Sale of Debts under Islamic Law of Contract

7 Jul

Nurshuhaida binti Zainal Azahar

2011

Sale of debt or Bai Dayn is defined under Article 158 of the Majelle as, “the thing due (which can be either in the form of money or commodity) owed by a certain debtor”. It is a sale of payable right or receivable debt either to the debtor himself, or to any third party and it could be paid immediately or for deferred payment. [1] There is no clear provision on the prohibition of sale of debt in Quran and Sunnah and on that basis; there were divergent rulings among traditional Muslim Scholars on the permissibility of the sale of debt. As far as the issue of the sale of debt to the debtor himself, the Majority of jurists (Hanafis, Hanbalis and Shafies) unanimously agreed that the sale of debt to the debtor himself is valid (through the contract of hiwalah) provided that it is sold at par value.[2]

However, the Jurists differ in their views in regards to sale of debt by the creditor to a third party. The Hanafis, Hanbalis and Zahiris were of the view that such sale is invalid because the creditor is not in the position to ensure delivery of the subject matter (debt) to the third party. It is therefore, in the presence of this uncertainty (gharar), such sale is void. The Shafies on the other hand, allowed sale of a confirmed debt to a third party because these debts are deliverable without impediments. Similarly, the Malikis allowed sale of debt subject to fulfillment of additional conditions. Firstly, sale of debt must adhere strictly to the prohibition of riba and gharar. Secondly, it must not involve food item or money or any ribawi item.[3] Obviously, trading money for money is not allowed. Thirdly, the debt must be sold prior to receipt or else selling of a discharged debt would be unfair to the new creditor. Fourthly, the price of sale must be paid immediately to avoid the selling of debt for a debt (kali bi al kali) which is prohibited in Islam. Fifthly, the price must be different genus from the debt to avoid riba al-fadl.[4] In addition, the debtor must be present during the conclusion of sale between the creditor (seller) and new creditor (purchaser) so that his financial standing is known to the purchaser. Furthermore, the debtor must acknowledge his debt to avoid selling an uncertain thing, thus invalidating the sale. In addition, the debtor must be able to take the responsibility of the debt.[5] Most importantly, there is no enmity exists between the debtor and purchaser.  These conditions are meant to safeguard the likelihood of nonpayment of debt or non delivery of debt to the new creditor and debtor are not subjected to injustice. In this regards, Malikis’ view is practical and would serve as credit risk’s mitigation in modern Islamic Finance.

In sum, it can be gathered from those rulings, that as a general principle, the sale of debt at its equivalent value and on spot payment is permissible.[6]  According to the Majority of Jurists, the permissibility of sale of debt for spot price is supported by the Hadith narrated by Abd Allah Ibn Umar, who said, “I came to Prophet (s.a.w.s) and said, I sell a camel in al Baqi, with the price denominated in gold coins and collected in silver coins and sell them in denominated silver coins and collecting in gold coins” He (pbuh) said, “there is no harm if you take it at its spot price, as long as you do not depart without fully concluding the transaction”.  On the authority of this Hadith, sale of debt was opined to be approved by the Prophet (s.a.w.) (Wahbah Zuhayli, 2003). [7]  This opinion is later endorsed by the Islamic Fiqh of Jeddah in 2002 which held that sale of debt for immediate payment is allowed.[8] In other words, the debt must be sold at an equivalent value; not more and not less or else any additional sum accruing from the sale of debt is riba.

Despite the standing of traditional Majority Muslim jurists that any surplus out of sale of debt is amounting to riba, it can be seen that Islamic banks and financial institutions continue to practice so by selling debt products such as the Islamic Accepted Bills and Islamic Bonds on discount. This paper shall unveil the operation of such products later and it can be observed that these Islamic Finance products are mere replications of conventional financing products. These products have incorporated the contract of sale of debt (bay’ al-dayn) to justify the “additional income” made such sale which shall be called as “profit” out of the trading of debts.  Indeed, while the Middle East Countries have prohibited the sale of debt, in Malaysia such practice is permitted on the basis the debt sold by Islamic banks is essentially the “profit” generated from sale of commodity based mode of Islamic Finance such as Murabahah. In other words, a debt is a tradable commodity/asset because its existence is attached or tied to the real assets sold under the Murabaha sale.

Another view to justify the permissibility of the sale of debt at a discount rate propounded by the minority of Muslim jurists is that such debt is in the form of the “rights” sold to the purchase. It is the sale of “haqq” and not the debt itself.  Thus, any gain out of this sale is considered a profit. However, the justification is considered unsound by majority of Muslim jurists.[9] Another contemporary view supporting the sale of debt at a discounted value is based on the principle of Ibra’. Ibra’ allows the discharge of a whole or part of one’s claim on a debtor. Hence, it is entirely the banks’ right to sell the debt at a discounted value. Nevertheless, scholars do not agree with this argument holding that Ibra’ and sale of debt have a completely different objective and implementation.[10]

In spite of such “justifications”, they are refuted by Mufti Taqi Uthmani who is of the view that sale of debt at discount value (even though backed by murabaha’s commodity) is prohibited because upon sale of the asset in a Murabahah transaction, the ownership has already been passed from the bank to the purchaser and it is no longer the commodity of the seller/bank. The bank is only entitled to the money (monthly installments) being the consideration of the commodity sold. Then, it is apparent that the bank is selling money rather than assets. [11]  Hence, the banks cannot justify the issuance of such paper money at discount. Thus, it is clear that any gain made on the sale of money for money is deemed as riba al fadhl.

 


[1] Article 158, Majjellah Al Ahkam Addliyyah

[2] Wahbah Zuhayli, Financial Transaction in Islamic Jurisprudence, Dar al Fikir: Damascus. 2003 V.1, P. 84.

[3] Hj. Zaharuddin, “Ruling on Debt Trading in Shariah” NST Business Times, 21st June 2006.

[4] Wahbah Zuhayli, Financial Transaction in Islamic Jurisprudence, Dar al Fikir: Damascus. 2003 V.1, P. 84.

[5] Ibid p.84

[6] Saiful Azhar Rosly & Mahmood M. Sanussi, “ The Application of Bay’ al- Inah and Bay’ al- Dayn in Malaysian Islamic Bonds: An Islamic Analysis”. International Journal of Islamic Financial Services Vol. 1 No. 2.

[7] Wahbah Zuhayli, Financial Transaction in Islamic Jurisprudence, Dar al Fikir: Damascus. 2003, First Edition. V.1;P. 81.

[8] 16th Convention on Islamic Fiqh Academy of Jeddah, Mecca, 5th-10th January 2002.

[9] Hj. Zaharuddin, “Ruling on Debt Trading in Shariah” NST Business Times, 21st June 2006

[10] Hj. Zaharuddin, “Ruling on Debt Trading in Shariah” NST Business Times, 21st June 2006.

[11] Taqi Uthmani (2002), An Introduction to Islamic Finance, Kluwer Law International:Hague.

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