UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

Archive for June, 2011

Living in Debt Bondage



From the moment we are born, no matter where in the world, we are choking on a dollar bill. Someone has made a profit off of our birth and many will continue to profit off of our very existence through schemes such as conventional insurance and banking.  In fact, in our current world economic system fashioned by the Bretton Woods institutions, it is just as profitable to enslave blood as it is to spill blood.  Enslave, spill, enslave, spill and enslave, bomb, and profit.  Tax me to death, make obtaining an education impossible for the vast majority, however, a lifetime economic burden for some, and a privilege for the elite few.  Brand me Harvard, Yale, or Oxford and make me the master of the debt bondage system.  Yes I want to live off debt slavery!  I want to see the whole world suffer by being bonded into an activity by invisible chains which squeezes every ounce of creativity from that human life, wrecks the environment, and kills spirituality.  Debt bondage is the system we are living in now but there is a way out.  If  we take a close look at Islam and the Qu’ran, we might discover that the Prophet Muhammad lived in a time in Mecca when all the people around him were enslaved in a system of grueling debt bondage.  However, through divine revelation, He was able to set everyone free.  The answer to freeing ourselves from the current system of debt bondage, where many of us are already dead or barely living, can be found in the true interpretation and application of Islamic finance.  Every culture and religion is a hidden treasure and has a gift to offer humanity.  Islamic finance is like a beautiful untouched rose whose radiant fragrance is being whiffed around the world and whose intricate beauty offers hope of setting us free.  Let’s discover how to free ourselves of debt bondage and restore ourselves as human beings that respect and learn from one another rather than enslave, exploit, and kill one another for profit from the cradle to the grave.

Bai Al Dayn in Islamic Finance

Bai Al Dayn  [i] means the selling of debt in Arabic.  Currently, products based on this concept are allowed in Malaysia, but not heavily practiced in the Middle East due to the differing opinions of the different schools of Islam on whether or not Bai Al Dayn is acceptable under the Sharia’h  [ii].  In Malaysia, for example, Bai Al Dayn is the basis for the sale and purchase of Islamic securities, debt certificates, and various products.  In the Middle East, the majority of scholars consider the trading of debt to be similar to the trading of money and therefore ribawi   [iii] or riba  [iv] (interest)-bearing.

According to several Malaysian scholars whom accept Bai Al Dayn as a valid instrument under the Sharia’h, “Bai Al Dayn means a sale and purchase transaction of a ‘quality debt’ i.e. the default risk of the debtor is low and the debt must be created from a business transaction that conforms with the Sharia’h and Bai Al Dayn can be either monetary or a commodity such as food or metal.  Therefore, according to these certain scholars, “Bai Al Dayn can be defined as a sale of payable right either to the debtor himself or to any third party.”  (The Law and Practice of Islamic Banking and Finance (2003) by Dr. Nik Norzrul Thani; Mohamed Ridza Mohamed Abdullah; Megat Hizaini Hassan)  This type of sale is usually for immediate payment.

The sale of such a payable right to a third party is a subject of disagreement amongst the scholars.  “According to most of the Hanafi, Hanbali and Shafi jurists, the sale of debt to a non-debtor or third party is prohibited based on the forbidden sale of Gharar  [v] (uncertain or obscure goods), sale of Al Kali Bil Kali[vi], and the sale of a thing which the seller does not possess.  However, there are exceptions to this rule.” (The Law and Practice of Islamic Banking and Finance (2003) by Dr. Nik Norzrul Thani; Mohamed Ridza Mohamed Abdullah; Megat Hizaini Hassan)

Exceptions to the Rule

1.     “The pooling of assets with a minimum of 51% in tangible assets where trading at values other than par are permitted.  (E.g. Ijara hybrid sukuk such as the hybrid sukuk issued by the Islamic Development Bank for $850 million in 2009 as part of its $1.5 billion sukuk program.
2.     A legal trick (hiyal) could take advantage of this rule where a debt certificate is exchanged for a commodity, which in turn could be sold at market value.  (Islamic Finance Wiki)”

Arguments Supporting Bai Al Dayn

I.               Hanudin Amin restates several arguments as to why Bai Al Dayn is acceptable under the Sharia’h.

First, he recounts that, “The sale is allowed and fully permissible.  According to the Hanafis, Malikis, Shafis, and Hanbalis, the creditor has the full right to sell his debt to the debtor at any price he likes as far as the debt is raised from the cost of damage, qard[vii], the price of a commodity, the cost of services, or the dowry of a woman.” Hanudin Amin recounts that, “This right is regardless of the type of debt in terms of the confirmation or time stipulation of the debt, but due to the reason that the creditor has the full right to waive or annul his debt at any point in time as he so desires.  Therefore, he also has the same right to sell it to the debtor at any price he may like.”

Hanudin Amin states that “this opinion is based on the hadith narrated by Ibn Umar who reported that:

“One day he came to see the Prophet (pbuh) and told him: I sell camels in Baqi in dinars (debt) and accept dirhams (payment) and I sell in dirhams (debt) and accept dinars (payment).  The Prophet said, ‘It is okay, but you should try to accept it at the day price for each before you conclude your contract.’”

Based on this hadith, Hanudin Amin restates that “selling a debt to the debtor is permissible provided that certain conditions are fulfilled.”

II. Hanudin Amin recounts a second argument in support of Bai Al Dayn.

“The sale is allowed.  According to some Shafi and Hanbali’s like Ibn Al-Qayyim, the creditor has the right to sell only confirmed debt to the debtor or to a third party.  This is based on the grounds that he is allowed to give it to the debtor and to a third party too.”  Hanudin Amin recounts that this opinion is based on the following arguments:

“There is no authentic source that prohibits such kinds of selling or giving.  Thus it should be allowed and permitted; The creditor has full right on possession and full right to sell it to a third party; and Based on a legal maxim, it is allowed, which states that all transactions are permissible until they are proven non-permissible by an authentic source.  So, since there is no authentic source prohibiting this transaction, then, it should be allowed.”

III. Hanudin Amin recounts a third argument in favor of Bai Al Dayn.

“The sale is allowed on three conditions.  According to some Shafi scholars namely Al-Shirazi, Al-Subki, and Al- Nawawi, the creditor has the right to sell his dayn or debt to a third party as well as to the debtor himself.  Nevertheless, this permission is subjected to the following conditions:

The dayn must be a spot debt in nature, otherwise, it will not be allowed; The debtor must be a rich person and he has to accept the sale or there must be strong evidence to prove the existence of the debt in case of any denials from the debtor.  Otherwise the sale should not take place; and The buyer must pay the price of the debt on spot basis, otherwise, the sale will be considered as invalid and illegal.

(Hanudin Amin, “An Analysis of the Classical and Contemporary Juristic Opinions on Bai Al Dayn, Labuan e-Journal of Muamalat and Society)

IV. Malaysian scholars write, according to the Maliki, Hanafi, and Shafi jurists, if certain conditions/requirements are fulfilled, such Bai Al Dayn sales are allowable under the Sharia’h.  The certain Malaysian scholars recount the conditions as follows:

1.    “It must be a confirmed debt (Dayn Mustaqir) and the contract must be performed at once and not deferred in order to avoid any relationship with the sale of a debt for a debt, which is prohibited under Islamic law.  The sale should not be based on selling gold with silver or opposite because any exchange between these items necessitates the immediate possession, and if the debt is money, its price in another debt should be equal in terms of amount of quantity.

2.    Selling of a debt by its equivalent in quantity and time of maturity by way of Hawalah[viii] is permitted in Islam.  The debt must be paid in its full amount and bear no interest and give no benefit to the purchaser.   Financial transactions involving debts should never allow for a payment against the length of the period of the loan because this would be tantamount to Riba(interest) or Bai Al Kilai Bil Kali [ix], which is clearly prohibited by the prophet in the Hadith: “Do not sell a debt for a debt”.  Thus, Bai Al Dayn for deferred payment is not allowed.

3. Trading of debt on its face value is allowed in Islam.  Where the price paid for a debt is not the same as the face value of that debt, the transaction would amount to Riba Al-Nasiah[x] (delay or deferred) and is therefore prohibited.

4. Islam strictly prohibits legal devices to be treated as a justification for transactions that Islam regards as unfair, unjust, and against the Islamic precepts.

5. In regards to the bonds, they would be acceptable if the financing is based on the legal maxim Al-Ghurmu Bil Ghurmi[xi], which means that no person is allowed to invest in a way that generates profit without exposing himself to the risk of loss.  Both parties should be exposed to the outcome of the deal, whether profit or loss.  (Avoiding usury)

6. This contract of Bai Al Dayn generally takes place in the secondary market where bonds are traded at a discount.  Buyers do not intend to keep these bonds for long term purposes.  They are usually speculators whose main target is to make fast and quick capital gains on the basis of market liquidity and interest rate movement.  There are no controversies when the bonds are redeemed or sold at par value.” (The Law and Practice of Islamic Banking and Finance (2003) by Dr. Nik Norzrul Thani; Mohamed Ridza Mohamed Abdullah; Megat Hizaini Hassan)

Malaysian Resolution and Regulation Concerning Bai Al Dayn

On August 21, 1996, the Malaysian Securities Commission Sharia’h Advisory Council passed a resolution confirming the acceptance of the principle of Bai Al Dayn as one of the concepts for developing the Islamic Capital Market Instruments in Malaysia.  This decision was based on the views of the Islamic jurists who found Bai Al Dayn acceptable under the Sharia’h subject to conditions.  Furthermore, the decision was implemented based on the knowledge that there is currently a well-developed and transparent regulatory system in the Malaysian capital market, which was set up to safeguard the maslahah (public interest) of the market participants.  In Malaysia, Bai Al Dayn is regulated by the Bank Negara Malaysia (Central Bank of Malaysia) and the Securities Commission Sharia’h Advisory Council.

According to Hanudin Amin, “The Malaysian Securities Commission Sharia’h Advisory Council held that in the context of the sales of securitized debt, the characteristic of securities differentiates it from currency.  It is not a legal tender and, therefore, it is not bound by the conditions of exchanging of goods.  It is therefore not a ribawi[xii] item.  (Hanudin Amin, “An Analysis of the Classical and Contemporary Juristic Opinions on Bai Al Dayn, Labuan e-Journal of Muamalat and Society)

[i] Means Debt.  A Dayn comes into existence as a result of any contract or credit transaction. It is incurred either by way of rent or sale or purchase or in any other way which leaves it as a debt to another.

[ii] The term Sharia’h refers to divine guidance as given by the Holy Qur’an and the Sunnah of the Prophet Muhammad and embodies all aspects of the Islamic faith, including beliefs and practice.

[iii] Goods subject to Fiqh rules on Riba in sales, variously defined by the schools of Islamic Law: items sold by weight and by measure, foods, etc.

[iv] Means an excess or increase. Technically, it means an increase over the principal in a loan transaction or in exchange for a commodity accrued to the owner (lender) without giving an equivalent counter-value or recompense (‘iwad) in return to the other party; every increase, which is without an ‘iwad or equal counter-value.

[v] This means any element of absolute or excessive uncertainty in any business or a contract about the subject of contract or its price, or mere speculative risk. It has the potential to lead to undue loss to a party and unjustified enrichment of the other, which is prohibited.

[vi] The term Kali refers to something delayed. It appears in a maxim forbidding the sale of al-Kali bil-Kali i.e. the exchange of a delayed counter value for another delayed counter value.

[vii] (Loan of fungible objects): The literal meaning of Qard is ‘to cut.’ It is so called because the property is really cut off when it is given to the borrower. Legally, Qard means to give anything having value in the ownership of the other by way of virtue so that the latter could avail of the same for his benefit with the condition that same or similar amount of that thing would be paid back on demand or at the settled time. It is a loan, which a person gives to another as a help, charity or advance for a certain time. The repayment of the loan is obligatory. The Holy Prophet is reported to have said “…..Every loan must be paid……”. But if a debtor is in difficulty, the creditor is expected to extend time or even to voluntarily remit the whole or a part of the principal. Qard is, in fact, a particular kind of Salaf. Loans under Islamic law can be classified into Salaf and Qard, the former being loan for a fixed time and the latter payable on demand. (see Salaf)

[viii] Bill of exchange, promissory note, cheque, draft. Tech: A debtor passes on the responsibility of payment of his debt to a third party who owes the former a debt. Thus, the responsibility of payment is ultimately shifted to a third party.

Hawalah is a mechanism, which can be usefully employed for settling international accounts by book transfer. This obviates, to a large extent, the necessity of physical transfer of cash. The term was also used, historically, in the public finance during the Abbaside period to refer to cases where the state treasury could not meet the claims presented to it and it directed its claimants to occupy a certain region for a certain period and procure their claims themselves by taxing the people.

This method was also known as tasabbub. The taxes collected and transmitted to the central treasury were known as mahmul (i.e. carried to the treasury) while those assigned to the claimants or provinces were known as musabbab.

[ix] The term Kali refers to something delayed. It appears in a maxim forbidding the sale of al-Kali bil-Kali i.e. the exchange of a delayed counter value for another delayed counter value.

[x] Riba Al-Nasiah or riba of delay is due to an exchange not being immediate with or without excess in one of the counter values. It is an increment on principal of a loan or debt payable. It refers to the practice of lending money for any length of time on the understanding that the borrower would return to the lender at the end of the period the amount originally lent together with an increase on it, in consideration of the lender having granted him time to pay. Interest, in all modern banking transactions, falls under the purview of Riba Al-Nasiah. As money in the present banking system is exchanged for money with excess and delay, it falls, under the definition of riba.

[xi] This provides the rationale and the principle of profit sharing in Shirkah arrangements. Earning a profit is legitimized only by engaging in an economic venture, applying risk sharing principles and thereby contributing to the economy.

[xii] Goods subject to Fiqh rules on Riba in sales, variously defined by the schools of Islamic Law: items sold by weight and by measure, foods, etc.

UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance