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Sale of Debts under Islamic Law of Contract

7 Jul

Nurshuhaida binti Zainal Azahar


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.

Islamic Finance in the Blue Ocean

6 Apr

by Ng Boon Ka

‘‘We don’t want to go back to the same normalcy that we’re coming from.
We will create a new normalcy which will stay and keep on moving and change the world.’’

Nobel Peace Prize winner Muhammad Yunus,
World Economic Forum 2009, Davos

Inspired by the ‘Blue Ocean Strategy (BOS)-How to Create Uncontested Market Space and Make the Competition Irrelevant’, a book of strategy and management by Prof. W. Chan Kim and Prof. Renee Mauborgne, it is high time to strategise the art of Islamic banking in a nascent ‘box’ altogether. Putting this into perspective, it is both strategically sound and tactically tenable in light of Albert Einstein’s words that, ‘‘we cannot solve our problems with the same thinking we used when we created them’’.

Leveraging on the distinctive and holistic fundamentals of Islamic finance such as the sharing of risk and reward, the prohibition of interest (riba) and gambling (maisir), minimisation of induced uncertainty (gharar), emphasis on real transactions, as well as ethical and charitable activities, a paradigm shift in the thought process of innovation and development is therefore warranted chiefly in vogue with the current age of financial turbulence.

To begin with, the thinking within the conventional box which seeks to benchmark against conventional risk and return profile in order to gain market share is plausibly applicable to underdeveloped and infant markets where Islamic finance is merely a small subset of the whole financial system. However, such thinking works in an accommodative rather than an innovative mode, taking into account the spirit of maslahah.

As Islamic financial markets are maturing with growing market shares, a more robust Shariah compliant approach would necessitate an upward shift towards thinking outside the conventional box. Once Islamic finance has gained dominant market shares at the higher innovation stage, the ideal level of thinking in a distinctive and ever-expansionary ‘Shariah box’ with a Shariah based approach, rather than a superficial realm of ‘outside the box’, shall achieve the higher ideals of Islamic economics and social order.

Having witnessed the unprecedented growth of Islamic banking along the global financial trajectory in recent decades, there is a current and sanguine need for a strategic metamorphosis from a niche ‘green field’ to an uncharted ‘blue ocean’, in lieu of a ‘red ocean’ with conventional banking.



Moving beyond Sun Tzu’s Art of War adage, ‘‘If you know both yourself and your enemy, you can come out of hundreds of battles without danger’’, to a higher ground of defeating an enemy without even fighting, the BOS advocates a better strategy by exploring ‘blue oceans’ – untapped and untargeted markets which hold tremendous growth potential – rather than going head-to-head against rivals for a share of the existing market. The latter scenario is akin to a ‘red ocean’ where competition is based on outperforming the existing competitive benchmark. In other words, the best approach to earn a competitive edge is to gain the first mover advantage over competitors.

While competitors are the ones who set the agenda and rule of the game in red oceans, competition becomes insignificant in blue oceans. At the heart of BOS lies the creation of value innovation which seeks to integrate all the firm’s functional and operational activities. That said, the development of BOS revolves around preference for more risk minimization and less risk taking by reconstructing market boundaries; focusing on big picture, not numbers; reaching beyond existing demand; and getting the strategic sequence right. Being a departure from business-as-usual, the execution of BOS entails the overcoming of organizational hurdles and the embedding of execution into strategy.

The current global economic crisis poses a ‘creative destruction’ whereby ‘out of destruction a new spirit of creativity arises’ for Islamic finance to be the optimistic agent of change. However, given that a full operation of an ‘Islamic institutional scaffolding’ (a platform of Islamic behavioral rules) is currently lacking, there is ‘‘need for the design and development of a comprehensive and dynamic regulatory-prudential-supervisory framework, uniquely designed for an Islamic financial system,’’ as highlighted by Abbas Mirakhor.

For Islamic finance to be the role model for global economy, emphasis should be also given to the formulation of Islamic monetary and fiscal system, banking for the poor and the unbanked, prioritization of inherent corporate social responsibility to create wider appeal for Islamic financial products, acquisition and transformation of conventional banks into Islamic banks, increasing market share as early market entrants particularly in emerging and/or underdeveloped markets such as Central Asia and Xin Jiang of China, among others.

It is worthy to note that, in promoting knowledge-based innovation with practical adherence to the tenets of Shariah, Malaysia has created a market space from her position of strength in advancing innovative drive by the establishment of institutional infrastructures like INCEIF and ISRA.

Viewing Islamic finance with the original spectacle in a new vision rather than a purely conventional glass may be the propeller for the departure of a prescriptive Shariah compliant approach towards a principle-based Shariah system. To conclude in Bank Negara Malaysia Governor Tan Sri Dr. Zeti Akhtar Aziz’s words, ‘‘Islamic banking and finance is a ‘mirror of the sea’ for until and unless we have the courage to explore its depth, we would never be able to uncover the treasures that reside within.’’

The summary of this article was published in The Malaysian Reserve on 6th April 2009.

Click here to find “A Blue Ocean Revolution in Islamic Finance” by Gabor George Burt, who is an internationally recognized expert on Blue Ocean Strategy and Value Innovation; the highly acclaimed, new approach to high-growth strategy formation and implementation conceived by INSEAD professors W. Chan Kim and Renee Mauborgne.


6 Feb

by Nurshuhaida Zainal Azahar



Islamic banking (IB) in Malaysia had developed quite fast for the past of more than 20 years, starting with the establishment of Bank Islam in 1983. IB is governed by both Islamic Banking Act 1983(IBA) and Banking and Financial Institution Act 1989(BAFIA). Section 3 of IBA defines Islamic Bank as “any companies which carries on Islamic banking business and hold a valid license; and all the offices and branches in Malaysia of such a bank shall be deemed to be one bank”. Islamic Banking Business is further defined as “banking business whose aims and operations do not involve any element which is not approved by the Religion of Islam”. In addition to this statute, Section 124 of BAFIA allows any licensed institution to carry Islamic Banking Business and Islamic Financial Business.

In my opinion, the progressive development of IB in Malaysia has its advantages and disadvantages. One of the advantages is that IB allows for a wide banking transaction compared to conventional banking. This is supported by the legal definition of “Islamic Banking Business” provided under Section 3 of IBA, “banking business whose aims and operations do not involve any element which is not approved by the Religion of Islam”. Meanwhile, in conventional Banking System, the banking transaction is limited to the definition provided under Section 2 of BAFIA, inter alia receiving deposits, paying and collecting cheques and provision of finance.

On this basis, we can find the concept/ products of Bai’ Bithamin Ajil (deffered sales), Ijarah (leasing), Qard al Hasan (money lending), Mudharabah (dormant partnership) and murabahah (active partnerships), and Istis’na (manufacturing) began to evolve for the past 20 years. However, the development of conventional banking remained static relying heavily on its main business of financing (loan) till now because of the restrictions in BAFIA, example Section 33 (restriction on carrying on of trade) and Section 66 (restriction on investment). Islamic Banking Business to some extent may also include Islamic Insurance (TAKAFUL) without a necessity to form another company to manage it if Bank Negara allows it.

Therefore, I am of the opinion that Islamic Banking had more prospect and profitable than Conventional Banking. This can be seen when many conventional banks had turned to Islamic Banking Business under section 124 of BAFIA. Some of the examples are RHB Islamic Bank and Maybank Islamic Bank. IBB is more profitable owing to the fact that there are wide varieties of banking products yet to be introduced. In addition, majority Muslim population in Malaysia contributes to a good prospect of IBB in future.

Nevertheless Islamic Banking still has its weaknesses. Firstly, there is a conflicting jurisdiction between Civil Courts and Syariah Courts. The issue of Islamic Banking’s jurisdiction had been resolved in the case of BIMB v. Adnan Bin Omar [1994] 3 CLJ 735, by N.H Chan J., where it was held that the case was rightly brought before the Civil Court because List I of Ninth Schedule includes banking being the subject matter where the Parliament can enact laws.

However, in my opinion, Islamic Banking’s cases should be brought before Syariah Court. This is due to the fact that not all Civil Court’s judges (with due respect) are well versed in Islamic transaction, what more in Islamic Jurisprudence in order to interprete the IB’s laws. My opinion might be obsolete based on Adnan’s case but I think that it is the time where High Court may set up an Islamic Division to deal specially with Islamic Banking cases. It would encourage specialization of judges and lawyers in IB as has been done with four other divisions (commercial, civil, criminal and appeal and special powers). This is the least we can do to serve the object of Islamic Banking. What is the point of setting up Islamic Banking if upon disputes; they may be interpreted by non Islamic Principles.

Secondly, Islamic Banking Products to certain extent, especially Bai’ Bithamin Ajil (BBA) is oppressive to the customers. For example in the case of Adnan Omar, the buyer (customer) had entered into BBA contract with BIMB, the purchasing price being RM 265,000 and the selling price was RM 583,000 for a deffered payment to be made in 180 months (15 years). The defendant had defaulted in payment after 2 year the contract was made. It was held in the case that the defendant was required to pay the amount of selling price of RM 583,000 and not entitled to Ibra’ (rebate) for early settlement.

In my opinion, this is unfair. The amount of selling price of RM 583,000 was agreed based on the consideration of the time factor of 15 years. When the defendant defaulted, the value of the house would not reach RM583, 000 just within 2 years, yet the defendant must pay such amount. This is unearned income by the bank. It defeats the object of Islamic transaction as it involves the element of oppression. In Affin Bank v. Zulkifli Bin Abdullah [2006] 1 CLJ 438 Abd Wahab Patail J., fortunately held that the customer was entitled to rebate even though he had defaulted in the payment. This is because the Bank is not entitled to gain such unearned income. The judge also had commented that Islamic Banking is oppressive compared to conventional banking.

In conclusion, Islamic Banking is a relief to the Muslims in this country who longed for Islamic financial aids. IB had come out with many products to serve this purpose. However, the fact that IB cases are decided by Civil Courts by Non Muslim judges or judges who are not well versed in Islamic transaction, raised doubts in the society. Is IB interpreted based on Islamic principles? Another interesting fact is, is BBA Islamic enough? Is the decision in Adnan Omar justifying the Islamic principle that a Muslim is not entitled to an unearned income? Should the Muslims still proceed to BBA knowing the fact that it is oppressive when they are unable to pay the sum within the specified period? Based on these reasons, I am of the opinion that IB must be reviewed frequently so as to ensure Islamic principles, forming the foundation of Islamic Banking is strictly adhered to.


1 Feb

by Ng Boon Ka 2008

Many a time scholars have resorted to the literal interpretation of the texts without piercing through the ‘veil’ to look behind the intended meaning and the associated context as they presumably take a conservative stance for fear of unjustifiable innovation (bidah). Howbeit, this fear itself is unjustified as not all modern innovations are contradictory to the Prophetic practice (sunnah) in toto. It is, therefore, in this predicament that the revivalism of the maqasid al-Shariah particularly in wealth is pertinent in our contemporary world. Maqasid al-Shariah can be aptly described by the succinct words of Prof. M.H. Kamali as a science of the Shariah in its own right which is largely concerned with the philosophy of the law, its outlook and objectives, rather than the formulation of its specific text.

The dual nature of al-maqasid in terms of ibqa (preservation) and hifz (protection) was discussed by Al-Ghazali in his Jawahir al-Quran. It is opined that the preservation of wealth can be metaphorically described as having its roots in the availability of wealth (essentials / daruriyyah), its branches in wealth circulation (complementariness / hajiyyah), and its blossoming fruits in the investment and growth of wealth (embellishment / tahsiniyyah). With regard to wealth protection, the growth of wealth would be superfluous akin to building a ship under the basement if there is no safeguard of its ownership and transmission (or inheritance).

Given that juristic differences (ikhtilaf) are blessings, al-maqasid approach plays an inspiring role to cherry-pick the preferred opinions amid jurisprudential disagreements. In other words, al-maqasid can provide an end which may accommodate different means (views). As time and circumstances have changed since the Prophetic era, to remain stagnant for fear of deviation would present a simplistic view of things. While al-maqasid is stable, the means are adaptable to time and space. Hence, with al-maqasid, the need for the furtherance of traditional legal rules governing Islamic financial products and activities can be pragmatically appraised.

Fresh air must be breathed into the body of the Shariah to revitalise the significance of al-maqasid in catapulting the Islamic wealth to its highest apogee, both in quantity and in quality. While opening more gates to achieve al-maqasid is a virtue, the development of wealth in Islamic finance should heed to the gradual and systematic nature of the Quranic revelation (tanjim). In fact, the growth of Islamic finance is a means of preaching (da’wah) to achieve the higher objective of Islamic monotheism and an end to improvise the livelihood of all mankind. That said, the Islamic objective of wealth which is allegorically acknowledged as the ‘last jewel of the Shariah crown’ (wealth being ranked the ‘lowest’ among the five objectives, i.e. religion, life, intellect, lineage, and wealth) should neither be achieved in isolation nor overlooked by the pursuit of other higher objectives.

This article was published in Berita Kijang of Bank Negara Malaysia in 2008.