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Sunday, January 3, 2010



The application of bay’ al-‘inah (sale and repurchase back) and bay’ al-dayn (sale of debts) is making the Islamic financial industry lost its identity. The issues are serious to the Islamic financial market movement, as it is not about minor details of religious practices (furuq) but sadly dealing with the fundamental (usul) of religion. This time it is riba or usury. Its application in Islamic financial market is partly caused by the lack of knowledge in riba that is both definite and decisive. For this reason, it is critical to put things straight and get to the basics again. This paper endeavours to give a thorough analysis between the Sale of Goods and the Sale of Debts. Only by appreciating the differences between both sales in the eyes of Shariah would only then one can appreciate the distinctions. Compliance to or otherwise to the principles of Shariah is one the agenda of this paper entitled “Sale of Goods and Sale of Debts - A Comparative Analysis From The Perspective of Shariah” which speaks for itself. Some of the issues will be discussed in general while some issues will be analysed in detail.

1.0    Introduction

One critical task of Islamic financial institutions (IFIs) is to ensure that the behaviour of fund providers and users compliance with the Quranic spirit of justice (‘adl) and cooperation (ta’awun). Driven by the profit motive, IFIs today have rationalised the application of murabahah[1] and bay’ bithaman ajil[2] (BBA) leading to a wholesale recognition of positive time preference. However, the worst scenario would be the application of bay’ al-‘inah[3] and bay’ al-dayn[4] likes in Malaysia has further driven Islamic banking and finance towards losing its identity as a system.

The Islamic financial products introduced to satisfy the customers’ tastes and preferences and also the Islamic bank’s attitudes for being risk-adverse, the principle of ‘al-ghurm bil-ghunm (no pain, no gain) has been isolated from financing. This point holds true for bay’ al-‘inah and bay’ al-dayn or combination of both products as they are intended to satisfy the customer’s desire for fixed income and risk-free investments. As lending has been the traditional approach in banking, Muslims thought that only bai al-inah, murabahah and BBA serve as the best alternative to lending. The same apply to salam[5] and istisna’[6] financing where muslims may see them as a loan instead of sale and purchase contract.

The same applies to the banking firms; for example, in the practice of al-ijarah, al bay’ (financial leasing instead of true leasing) is usually applied. In this way financiers do not bear the risks of ownership and other obligations attached to it. The banking firms for being risk-adverse generally perceived the application of mudarabah[7] and musyarakah[8] as risky ventures, in turn, resorts more into application of bai al-inah, murabahah and BBA, to suit to customers’ preferences.

Not to limit to the application of bay’ al-‘inah and bay’ al-dayn,  but the widely used bay’ al-‘inah and bay’ al-dayn (and not to mention organised tawarruq[9]) issues are serious to the Islamic financial market movement, as it is not about minor details of religious practices (furuq) but sadly dealing with the fundamental (usul) of religion. This time it is riba or usury. For this reason, it is critical to put things straight. This means getting back to basics.

This paper endeavours to explore the critical issues between the ‘sale of goods’ and the ‘sale of debts’. It is important to highlight and address the distinctions between both ‘sale of goods’ and the ‘sale of debts’ which is presently thought of many people as synonymous. There is danger for such kind of perception because the basic building blocks for respective sales (that boils down straight to the validity of such transactions) are worlds apart from the eyes of Shariah (Islamic Law). Further, such blind acceptance, adoption and treatment of these sales without taking appreciation of its peculiarities and conditions to the validity of the contracts would lead to socio-economic behaviour inconsistent with the specific Islamic objectives. Compliance to or otherwise to the principles of Shariah is one the agenda of this paper entitled “Sale of Goods and Sale of Debts - A Comparative Analysis” which speaks for itself. Some of the issues will be discussed in general while some issues will be analysed in detail. To start with the analysis, the second section of this paper will discuss the definition and giving a good grasps to the matter of the pillars (‘arkan) of a contract.

Section three of this paper will provide a critical analysis towards the sale of goods. The contract of sales of goods will be analysed starting from its very definition which is al-bay’ that is associated with property (al-mal). This analysis will be continued with the meaning of mal that has lent to the problems to what exactly constitutes to the contract of sales of goods. Subsequently, section four will give a thorough analysis of the sale of debts together with the opinions of the jurists to the determination of its validity and other matters relevant to the subject. After the analysis for each respective are done, the paper will end with the conclusion by comparing to the each respective sale.

2.0       Pillars of the contracts

The principles of contract in commercial transactions do not arise today but it had before Islam and until today. Although the fundamental procedures in a contractual dealing remain the same in all of the periods, there are still some differences in the nature, scope and additional principles. The fact is that, it is impossible to make erect something lasting without an accurate foundation. This is because the foundation is like a pillar, which supports any particular action, make or structure cannot survive long and will eventually collapse. In this section, the paper will look the contract to the pillars (arkan) of all contracts in Islamic law that lends to the validity to contracts. Thus, in order to critically analyse and compare the differences between the sale of goods and sale of debts, a clear demarcation line between the contracts of sale of goods to other contracts should be drawn to distinguish its peculiarities

            2.1       The pillars (arkan) of all contracts

When we analyze the prerequisites of shariah contracts, certain conditions need to be fulfilled. Most of these conditions are related to the three pillars (arkan) of a contract; (i) a statement or a form (sighah), (ii) two contracting parties (‘aqidan), and (iii) the subject of a contract (ma’qud ‘alayhi). Hanafi jurists however, hold that there is only one element of a contract which is a statement or a form (sighah). This, however, implies the existence of other elements. Practically, there is not much different between the opinions from the Hanafi School of law with the rest of Sunni schools of thought.

                        2.1.1    Statement or sighah

As mentioned above, our Holy Prophet Muhammad pbuh was also reported to have said “Sale is constituted by mutual consent”. Thus, factors nullifying full consent must be eliminated. Most Muslim jurists uphold the importance to the statement or sighah because it dictates the mutual consent of both parties involved. Without it, the contract for sale of good will render to be invalid. In fact, the Hanafi School of law maintains that the statement is considered to be the only pillar of a contract because other aspects will automatically follow the statement. Thus, other aspects beside statement are not to be considered pillars of a contract. The statement or sighah is the instrument or the means by which a contract is made. However, majority of jurists, the conditions of two contracting parties and the subject matter are also to be considered among the pillars of a contract.

Statement or sighah is formed through offer and acceptance. Offer and acceptance that has led to the mutual consent signifies the internal aspects. The ijab (offer) and qabul (acceptance) are considered as external proof of the contract. Ijab signifies the willingness of a party to do something. Ijab is defined as a declaration that is made first with a view to creating an obligation whilst qabul is defined as a declaration of an accepting the obligation. According to the Hanafi School, an offer is what is stated first before acceptance to be stated by other party, indicating his consent to what the first party has established. Majority of the jurists maintain that it does not matter for which offer come first before the acceptance or whether acceptance come first before the offer and the view of Hanafi School is preferred because it is precise and the differentiation between offer and acceptance becomes easier.

In Islamic Law offer and acceptance can be conveyed in a number of ways such as by words, writing, gesture or indication and by conduct. Jurists prefer the past tense for verbal expression in order to form the offer and acceptance such as “I bought” and “I sold”. If these tenses prove an intention to form a contract, it will be formed, otherwise the contract is not concluded. Beside verbal expression, writing also could form an offer and acceptance, whether or not both parties are able to talk, unable to talk, or either one of the parties able to talk except in the case of marriage contract that require special treatment of sighah. The acceptance must be made to correspond with the proposal. It is necessary that the acceptance must conform to the offer in all its details irrespective of whether such conformity is express or implied. If this conformity does not exist, there will be no consent. This conformity could either be explicit or implicit. In case if there are variances between the offer and acceptance, there shall be no contract. Except in the case where the purchaser make an offer for a certain price and the seller accepts for less than the price offered or when a seller makes an offer for a certain price and the purchaser accepts for more than the price mentioned. The increase is accepted willingly by the seller at the meeting. Clarity of offer and acceptance is a must. Both offer and acceptance must be clear and avoiding any ambiguities. In addition, both offer and acceptance must be clear and void of ambiguity.

Another condition of sighah that lend to the validity of the contract is that the acceptance of the offer made must be made in the same meeting (unity of session). The doctrine of session of contract (majlis al-‘aqd) states that in order for offer to be conformed to the acceptance, both parties should be present in the same session (majlis). However, the opinion of the unity of session is divided among scholars. Jurists differ on whether the connection of an acceptance with an offer means their occurrence happens in the same session (majlis) or not. Some jurists maintain that this connection must be in the same session while others opine that it means that both should be at the same time. The second view is regard as preferable because in many contemporary circumstances such as making an offer by phone, fax, email etc., it is not possible to connect the acceptance with the offer in the same session. The underlying principle should be the ‘unity of time’ instead of ‘unity of session’ of the contract.

Notwithstanding to the concern for the ‘unity of session/time’, jurists are also dispute on whether a contract is binding immediately following an offer and acceptance, or parties are allowed to delay for further thinking about it until the end of the session. This is called as the doctrine of khiyar al-majlis. According to Hanafi and Maliki Schools, they maintain that a contract is binding immediately following an offer and acceptance. On the other hand, other jurists maintain that both parties are allowed to rethink and delay until end of the session. The second view is regard as preferable because it is supported by a strong hadith; “Both seller and purchaser have the choice (to revoke the contract) unless they have separated from each other”. The second opinion is considered preferable over the other is because, if the contracting parties conclude the transaction in one session and observe the requirement of the agreement, they still have the right to think over the transaction and revoke it within a specified time. This is called as a Khiyar al-Shart or option of stipulation. Option of stipulation makes a contract non-binding for the party, which has reserved that right within a specified period.

                        2.1.2    Two contracting parties (‘aqidan) and their conditions

Contractual capacity of the contracting parties would be the next requirements that lend to the validity of the contract. Basically, it is whether the contracting parties qualified to enter a contract or not. The parties who have the legal capability to enter into a contract must have the following attributes; (i) puberty, (ii) sanity, and (iii) maturity.

In general rule of the Islamic Law of contract, both parties must be sane. If both or one of them is insane, no contract is to be made. If however, the insanity is only temporary, and later the party regains his sanity, his is allowed to conclude a contract when he remains sane, but is not allowed when become insane. The complete capacity for the parties to enter the contract is when he attains full mental development and maturity. This standard is the puberty or baligh. A male can attain it when he starts to ejaculate sperms in his night dreams, while a female can attain it at the onset of menstruation. However, if these signs do not appear and they become older, they are considered pubescent. According to Imam Abu Hanifah, this age is eighteen years for a male and seventeen for a female. On the other hand, Imam Malik considers the pubescent age to be seventeen years for both male and female. Abu Yusuf and Muhammad al-Shaibani maintain that this age is fifteen years for both male and female. Since this issue is still in dispute and moreover as there is no direct reference to it in any text, an authority in a given jurisdiction is empowered to select any of these opinions based on the circumstances of a particular jurisdictions.

However, attaining puberty in itself alone is not sufficient evidence that a person has acquired capacity for business execution. In addition, one must have the possession of rushd or maturity of action when it is deemed necessary, not only with regards to financial matters but also in matter of din (religion). However, according to some jurists, maturity or rushd is; ‘good and proper dealings with wealth from a worldly viewpoint’. If someone is a wrongdoer from the religious point of view and yet from the worldly perspectives, he is capable of dealing with money and wealth properly without wasting or misusing it, he is considered to be mature.

If person possesses all these three qualities, that is puberty, sanity and maturity, he is considered to be fully capable of negotiating and concluding different types of contracts independently. If he lacks one of the three qualities, he is not allowed to go into a contract. In addition, there should be more than one party to the contract. There is no contract when the same person acts as a buyer and a seller except when a father, guardian or a judge when selling their own property to minor or purchasing a minor’s property. Should there be an agent that represents either buyer or seller, besides legal capacity, the agent must have proper authority to make a transaction. The agent is required to perform the undertaking according to the instructions of the principal and exercise due care and skills.

                        2.1.3    The subject of a contract (ma’qud ‘alayhi)

The subject matter of the contract is also one of the foundations of the Islamic Law of contract. This is because a contract is an agreement or promise between two parties on a particular subject matter. Hence, no contract can exist without a subject matter, which may be in the form of goods or property. The Islamic Law has laid down the following conditions for the subject matter. The conditions namely are; (i) Suitability, (ii) Precise determination of subject matter, (iii) Existence of subject matter, and (iv) Certainty of delivery.

For the subject matter (ma’qud ‘alayhi), Muslims jurists have unanimously maintained that a subject matter must be suitable for concluding a contract on it. Suitability of the subject matter relates to its legality. First and foremost, the subject of sale must be valuable. The goods must have an explicit material value, which can be determined by the market. Goods without real value cannot be bought or sold. In addition, the subject matter must be allowable commodity in Shariah perspectives. It is forbidden for Muslim to acquire and transfer through contract anything that the Shariah has declared haram (forbidden). Any contract or transaction that entails these evils or promotes them in any way is also forbidden. Thus, any contract or transaction that entails these evils or promotes them in any way is also forbidden. Legality of subject matter also requires that there should be commodity should be owned by someone. Thus, public property is excluded and cannot be subject matter of contract. And legality of subject matter also requires that there should be no encumbrance or right attained to it. The subject of sale should not be a thing used for un-Islamic purpose.

The subject matter must be precisely determined by both parties. Jurists basically agree that the subject matter must be precisely being known to both parties. The Shafi’i School of Law that emphasis subject must be known to both parties for different types of contracts. On the other hand, Hanafi School of Law opines that this condition limited or should be fulfilled for marriage contract and contracts relating to exchange of property. All and all, the general principle in Islamic Law is that the subject matter must be precisely determined as regards to its essence, quantity and value. Similarly, if the subject matter is an obligation or performance, it must be precisely determined at the time of the contract otherwise the contract will be invalid.
The subject of sale must be specifically made known and identified to the buyer. If the goods are not specified and agreed to up-front, the sale is void as the goods may not be the agreed goods at the point of sale. There is a possibility for abuse and conflict should the goods not agreed upon. The quantity and attributes of the subject matter must be known and agreed upon together with the certainty of the timing for completion and delivery of the contractual obligations. However, for a contract like donation, charity, making a will or gift, Hanafi and Maliki School of Law maintain that precise determination of subject matter is not required because ignorance does not cause a dispute. The price of the subject of sale must be certain and becomes a necessary condition to the validity of the sale contract. If the price is uncertain, the sale is void. For instance, it is not allowed to sell a house which is not defined or to sell a house for a current price and the current price is not defined. Thus, a sale should be free from any misrepresentation or fraud. In the case of sales on credit, the terms of payment should be known. Otherwise, the sale is deemed invalid.

The general principle of Islamic Law is that the subject matter for transactions should be in actual existence at the time of contract or it should be capable of being acquired and delivered to a prospective buyer in the future. The subject of sale must exist at the time of the sale. Anything that does not exist at the time of the sale cannot be sold and its non-existence makes the contract void. The subject of sale must be in the ownership of the seller of the time of the sale. If he sells something that is not fully owned by him, the sale of the goods becomes void. In addition, the subject of sale must be in physical or constructive possession of the seller when he sells it to another person. Constructive possession means the seller has not taken physical delivery of the goods, but he has control of its rights and liabilities of the goods including the risks (such as risk of destruction or loss). Another condition is that, the sale must be instant and absolute. The sale of goods at a future date or event is void except for exceptional conditions that allowed by Islamic Law of contracts for example salam or istisna’ transactions. On the other hand, if the subject of a contract is a utility or work, its presence at the time of contract is not required. What is required is the strong possibility of its occurrence in the future such as a contract for renting a house is allowed because there is strong possibility that the purpose of renting will be accomplished.

The general rule on the deliverability is that the subject matter must exist at the time of contract and must be owned and in possession by the seller before it can be transacted. The delivery of the subject of sale must be certain i.e. not depending on a contingency or chance. The possibility of delivering the goods is to be assured. Therefore, a sale contract for a stray animal, which the seller cannot hand over to the buyer, is invalid. However, jurists dispute on the fulfillment of this condition with regards to the donation or charity. The Maliki School of Law maintains that the above condition is not required for these types of contracts. On the contrary, the majority jurists opine that this condition is indeed required.

All of the ruling mentioned above is trying to mitigating the risk of non-performance of contractual obligations and the risk of disputes.  The negative outcome may result either party into frustration and non-deliverability of the subject matter. All these conditions imposed directly or indirectly to eliminate the elements of gharar or excessive uncertainties in the sale of contracts. However, it is worth to note that gharar also affects investment contracts to some extent, but in a different way from how it affects exchange contracts (‘uqud al mu‘awadat). In investment contract, although certainty is needed in the contractual terms, there must be no guarantee for any return on the investment. In fact, there should be no certainty for any capital preservation. There is a need for some form of risk-taking (commercial risks) termed as ghurm, to justify the profit taking. The requirements of lawful sale in Islamic transaction highlight the role of iwad’ or the equivalent counter-value, which embodies both risk-taking (ghurm), value creation (ikhtiyar) and liability (daman) to justify any increase from the sale. The relationship between profit taking and risk-taking is mentioned in the Islamic legal maxim;

“al ghunmu bil ghurmi”
“no gain without the undertaking of risk”

The Islamic Law prohibits all those conditions that may favour one of the parties at the expense of another or conditions that may lead to usury. Notwithstanding to that, Islamic Law also prohibits that a sale contract may comprise two agreements with one of which is a condition for the other. The sale must be unconditional. A conditional sale is invalid unless the condition is recognised by both parties as an integral / unavoidable part of the transaction according to the usage of the trade. In the case of two sales in one sale for example, a property is sold to one person and then to the second person, the second sale is render to be invalid because the property is no longer in the hands of the owner. When a contract is made, it should not be cancelled in favor of another contract. However when a contract is not concluded it is allowed to make offers or acceptance.

3.0       Critical issues in sales of goods

Bay’ literally means exchange and applies to both sale and purchase. In technical terms, bay’ refers to an exchange of one property for another, which often called as price. Bay’ or sales can also be defined as a transfer of ownership of property for a consideration or compensation. The effect of a sale contract is to transfer the ownership of the property from the seller to the buyer and the ownership of money from the buyer to the seller. Sale allows both the parties to use their acquired properties in any way they like within the limits of law. 

The legality of bay’ derived from the Quranic verse in 2:275;

“But Allah has permitted trade and forbidden usury”

The Holy Prophet Muhammad pbuh was also reported to have said;

“Sale is constituted by mutual consent”

In another hadith, the Holy Prophet pbuh has said;

“The best earning is where a person earns through his own efforts and all sale transactions that are free from deception and cheating”

What makes contract of sales of goods is important is because it represents the earliest activity of economic events in any society at anywhere in the world. It is known that the economic activities of bay’ or sales takes in the form of barter trade or the sale of things for things the determinate article is sold for another determinate article. The fact that the contract of sales of goods is by far the most common type of transaction and perhaps the most significant contract in our daily life has placed the contract of sale of goods an important role in Islamic legal theory both as a facilitator of commercial and non-commercial transactions.

The contract of sale of goods does share similar features to other contracts such as contract of hiring, partnership, surety assignment of debt, pledge and many other commercial contracts. On the contrary, it also carries with its own unique features even though its ‘definition’ and ‘scope’ are problematic. This is because both its ‘definition’ and ‘scope’ are so exhaustive and exclusive. The contract of sales of goods will be analysed starting from its very definition which is al-bay’ that is associated with property (al-mal). Subsequently, the paper will look into the conflict between the concept of mal and the concept of sale of goods that because of its generic unintended wide connotation lend to the difficulty in drawing a demarcation line between sale of contract and another kind of contract such as contract of hire.

            3.1       Al-mal as a centre definition to the contract of sale of goods

Al-Shafi’i looks the word mal with the specific criterion. Mal is a property that has a “material value”, by “which it can be sold”. This definition, which denotes the “material valuability” criterion, provides a very good basis for the definition of the concept of mal that can overcome the deficiencies inherent in the Hanafis and Hanbalis criterion which look from the perspectives of “desirability” plus “storability” and “beneficial nature” respectively. With the additional phrase “which it can be sold”, the subject matter of the sale contract is confined to corporeal, special rights (haqq) and some debts only.

As mentioned before, the meaning of bay’ in the usage of the Arabic language is the exchange of mal (property) for mal (property). Mahdi and Shafaai in their combined journal ‘Definition and Scope of the Islamic Concept of Sale of Goods’ (Arab Law Quarterly, 2001)[10] have quoted that;

 “It is perhaps no exaggeration to say that no other term in Islamic law has caused such highly controversial views than the concept of mal. The main concerns of the controversy over its meaning have been regarding its quantitative and qualitative aspects and the relationship between mal and concepts such as ownership, corporeal and usufruct property”

We need to test the scholars’ views against the meaning of mal to the primary sources of Shariah. Qur’anic verse based on which a husband has to give his wife a gift or dowry from his mal upon conclusion of marriage contract. In addition, there is Qur’anic verse it was reported during the Prophet’s time, Holy Prophet Muhammad has ruled that the Ansar man, who happened to own no property, should teach the bride some Qur’anic verses that he memorised as a replacement for the requirement of giving her dowry. Based on the verse, it is clear that the Holy Prophet pbuh explicitly recognised intellectual property as a form of mal too. Neither the Qur’an nor the prophetic tradition restricts the scope of mal to corporeal or material property.

Study after study with regards to the contract of sales of goods, majority of the scholars classify the concept of mal into three main types, namely ‘ain (corporeal), manfa’ah (usufruct) and haqq (right). Corporeal refers to a property that has a physical existence whilst manfa’ah or usufruct refers to some kind of benefit.  As for the haqq or right, it represents a special right over a particular property.

3.2       The concept of mal and the contract of sale of goods – The conflict

As mentioned above, the general concept of mal includes corporeal, usufruct and special rights.  Thus, if we apply this concept to the definition of contract for sale of goods, it would be restated as the exchange of mal for mal; the range of the contract of sale will be so wide to cover every aspect that dealing with all types of property; be it corporeal, usufruct or special right. However here, the embedded problem of usage the generic term with unintended wide connotation lend to the difficulty in drawing a demarcation line between sale of contract and another kind of contract such as contract of hire. Therefore, it is important to refine the meaning of the term mal in such a way as to suit the contract of sale, or to redefine the concept of sale. Hanafi school of law has already taken the second solution whereby through its approach, the term mal will only be used in relation to the contract of sale that is confined to corporeal and some property in the form of a debt. This is due to the fact that, they disregard usufruct from being included under the term mal. Thus, the scholars are now widely agreed even though the term mal have been defined in a much wider sense, they agree not to include usufruct when it comes onto the purview of the contract of sales of goods. They are in agreement that the term mal as occurs in their definition should be interpreted specifically to cover the corporeal, some types of debt and pecuniary right.

4.0       Sale of Debts or Bay’ al-dayn

Dayn or debt is basically a liability of a person to pay certain amount of money or in kind and the obligation will reside until it is completely discharged. Dayn is more general than qard (loan) whereby, in qard contract, creditor lends money or item to the debtor on a condition that the debtor will return the value of the money to the lender at a specific time. Thus, this is the source for dayn to arise. Therefore, the qard is only a type of dayn. Bay’ al-dayn (debt trading) in Islamic commercial law point of view is referring to the principle of selling the dayn which results from mu’awadhat maliyyah contracts (exchange contracts) such as murabahah, BBA, ijarah and others. In Islamic commercial law, dayn can be traded only at par under the purview of hiwalah (transfer of debt). There is no room to profit from a debt trading. According to most of Hanafis, Hanbalis and Shafi’s jurists, bay’ al-dayn is not allowed to a non-debtor or a third party at all. Such opinions are based on the forbidden sale of bai’ al-kali bil kali[11] (a debt that is paid by debt) and a sale of gharar[12], which implicates the sale of a thing which the seller does not possess; debt is intangible asset in nature. In general, the majority of Islamic jurists are unanimous in allowing the activity of selling debts to the debtor. They only differ in opinion about selling the debt to a third party for the reason that the seller will not be able to deliver the sold item to the buyer.

Zahiris maintained that the sale of debt is disallowed to third party or even to the debtor himself. Hanafi Mazhab looked at bai’ al-dayn from the aspects of potential risks to the buyer, debtor and the nature of the debt itself. Thus, Hanafis also disallowed bay’ al-dayn to the third party regardless of the types of debts because the risks cannot be overcome in the context of debt selling.  This is because the debt is in the form of mal hukmi (intangible assets) and the debt buyer takes on a great risk because he cannot own the item bought and the seller cannot deliver the item sold. Contrary to that, Shafi’is maintain that the sale of a debt is allowed if it is confirmed debt (dayn mustaqir) and was sold in exchange for ‘ayn (goods) that must be delivered immediately. Furthermore, the debt sold must be traded at par value. When the debt was sold, it should be paid in cash or tangible assets as agreed. Ibn al-Qayyim, a Hanbali jurists confirmed that bai’ al-dayn is completely in agreement with Shariah and there was no general nas or ijmak (consensus on legal opinion) that prohibited it. What was stated was the prohibition of bay’ al-kali bil kali. Thus, bay’ al-dayn for deferred payment is not allowed.

The Malikis also shared the same view with Ibn al-Qayyim except that Malikis imposed eight conditions to be fulfilled in order to protect the rights of the debt buyer, to avoid debt selling before qabadh and to avoid riba. The followings are the eight conditions;

  1. Expediting the payment of the purchase,
  2. The debtor is present at the point of sale,
  3. The debtor confirms the debt,
  4. The debtor belongs to the group that is bound by law so that he is able to redeem his debt,
  5. Payment is not of the same type as dayn, and if it is so, the rate should be the same to avoid riba,
  6. The debt cannot be created from the sale of currency (gold or silver) to be delivered in the future,
  7. The dayn should be goods that are saleable, even before they are received. This is to ensure that the dayn is not of the food type which cannot be traded before the occurrence of qabadh, and
  8. There should be no enmity between buyer and seller, which can create difficulties to the madin (debtor).
The study shows that the ikhtilaf (differences of opinion) among past Islamic jurists centred on the ability to deliver the items sold. This was stated by Ibnu Taimiyyah himself and was also based on statements made in the great books of the four mazhab.

Those who oppose the sale of debt argue that the seller may not be able to deliver the debt to the buyer. They, therefore, argue that there is an element of gharar that results from the absence of qabadh. i.e. the possible inability of the seller to deliver it. As for Hanafi jurists, the prohibition for the sale of dayn to third party for the fear that the buyer will have to bear great risks holds the truth in it. This is especially true if there is an absence of supervision and control. Furthermore, the Hanafi jurists also do not include dayn which is a type of claim or right in the definition of properties, which is mal. In this context, the buyer’s maslahah should be safeguarded because he is the party that has to bear the risks of acquiring the debt sale while making the sale contract. On the other perspectives,  the fifth condition set by Maliki Mazhab for bay’ al-dayn relates to the exchange of ribawi items: the debts can only be sold at par value.

4.1       Criteria of subject matter of debt transfer (hiwalah) in Islamic commercial law?

Hiwala is defined by Accounting and Auditing Organization For Islamic Financial Institutions (AAOIFI) as ‘a transfer of debt from the transferor (muhil) to the payer (muhal alayh)’[13]. The Majallah (Art.673) defines it as “to make a transfer from one debtor account to the debtor account of another”. Thus, hiwalah is an agreement by which a debtor is freed from a debt by another becoming responsible for it. As a consequence, once the transferee (new debtor) has accepted the transfer of debt, the original debtor (transferor) is released from any obligation of the debt (and creditor has no recourse to him anymore). The creditor can now claim his debt only from the transferee. The transfer of debt is differ from transfer of right in that in transfer of debt, a debtor is replaced by another debtor, whereas in a transfer of right is a replacement of a creditor with another creditor. 

Malikis and Shafi’is stipulated three conditions for the item transferred to be satisfied;

(i) the debt must be matured,
(ii) the debt must be equal to the debt owed to the transferor by transferee in kind and amount, and
(iii) the two debts must not be foodstuffs that are object of salam (spot payment from deferred delivery) sale.

Basically, the prerequisite for the transferred item must be in the form of debt which is established on the dhimmah (obligation) of the transferor. If the transferred item is not a debt, then, such contract becomes contract of agency. This implies that the transferred debt cannot be in the form of fungible item because those cannot be established as liabilities. In addition, the binding debt must be considered as a contractual obligation. Other conditions would be the debt to be used for settlement must be known to the contracting parties.

Shafi’is school also allowed the transfer of debt that will ultimately become binding e.g. the liability for a price that will take effect once a contract option is exercised or expired. Hanafis, however, do not make it condition that the transferee must be indebted to the transferor prior to the contracts.

            4.2       Musaqqah or set-off in settlement of debts

Muqassah is generally a clearance of obligation and involves setting off debts of the debtor and creditor who is indebted to each other. The debts set off must be identical in all aspects or when the debt is of different value, the smaller debt is reduced from the larger debt. The legality of muqassah can be divided into three opinions.

First, one group of Muslim jurists opined the muqassah is a approved method for the settlement of debts. The subject matter doesn’t come under purview of sale of debt (bai’ al-dayn). Second, a group of jurists treated muqassah as an exception to the sale of debts, which will fall under certain conditions. Third group is who opined that muqassah is a sale of debts by nature, but its practice is legalised by the consensus of opinion of the scholars. The legal source for muqassah comes from the Holy Quran and Hadith (prophet says, actions and silences), but none is clear-cut on the subject. The subject matter of muqassah is mainly dayn (debts). The Muslim jurists have identified only three types of debts that can be available to be set-off by muqassah concept; (i) currency debts (duyun al-naqd), (ii) commodity debts (duyun al-‘ard), and (iii) usufruct (manfaah). The rule of thumbs would be the debts to be set-off must be same in nature. Muqassah normally would not be applicable between two different debts. On the contrary, Hanafis ruled that muqassah between two different types of debts is permissible. A close analysis shows that debt clearance can only be made obligatory or voluntary for two similar debts whereas mutual consent is required if both of not in similar nature.

Muqassah al-qanuniyyah is a mandatory set-off, which is valid even though without mutual consent of both parties. The set-off would be possible when the debts are equal and no adverse consequences for any party while exercising the set-off. The mutual obligation must actually exist between two persons in their own personal capacities. In other words, each one must be personally creditor or debtor for the other. The mandatory set-off can also comes from the judicial or legal enforcement set-off by the order of the court (when there is a dispute between creditors and/ or debtors as to the existence of debts). Another condition for the permissibility of mandatory set-off is when two cleared debts must be of equal nature (ejusdem generis). The debts must be in the same genus, type, characteristics and date of maturity. However, the set-off is not possible when there is variation in regards to the debts. On the contrary, the Muslim jurists have agreed that if the two debts are not equal in amount, a set-off will still take place as regard to the equivalent amount on both sides. The party that owes larger debts will remain as creditor after the set-off.

Muqassah al-talabiyyah or mandatory set-off on demand is the set-off by the request of the superior creditor. This kind of set-off needs only the consent of the privileged creditor. Muqassah al-talabiyyah normally takes place when there is no correspondence of the status of the debt or when one debt is preferred over the other. However, when there is cases where the set-off will bring injustice to the other party (happens because only consent of the superior creditor is required), both parties can bring the case to the court and the judge will decide the procedure to set-off the debts.

Voluntary set-off or muqassah al-ittifaqiyyah needs the consent from both parties because the debt to be set-off is different in nature. This is also known as contractual set-off. Voluntary set-off is applicable when the subject matter is not similar in genus or attribute. The parties still need to observe that the set-off should not result in violation of Shariah rulings.

            4.3       Debt trading in modern application

In the Malaysian context, the trading of Islamic debt securities instruments (or Islamic bonds) is regulated by the Central Bank of Malaysia and Securities Commission to safeguard the parties involved. Therefore, the conditions set by the Maliki Mazhab and the fears of risks by Hanafi Mazhab are overcome by the regulation and surveillance set by these regulators. In the case of Islamic bonds as practiced in Malaysia, a bond that matures at par value can be sold at a discount before maturity. For example, the creditor (i.e. investor) is forced to sell at a discount the Islamic bond for liquidity purposes. But in the capital market, practically no non-debtor will buy debt at par value, unless he can make some capital gain from it. A bond worth RM1,000 (par value) may be sold for RM920 to the third party. Likewise, the third party can sell the bond at a profit before maturity. If he anticipates that the interest rate is falling (this in turn will increase the bond’s price), he can sell it at the higher price than RM920. If he anticipates the interest rate will rise (this in turn will decrease the bond’s price), he may sell it immediately or hold the bond till maturity and redeem it at par. In this way, he still making profit of RM80 (RM1,000 - RM920 = RM80).

What practically happened is that Malaysian jurists hold the view that the sale of securitised debts is similar to the sale of properties: the process of securitisation of the debts will glue the bonds or papers to some underlying assets and thus can automatically qualify itself as property (al-mal). Hence, the characteristics of debt securities are now different from currency or money (ribawi item). Since a property can be sold at any price, thus, the Islamic bond as a property can be disposed at any price agreed upon by the contracting parties. In a contract of sale, the subject matter or object of sale must generate usufruct (manfa’ah) to the buyer. For example, people buy food for consumption or buy houses to protect them from the heat or cold. But the bond or dayn in this sense is not the commodity or property, but only a legal right to a loan (i.e. right to future cash flow arising from loan repayments) represented by a piece of document in the form of papers or certificates. The underlying of it is more of a future monetary claim. Thus, the bond or dayn is indeed money in nature, not property. Therefore the sale of dayn must only be made at par value. Even if the underlying debt was not the result of a moneylending transaction (qard), the question of riba arises if it was sold not at par value. Islam does not recognise money as a subject-matter of trade.

Money has no intrinsic utility; it is only a medium of exchange; each unit of money is 100% equal to another unit of the same denomination, therefore, there is no room for making profit through the exchange of these units inter se. When the bonds are sold at a discount or premium, the sale of dayn is similar to the unequal exchange of money for money; it implicates riba al-fadl[14]. Hence, any profit created from the sale of dayn is unlawful.

5.0       Conclusion

As mentioned above, it is important to highlight and address the distinctions between both ‘sale of goods’ and the ‘sale of debts’ which is presently thought of many people as synonymous, are worlds apart from the eyes of Shariah (Islamic Law). This is because it boils down straight to the validity of such transactions. Whilst ‘sale of goods’ are the exchange of goods or things or properties with price, the ‘sale of debt’ dealing with the exchange of intangible things with money. More often than not, the liability obligations derived from dayn is in the form of money. Thus, money and money can only be traded at par as in the case of sarf (money exchange whereby the currency is to be traded at spot rate). Deviation from this rule would lead to the elements of riba to be incorporated in such transactions. Money has no intrinsic utility; it is only a medium of exchange; each unit of money is 100% equal to another unit of the same denomination, therefore, there is no room for making profit through the exchange of these units inter se. Because of lack of understanding in money, the current issue on sale of dayn has arisen.

For these reasons, it is critical for us to get to the basics again. We are not only need to know what leads to riba, we also need to know are the basic components of Islamic legitimacy in Islamic commercial contracts, so that there’ll be no more hilah is used to legitimize what is forbidden in Islam. The application of bay’ al-‘inah and bay’ al-dayn is making the Islamic financial industry lost its identity.

In Islamic commercial law, sale of dayn at par value is permissible since this is equal to the exchange of equivalence for equivalence (mithlun bi mithlin) and the debt must be confirmed debt. There is no room to profit from a debt trading. However, what is happening in the capital market like in Malaysia, is sadly discouraging and directly contradicts to the principle of Shariah. The selling of bonds at premium or discount is equivalent to the unequal exchange of money with money, thus, implicates riba al-fadl to arise. Now, it is the time to seek other alternatives for bay’ al-‘inah and bay’ al-dayn  such as musyarakah and mudarabah contracts. It is only when we get to the basics; maqasid al-Shariah or the objectives of Shariah can be achieved.

Dr. Zainal Azam Abdul Rahman. 2003. “Islamic Securities Play A Key Role”. The Star. Tuesday 3 June 2003. Pp 22.

Dr. Zainal Azam Abdul Rahman. “Currency Fluctuation And Its Effects On Debts And Obligations In Islamic Law”. Jurnal Undang-Undang. Pp 21-38.

Dr. Zainal Azam Abdul Rahman. “Krisis Mata Wang Dari Perspektif Islam”. Mingguan Malaysia.

Rosly, Saiful Azhar. 2005. Critical Issues on Islamic Banking and Financial Markets: Islamic Economics, Banking and Finance, Takaful and Financial Planning. Kuala Lumpur. Dinamas Publishing.

Munawar Iqbal and David T.Llewellyn. 2002. Islamic Banking and Finance: New Perspectives On Profit-Sharing and Risk. United Kingdom. Edward Elgar Publishing.

Resolutions of The Securities Commission Shariah Advisory Council. 2nd Edition.

Amin, Hanudin. 2007. An Analysis of the Classical and Contemporary Juristic Opinions on Bay al-Dayn. Labuan e-Journal of Muamalat and Society, Vol.1 2007, pp. 29 – 40.

Mahdi Zahraaa and Shafaai M Mahmor. 2001. Definition and Scope of the Islamic Concept of Sale of Goods. Arab Law Quarterly (2001). ©2001 Kluwer Law International.

Dr. Muhammad Tahir Mansuri. 2006. Islamic Law of Contract and Business Transactions. New Delhi. Adam Publishers & Distributors.

Mohd. Ma’sum Billah. 2006. Shariah Standard of Business Contract. Kuala lumpur. A.S. Nooordeen.

[1] Murabahah : Sale at specified margin. However, the term is now used to refer to a sale agreement whereby the seller purchases the goods desired by the buyer and sells them at an agreed marked-up price, the payment being settled either in instalments or in lump sum.
[2] Bai’ bithaman ajil : Trading at cost plus specified mark-up. A variation form of murabahah (sale at specified margin) with purchase payments is deferred and payable at a certain particular time in the future (e.g. via installments).
[3] Bai’ al-‘inah : Sales and repurchase back. Refers to trading whereby the seller sells his assets to the buyer at agreed selling price (with a specified mark-up) to be paid by the buyer at a later date. After that, the buyer sells back the assets to the seller at a cash price, lower than the agreed selling price.
[4] Bai’ al-dayn : Sale of debt or liability. According to large majority of fuqaha (jurists who give opinion on various juristic issues in the light of Quran and the Sunnah), debt cannot be sold except at its face value.
[5] Salam : A sale whereby the seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advanced price fully paid on the spot.
[6] Istisna’ : A contract whereby a manufacturer (contractor) agrees to purchase (build) a deliver a well-described good at a given price on a given date in the future.
[7] Mudarabah : A profit and loss sharing contract in which one party provides the financial capital and the other manages the enterprise. While profit is shared, loss is borne by the financier.
[8] Musyarakah : Similar to mudarabah contract, with the difference that both partners participate in the management and the provision of capital and share in profit or loss.
[9] Tawarruq : An instrument of obtaining cash financing. A customer of the bank buys something at a higher deferred price and sells it for a lower immediate cash price.
[10] Mahdi Zahraaa and Shafaai M Mahmor. 2001.‘Definition and Scope of the Islamic Concept of Sale of Goods’ Arab Law Quarterly (2001). ©2001 Kluwer Law International. In the journal, Mahdi and Shafaai have outlined the specific requirements of al-mal in the context of sales of goods from the perspectives of Hanafis school of law. Hanafis school that look into two key criteria which are the “desirability” and “storability”. The test of desirability by its nature can be very subjective that can lead to disparity in application whilst storability also shows deficiency in two ways whereby things like vegetables would be excluded from purview of definition and confine property to things that have a physical existence i.e. corporeal but disregard usufruct. Ibn Qudamah, a Hanbali scholar has chosen key criterion of mal that based on its “beneficial nature” as long as it is in line with Shariah. This definition seems denote a wider meaning than that of the Hanafi because it includes usufruct. Al-Shafi’I, on the other hand, states that mal constitutes a thing that has a material value, with which can be sold.
[11] Bai’ al-kali bil kali : A debt sale that is paid by debt. It is a type of credit sale in which on the date of the discharge of the debt, the debtor seeks extension with the promise to pay something in addition. The creditor then sells the debt again to the debtor for another period and increases the price. In this case, the debtor did not receive anything in exchange when being charged for extending the period of payment.
[12] Gharar : Literally means deception, danger, risk and uncertainty. Technically, means exposing oneself to excessive risk and danger in a business transaction as a result of uncertainty about the price, quality, quantity of the counter-value, date of delivery, the ability of either the buyer or the seller to fulfill his commitment or ambiguity in the terms of deal.
[13] Shari’a Standard No.7 : Hawala. Definition of hiwala from Shari’a Standards by Accounting and Auditing Organization For Islamic Financial Institutions (AAOIFI) Rabi’ I 1424H – May 2003.
[14] Riba al-fadl : Riba pertaining to trade contracts. It refers to an exchange of different quantities (but different qualities) of the same commodity.


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