Ruling on Debt Trading in Shariah
( Published on NST Business Times on 21st June 2006)
By : Ust Hj Zaharuddin Hj Abd Rahman
"Dayn" means "debt" and "Bai' " means sale. "Bai'-al-dain", therefore, connotes the sale of debt. According to Majalah al-ahkam al-adliyah, no 158 ; Dayn defines as the thing due i.e the amount of money owed by a certain debtor. Al-Dayn can be either monetary, or a commodity, i.e food or metal. Bay' Al-Dayn or debt trading or sale of debt can be defined as the sale of payable right or receivable debt either to the debtor himself, or to any third party. This type of sale is usually for immediate payment or for deferred payment.
The Shariah permits the selling of debt by its equivalent in quantity and time of maturity by way of hawalah. This form of debt trading is accepted by all schools of Islamic law provided it is paid in full and thus gives no benefit to the purchaser. The rationale for this ruling is that financial transactions involving debt should never allow deferred payment, as this would be regarded as Riba or Bay’ al-Kali bi al-Kali which is prohibited by the Prohpet S.A.W. (International Journal Of Islamic Financial Services, vol 1, no 2, Saiful Azhar)
According to most Hanafis, Hanbalis and Shafie jurists, it is not allowed to sell Al-Dayn to non debtor or a third party at all. However Malikis, and some Hanafis and Shafie jurist allowed selling of debt to third party with some conditions which are :-
a- The ability of seller to deliver the debts;
b- The debt must be mustaqir or confirmed and the contract must be performed on the spot;
c- The debt cannot be created from the sale of currency (gold and silver) to be delivered in the future and the payment is not of the same type as debt, and if it is so, the rate should be the same to avoid Riba.
d- The debt should be goods that are saleable, even before they are received. This is to ensure that the debt is not of the food type which cannot be traded to the debtor. ( Hasyiah Ad-Dusuqi, vol 3, p 63 )
The main issue here is, whether is is permissible to sell a confirmed debt which is backed by a non ribawi goods at discounted price?
Mainstream Islamic scholars have put a plug on the possibility of earning profit by confirming that any sale of debt (Bay’-al-dayn) or transfer of debt (Hawalat-al-dayn) must be at face value. This means in the above question, when the bank buys the instrument of debt (shahada-al-dayn) from the original buyer, it is not entitled to any discount. Doors of riba are closed shut by disallowing any difference between what it pays (purchase price of the instrument) and what it receives on maturity (its maturity value). Notwithstanding the clear verdict against such transaction, some Islamic banks have been offering Islamic bill discounting products. They essentially treat debt as any other physical asset that can be traded at a negotiated price.
In fact, the prohibition of Bay’-al-dayn is a logical consequence of the prohibition of "riba" or interest. A "debt" receivable in monetary terms corresponds to money, and every transaction where money is exchanged from the same denomination of money, the price must be at par value. Any increase or decrease from one side is tantamount to "riba" and can never be allowed in Shariah.
Some scholars argue some forms of Bay’ ad-Dayn is permissible, and they said that the permissibility of Bay ad-Dayn is: -
restricted to a case where the debt is created through a sale of a commodity. In this case, they say, the debt represents the sold commodity and its sale may be taken as a sale of the commodity. They said that on the conditions set by Maliki mazhab “payment is not of the same type as dayn, and if it is so, the rate should be the same to avoid Riba”. In this context of the sale of securitized debt, the characteristics of securities differentiate it from currency, and hence, it is not bound by the conditions for exchanging of Ribawi goods, therefore, selling debt which is represented non-Ribawi asset is permissible to be discounted. (Securities Commission Shariah Advisory Council Resolution, p 19)
The debt is created by the sale of goods and services through the sale-based modes of Islamic Finance, particularly Murabahah. The debt is created by the Murabahah mode of financing permitted by the Shariah and the price, according to the Shariah Scholars themselves, includes the profit on the transaction and not interest. Therefore, when the bank sells such debt instrument at a discount, what it is relinquishing, or what the buyer is getting, is not interest but rather a share in the profit.
The arguments, however, have been rejected by majority of the jurists. According to them, once the commodity is sold, its ownership is passed on to the purchaser and it is no longer commodity of the seller. What the seller owns is nothing other than money, therefore if he sells the debt, it is regarded as the sale of money and it cannot be termed by any stretch of imagination as the sale of the commodity. This is why the view has not been accepted by the overwhelming majority of the contemporary scholars. (Mufti Taqi Uthmani, An Introduction to Islamic Finance)
It is considered as the sale of rights on a debt and not the debt itself. In that sense, it is allowed to sell it to the third party and also either with discount or not. However, majority of Shariah scholar rejected this view as the right of the debt is still considered as the debt itself. Such sale would be nothing but a disguised way of receiving and paying interest.
This is the same as the principles of debt settlement. They say that there is a Hadith narrated by al-Bukhari that strongly support debt reduction, while parties opposing to the concept are unable to provide any strong arguments except to justify that debt reduction contains element of Riba al-nasiah and Riba al-Fadl. Such argument is not correct because the process of settling a debt does not constitute a trade. Furthermore, those opposed to debt reduction or discounting have overlooked the mechanism of Ibra’ which involves the discharge of the whole or part of one’s claim on a debtor. Ibra (rebate) which is similar to debt reduction is accepted by Shariah jurist.
However, the opposing scholars do not agree with the analogy and considered ibra’ and sale of debt with a discounted price is different in its objective and its implementation. The prohibition is also based on the concept of Sadd az-Zariah or closing the potential Riba from occuring.
With regards to Shariah issue on gharar (uncertainty) in this kind of sale, I do not think that it is not a major issue in the arguments. It is because in the present day, sale of debts by banks, we are not talking off a debt by an unknown (majhul) person with an unknown credit standing. The debt intended to be sold are generated by financing provided through the sale-based modes to governments and well-known corporations and firms having a high credit rating. It is rather asset-based and well-secured. Its payment is hence almost certain. Therefore, there is no question of any gharar (uncertainty). The past ruling of the Islamic jurist given in entirely different circumstances, does not, therefore seem to fit the changed realities of modern times.
Some parties in Malaysia encourage the development for debt discounting as an Islamic Financial product on the basis that it represents an important field of short term and self liquidating investment, because the terms of negotiable instruments do not in most cases extend beyond six months especially in trade based debt discounting (Saiful Azhar , International Journal Of Islamic Financial Services, vol 1, no 2)
The Islamic Fiqh Academy of Jeddah which is the largest representative body of the Shariah scholars and is represented by all the Muslim countries, in its 16th convention at Mekka on 5-10th January 2002 has re-discussed the issue and stated that sale of debt is prohibited including the following:-
a) Sale of debts to debtors with a deferred payment plan exceeding debt amount as this can be considered as Riba al-Fadl and Riba an-Nasiah. (Jadwalah ad-Dayn)
b) Sale of debts to a third party with a deferred payment plan whether the debt is paid with the same type of kind or not; as this can be considered as sale of debt with debt (bai’ al-kali bi al-Kali which is clearly prohibited by Prophet Muhammad)
According to the academy, commercial papers such as cheques, promissory notes and bill of exchange cannot be sold at a discount as there is element of Riba.
It is not allowed to deal, issue, distribute or trade with Riba based Bonds because the element of Riba is present.
It is not allowed to deal with debt notes in the secondary market as it involves discounts and sale of debts to third parties which has Riba elements.
The Islamic Fiqh academy proposed that a Shariah approved alternative for discounted papers and and sale and purchase of bonds is sale in the form of goods; with a condition that the seller hands over the good during aqad (contract), it is allowed even though the price of the good is less than the value of the commercial paper.
It is crucial to recognize and appreciate the differences in opinion even though the opposite opinion is seems to be weak. Especially in the situation in which all parties involved are qualified and have their own evidences and interpretations which are guided by true ijtihad (intellectual effort) guidelines. We must also realize that there is still room for ijtihad, particularly in the Fiqh Muamalat issue which fall under the Islamic Legal Maxims “it is a fundamental principle that rulings in Islamic transaction must be take into account it objectives”. Therefore, as long as there no ijma’ (consensus of jurist) that forbids Bay’ ad-Dayn, it is not healthy to condemn other ijtihad. However the best way suggested in this kind of issue is “Get out from the disputation is always recommended”. Thus, it’s better to avoid Bay’ Ad-dayn when there is alternative.
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