2/2. 850850 Shariah Standard No. (34): Hiring of Persons
Commitments of the Employee and the Employer 7/1 Commitments of the employee 7/1/1 The private employee has to render his service to the employer and observe the period of hiring during which he should not be absent, except on permission of the employer, or to perform a recognizable duty. Similarly, the shared employee has to perform the work as agreed upon, and within the stipulated period, if any. 7/1/2 In principle, the employee is supposed to do the work by himself since he has been hired to perform a specific work required from him, unless the contract stipulates otherwise. This, however, does not hold true in case of hiring someone to do a future service/ work that has been specifically defined. In this latter case, what needs to be catered for is observation of all the specifications mentioned in the contract. 7/1/3 In hiring of persons, it is permissible to stipulate a penalty code indicating a specific amount which the employee should pay to the employer in case of delay in performing the work/service within the specified period. The amount to be thus paid has to be determined with due consideration to normal practice as well as justice. 7/2 Commitments of the employer 7/2/1 The employer shall observe the following: a) Payment of the pay in advance, on deferred payment basis, or in installments as agreed upon. In the absence of agreement on a specific form of payment, the due pay should be paid after rendering the complete service to the employer, or on expiry of the hiring period in case of private employment. When a due pay is delayed by the employer in spite of noti- fication the employee has the right to stop work or prevent the employer from utilizing the service that has already been done. 851851 Shariah Standard No. (34): Hiring of Persons b) Provision of facilities/requirements to the employee, if the work to be done so requires, or when provision of such fa- cilities and requirements is stipulated in the contract.
Emergencies, Termination, Expiry and Renewal of Hiring Contracts 8/1 Emergencies of hiring 8/1/1 A private or shared hiring contract which relates to the employee in person as per normal practice, shall be terminated on the death of the employee, or when the employee loses his entire legal competence, or when - due to injury or sickness

he becomes unable to work anymore or for a period which is normally considered to be too long for the employer to tolerate. Such contract shall also be terminated when the employee-institution encounters liquidation, bankruptcy, or freezing of activities. 8/1/2 When the employee refrains from delivery of the service as required, and fails to present the suitable alternative as agreed upon, the employer has the right to terminate the contract and demand indemnification for the actual harm caused to him by the act of the employee. 8/2 Termination, expiry and renewal of hiring contracts 8/2/1 In specific hiring, when the service/work becomes completely useless the contract becomes null and void; whereas when it is partially useless the employer has the right to terminate the contract. If, instead, the service/work that has become useless pertains to hiring on the basis of future delivery of a well defined service, the contract shall remain valid, and the employee, in this case, has to deliver a similar service. 8/2/2 The hiring contract can be terminated on the consent of its two parties, yet none of them has the independent right of its termination, except for a contingent excuse or force majeure termination, except for a contingent excuse or force majeure situation. The employer has the right to terminate the contract on the existence of a defect that makes the service useless. The 852852 Shariah Standard No. (34): Hiring of Persons contract can also be terminated on the basis of a conditional ), by the party who has stipulated such Khiyar al-Shart), by the party who has stipulated such option (Khiyar al-Shart option ( option, and within its specified period. 8/2/3 The employee has the right to stipulate termination of the contract when the employer fails to make or delay payment of the pay agreed upon, or when the employer does not pay one installment or more of such pay (Khiyar al-Naqd one installment or more of such pay ( Khiyar al-Naqd).). 8/2/3 On the consent of the two parties, the hiring contract can be terminated before its effectiveness. 8/2/3 Hiring comes to an end at the end of the contract period, yet it remains when it is needed for a reasonable excuse or for avoidance of harm. In case of continuation, hiring shall be for a pay to be agreed upon between the two parties, otherwise the normal pay for similar services should be applied. 8/2/6 The hiring contract can be renewed for another period, whether renewal is to be declared before expiry of the original contract, or to take place spontaneously. For spontaneous renewal, a con- dition is to be stated in the contract indicating that the contract shall spontaneously become renewed on the commencement of a new period, if none of the two parties notifies the other about his disinterest in renewal.

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