Category Archives: Islamic Finance

Everything related to Islamic finance; the akham and hikmah surrounding various types of transactions, pillars of finance, rulings, etc.

Down Deposits: Halal or Haram?

fork-stabbing-cake

Bismillah.

One of the types of transactions that’s very common today is a down-deposit transaction. This happens all the time with somewhat large purchases, like wedding cakes, or cars.

Say your sister is getting married. You go to the bakery to locate a nice cake; passing by towers of icing, you locate one that doesn’t seem too unhealthy.

“That one?” the shopkeeper says. “That one is $200. There’s a non-refundable deposit of $50 on it.” Non-refundable–if you pay for it, walk out, change your mind, and cancel, then that money is lost.

Is this allowed or not?

Scholars have differed over this. The majority of scholars hold that it is not permissible to do this.

Why? Because it’s a debt-for-debt transaction! You owe the guy $200 – $50 (so $150), and he owes you a cake! That’s a debt-for-debt transaction! Ahhhhhhh!! (Wait, wait!! Don’t throw up that cake yet ….)

The Hanbali scholars disagree with this; they hold that this is a permissible type of transaction. And their opinion is insha’Allah the stronger and the correct one.

Why did they say this? Two of their proofs are:

  1. No Prohibition: There is no specific prohibition against a down-deposit transaction. The asl (root) is that all transactions are halal until proven haram. Since there’s no specific prohibition, we’re somewhat good to go.
  2. The Narration of Nafis lbn al-Harith. Nafis (radiallahu ‘anhu) built a prison for ‘Umar (radiallahu ‘anhu) and sold it to him on the condition that if he liked it, he would pay the full amount; and if he didn’t like it, then his deposit would be forefit! [Recorded in the Musnad of Imam Ahmed] Isn’t that exactly what we’re doing here?

So insha’Allah it’s halal. So go ahead! Enjoy that cake!

Wallahu ta’ala ‘alam.

Action Steps:

  • Grab the nearest person and explain to them why down payments are permissible, and what the proofs are for both sides of scholars. (Grab your friend, email your family member, blog it, podcast it, whatever you like!)
  • Use down payments in your transactions as a seller. If you’re selling something and stand to lose a lot and need collateral, use a down deposit! It’s halal!
References

Shaykh Tawfique Chaudhry. The Real Deal. University of Toronto, Toronto. 08 Jan. 2009.

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Futures: Halal or Haram?

feathers flying out of an open box

Is futures trading halal or haram? Futures trading isn’t just for investors–even day-to-day transactions like buying and selling fruit, furniture, or funky gadgets can take the same ruling!

So is it halal? Or haram?

What exactly are futures? Futures trading generally apply to stocks, indexes, etc. Say you’re trading currencies (such as the Japanese Yen). Normal trading is buying high and selling low; futures trading is “I’ll sell you 1000 Yen at this price, two months from today, and you pay me then.” An option to buy later at a specific price guaranteed now, which you pay for later.

For the sake of simplification, you can consider it as a contract to buy furniture from your aunt, who buys and sells antique furniture. She tells you “I’ll sell you an antique wooden chest next week for $350. Pay me next week.” That’s what futures is.

How does it measure up, Islamically?

  • Selling what you don’t have possession of: Futures is generally a debt-inducing contract; the buyer sells you something they don’t have (but intend to buy at a cheap price). Sometimes, the commodity being sold doesn’t exist, and it may exist later on (at the date of the contract). In either case, the buyer is selling something that they don’t own! And that’s not permissible in Islam!
  • Debt for debt: Even if you own the commodity in the exchange that you’re selling (or buying) in a futures contract, it becomes a debt for a debt. You owe some money, and the seller owes some commodity. Again, not permissible.

So how can we make a futures contract halal? How can we tackle these issues?

  1. Buy and sell what exists. Make sure that, whatever the commodity is, be it stocks, or currency, it already exists in the world.
  2. Make it a promise, not a transaction. If you consider the deal a legally binding transaction, then it’s haram; but if it’s just a promise to buy at a later date (spiritually, but not legally, binding) then it becomes permissible. Practically, this means you CAN (but shouldn’t) back out of the deal when the time comes; and that you cannot take to court, in an Islamic system, the other party.
  3. Pay a deposit. Another solution to the debt-for-debt transaction is to pay a down-payment up-front; at least then, something has exchanged hands, and it’s not a debt-for-debt transaction anymore, but a proper, legally-binding transaction.
  4. No reselling. If you bought a futures contract and paid money, that contract entitles you to some commodity. Can you resell that commodity? No! Because you don’t physically have possession of it!

However, why are futures haram? One of the goals of shari’ah is to prevent thulm; and with futures, the wisdom of prohibition may be around not being able to provide what you sell — if you promise someone you’ll sell them something, and you can’t deliver, then what?

There’s a relevant hadith about a man who came to rasulullah (salallahu alayhi wa sallam) and said: “People ask me to sell them things I don’t have. Should I say yes, and go buy them?” and the messenger of Allah (salallahu alayhi wa sallam) said, “No, go buy them first, and then sell them.”

On the other hand, he (salallahu alayhi wa sallam) permitted farmers to sell their future crops before they were planted! You might say, “What the?!”

Look again at the wisdom of prohibition — not being able to provide what you don’t have. In the case of farmers, they are capable of providing it (albeit at a somewhat uncertain quality or quantity), and the money would help them now to generate crops — so they are exempted from the prohibition of futures.

And from this hadith, scholars derive a rule: if you are a primary producer or manufacturer of an item, you can sell it before it’s manufactured or produced. So the issue of house builders selling houses based on blueprints? It would be permissible insha’Allah.

But you can’t resell that!–Because you’re not the primary manufacturer!

And that’s futures contracts, in a nutshell. To summarize:

  1. Don’t deal in futures. It’s a fickle thing. Especially if you don’t understand the fiqh.
  2. Consult your local (knowledgeable) imam. They can tell you what to do.
  3. You can initiate futures contracts, provided the commodity exists and the seller possesses it.
  4. Give or pay a down payment, to avoid a debt-for-debt transaction.

Wallahu ta’ala ‘alam.

References

Shaykh Tawfique Chaudhry. The Real Deal. University of Toronto, Toronto. 08 Jan. 2009.

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The Certainty Principle

Edit: It’s makrooh, NOT haram, to sell something when you’re 50%+ sure it’ll be used for haram.

green-grapes

In Islamic finance, permissibility to sell something is tempered by the certainty principle–that is, how certain are you that this thing you’re selling will be used properly?

Say you sell grapes in a specialty grape-only store. A few types of customers come in:

  • A young woman comes in with her little boy and buys some grapes; you see her feeding him the grapes as soon as the cashier scans it through. Is it permissible to sell her grapes? Absolutely. It’s halal.
  • A young executive comes in; you see “Wines R Us” embroidered on his jacket. He asks you, the owner, about the quality of different grapes you sell, and mentions that he needs sour grapes for a certain type of wine. Is it permissible to sell him the grapes? Absolutely not. It’s haram. Because it becomes the means of haram.
  • A man comes in looking to buy grapes. You think that he might be making wine with it. But you’re not sure. What’s the ruling? It depends on how certain you are.

The ruling is that if you are 50% certain (or more) that something will be used for haram, it’s makrooh (maybe super-duper-uber makrooh) to sell it. Once you reach 100% certainty that it will be used for haram, it becomes haram to sell it.

What’s the proof of this principle? The hadith in Bukhari. A man came and asked the Prophet (صلى الله عليه و سلم), what do I do if I think I broke my wudoo? The Prophet (صلى الله عليه و سلم) said, if you hear it or smell it, THEN act on it.

Is it possible you broke it, but without noise or maybe without smell? Yes! There’s a possibility! But are you required to act on that possibility? No! Because it’s less than 50%–until the signs of certainty appear to you!

Another proof is ahaad hadith (a hadith where, in the chain, at some point, there’s only one person narrating the hadith). Is it possible, in this case, that the one person made a mistake in the hadith? Yes. How possible is it–given the strict requirement of Saheeh Bukhari and the science of hadith? Very, very small; less than 1%. It’s not 100% certain that the hadith is correct–but you are obliged to act as if it is certain.

So think about it. This applies to everything from selling iPods (where the majority are used for haram–music) to grapes (which may be ok or maybe not) to umbrellas.

Wallahu ta’ala ‘alam.

References

Shaykh Tawfique Chaudhry. The Real Deal. University of Toronto, Toronto. 08 Jan. 2009.

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Debt for Debt Transactions

mangos

One of the ways in which Islamic finance differs greatly from conventional law is in the debt-for-debt transaction. In Islamic finance, a debt-for-debt transaction is not allowed.

And this is one of the big factors in the current economic depression–people selling a debt for a debt for a debt for … one report says that America is built on debt seven times over! The guy at the bottom finally asks for his commodity, and all the people in the chain realize there was nothing there at all; it’s all debt on debt.

So let’s examine what a debt-for-debt transaction means.

Transaction means, an exchange of money/commodities takes place between a buyer and seller. The important point here is: no exchange means no transaction took place.

Debt for debt means you cannot sell something tomorrow for some money tomorrow. For example, you go to a guy selling mangoes. You say “I’ll buy 3 mangoes tomorrow for $20, which I’ll pay you tomorrow.” THAT’S debt-for-debt.

Or, in Medinah university, students leaving their last year liquidate their belongings. So a student A (who’s graduating) might want to sell his car to student B. Their conversation might go:


Student A: So you like the car? It's $10,000.
Student B: Yeah, it looks good. I'll take it.
Student A: Ok. I'm leaving in 7 days, so one of my conditions is that I can use the car until I leave.
Student B: Sure, no problem.
(They shake hands)

WHOA! What just happened there?

  • Student A owes a car to student B
  • Student B owes $10,000 to student A

That’s debt-for-debt! That transaction is not permissible!

As you can tell, debt-for-debt appears A LOT in our every-day interaction. How can we make these transactions permissible? Recall the first three fundamental principles of Islamic finance:

  1. All transactions are halal until proven otherwise. In this case, we know it’s otherwise already.
  2. Do our best to make the transaction permissible before declaring it impermissible. Change the transaction to make it permissible (not through loopholes, but using legitimate means).
  3. When all else fails, the transaction is considered impermissible. Contrary to what most Muslims believe, haram is NOT the default ruling on financial transactions.

Given this understanding, there are a few things you can do to make this type of transaction permissible:

  1. Consider it a promise, not a contract. A promise means, a morally/spiritually/ethically/islamically sound promise to buy; it is NOT a contract–so you cannot take the person to the qadi (judge) or the courts. Islamically, you should fulfill your promise; but it’s not the same as a legal contract. You promise to buy the mangoes tomorrow, and you come back tomorrow and do so. (One difference from a contract is: he might have already sold his mangoes tomorrow. Or you might have something come up and be unavailable; legally, nothing has taken place.)
  2. Take a down payment. As the seller, ask for a non-refundable down payment; or as the buyer, offer it. Once done, commodities/exchange has taken place–a transaction has taken place. Thus, it’s not debt-for-debt anymore. So offer up a $5 deposit on that box of mangoes!
  3. Buy from someone else. Especially living in non-Muslim lands, if you’re the buyer and you can’t get what you want from one seller, buy it from someone else. Don’t fall into debt-for-debt.

Wallahu ta’ala ‘alam.

References

Shaykh Tawfique Chaudhry. The Real Deal. University of Toronto, Toronto. 08 Jan. 2009.

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Specific vs. Non-Specific Commodities

Several apples in a basket

In Islamic Finance, the shari’ah differentiates between two types of commodities (this is just one differentiation): specific, and non-specific.

Specific: “I’ll sell you this Saheeh Bukhari printed in 2004 by Dar-us-Salaam that I’m holding in my hand.”
Non-Specific: “I’ll sell you a copy of Saheeh Bukhari printed in 2004 by Dar-us-Salam.”

So if you own some large amount of inventory, or you sell in volume, or you have a bookstore, etc. you are probably selling non-specific items. Like those apples above. If you’re using Craig’s List, or eBay, you’re likely selling specific items (unless you’re bulk-selling).

Why does it matter? Because specificity determines what to do in case a defect is found.

  • With a specific commodity, the seller must refund the value in case a defect is found. You cannot offer an alternative product. No exchange, just refund.
  • With a non-specific commodity, the seller may offer a refund or exchange. And if the seller offers an exchange, the buyer cannot force them to return money.

Why does this matter? Because you need to implement shari’ah as much as possible in your lives. If you’re a buyer, and you’re returning something non-specific, and the vendor doesn’t offer a refund, only exchange, don’t force them to return money. That would be thulm.

Or if you’re a seller, and you’re selling specific items, make it clear that you issue refunds only, not exchanges. Or if you’re selling non-specific items, make it clear that you issue refunds and offer exchanges.

Wallahu ta’ala ‘alam.

References

Shaykh Tawfique Chaudhry. The Real Deal. University of Toronto, Toronto. 08 Jan. 2009.

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