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:
- All transactions are halal until proven otherwise. In this case, we know it’s otherwise already.
- 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).
- 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:
- 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.)
- 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!
- 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.
Shaykh Tawfique Chaudhry. The Real Deal. University of Toronto, Toronto. 08 Jan. 2009.