UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

The Concept of Money and Commodity in Islamic v Conventional Economic Systems

Fish Market, Dubai, UAE


‘The modern capitalist theory does not differentiate between money and commodity in so far as commercial transactions are concerned.  In the matter of exchange, money and commodity both are treated at par.  Both can be traded in.  Both can be sold at whatever price the parties agree upon.  One can sell one dollar for two dollars on the spot as well as on credit, just as he can sell a commodity valuing one dollar for two dollars.  The only condition is that it should be with mutual consent.
The Islamic principles, however, do not subscribe to this theory.  According to Islamic principles, money and commodity have different characteristics and therefore, they are treated differently.  The basic points or difference between money and commodity are the following:

(i)            Money has no intrinsic utility.  It cannot be utilized for fulfilling human needs directly.  It can only be used for acquiring some goods or services.  The commodities, on the other hand, have intrinsic utility.  They can be utilized directly without exchanging them for some other thing.

(ii)           The commodities can be of different qualities, while money has no quality except that it is a measure of value or the medium of exchange.  Therefore, all the units of money, of same denomination, are 100% equal to each other.  An old and dirty note of Rs. 1000/- has the same value as a brand new note of Rs. 1000/-, unlike the commodities, which may have different qualities and obviously an old and used car may be much less in value than a brand new car.

(iii)         In commodities, the transaction of sale and purchase is effected on a particular individual commodity, or at least, on the commodities having particular specifications.  If A has purchased a particular car by pinpointing it and seller has agreed, he deserves to receive the same car.  The seller cannot compel him to take the delivery of another car, though of the same type or quality.  This can only be done if the purchaser agrees to it, which implies that the earlier transaction is cancelled, and a new transaction on the new car is effected by mutual consent.

Money, on the contrary, cannot be pinpointed in a transaction of exchange.  If A has purchased a commodity from B by showing him a particular note of Rs. 1000/-, he can still pay him another note of the same denomination, while B cannot insist that he will take the same note as was shown to him.

Keeping these differences in view, Islam has treated money and commodities differently.  Since money has no intrinsic value, but is only a medium of exchange, which has no different qualities, the exchange of a unit of money for another unit of the same denomination cannot be effected except at par value.

If a currency note of Rs. 1000/- is exchanged for another note of Pakistani Rupees, it must be of the value of Rs. 1000/-.  The price of the former note can neither be increased nor decreased from Rs. 1000/- even in a spot transaction, because the currency note has no intrinsic utility nor a different quality (recognized legally), therefore, any excess on either side is without consideration, hence not allowed in Shari’ah.  As this is true in a spot exchange transaction, it is also true in a credit transaction where there is money on both sides, because if some excess is claimed in a credit transaction (where money is exchanged for money) it will be against nothing but time.

The case of the normal commodities is different.  Since they have intrinsic utility and have different qualities, the owner is at liberty to sell them at whatever price he wants, subject to the forces of supply and demand.  If the seller does not commit a fraud or a misrepresentation, he can sell a commodity at a price higher than the market rate with the consent of the purchaser.  If the purchaser accepts to buy it at that increased price, the excess charged from him is quite permissible for the seller.  When he can sell his commodity at a higher price in a cash transaction, he can also charge a higher price in a credit sale, subject only to the condition that he neither deceives the purchaser, nor compels him to purchase, and the buyer agrees to pay the price with his free will.  It is sometimes argued that the increase of price in a cash transaction is not based on the deferred payment, therefore, it is permissible while in a sale based on deferred payment, the increase is purely against time, which makes it analogous to interest.  This argument is again based on the misconception that whenever price is increased taking the time of payment into consideration, the transaction comes within the ambit of interest.  This presumption is not correct.

Any excess amount charged against late payment is riba only where the subject matter is money on both sides.  But if a commodity is sold in exchange of money, the seller, when fixing the price, may take into consideration different factors, including the time of payment.  A seller, being the owner of a commodity, which has intrinsic utility, may charge a higher price and the purchaser may agree to pay it due to various reasons.

For example:

(1)   His shop is nearer to the buyer who does not want to go to the market which is not so near;

(2)   The seller is more trust-worthy for the purchaser than others, and the purchaser has more confidence in him that he will give him the required thing without any defect;

(3)   The seller gives him priority in selling commodities having more demand;

(4)   The atmosphere of the shop of the seller is cleaner and more comfortable than other shops;

(5)   The seller is more courteous in his dealings than others.

These and similar other considerations play their role in charging a higher price from the customer.  In the same way, if a seller increases the price because he allows credit to his client, it is not prohibited by Shari’ah if there is no cheating and the purchaser accepts it with open eyes, because whatever the reason of increase, the whole price is against a commodity and not against money.  It is true that, while increasing the price of the commodity, the seller has kept in view the time of its payment, but once the price is fixed, it relates to the commodity, and not to the time.  That is why if the purchaser fails to pay at a stipulated time, the price will remain the same and can never be increased by the seller.  Had it been against time, it might have been increased, if the seller allows him more time after the maturity.

To put it another way since money can only be traded in at par value, as explained earlier, any excess claimed in a credit transaction (of money exchange of money) is against nothing but time.  That is why if the debtor is allowed more time at maturity, some more money is claimed from him.  Conversely, in a credit sale of a commodity, time is not the exclusive consideration while fixing the price.

The price is fixed for the commodity, not for time.  However, time may act as an ancillary factor to determine the price of the commodity, like any other factor from those mentioned above, but once this factor has played its role, every part of the price is attributed to the commodity.
The upshot of this discussion is that when the money is exchanged for money, no excess is allowed, neither in cash transaction, nor in credit, but where a commodity is sold for money, the price agreed upon by the parties may be higher than the market price, both in cash and credit transactions.  Time of payment may act as an ancillary factor to determine the price of a commodity, but it cannot act as an exclusive basis for and the sole consideration of an excess claimed in exchange of money for money.’

(Mufti Taqi Usmani – Murabahah)

UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

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