REVIEW OF FATWAS ISSUED DURING ALBARAKA BANKING GROUP

SYMPOSIUMS

(THE SECOND PART)

By Prof. Dr. Ali Muhyi al-ddin Algari Dagi, lecturer at the Kulliyyah of Shariah in Qatar

University, international prize winner, participating expert in various fiqh councils,

member of the European Council for Fatwa and Research and the Deputy Chairman

of the management board for communication and cultural club at Islam Online.

In the name of Allah, the most Gracious, the most Merciful. Praise is to Allah. May

blessings and greetings be on the Holy Prophet s.a.w, which was sent as a mercy to

the universe, his pure relatives, his noble Companions, and anyone who follows

them with righteous deeds.

It is worth noting that the efforts of the Research and Development Division of the

Albaraka Banking Group in organizing economic symposiums in the month of

Ramadhan is unprecedented.

As at now, the number of symposiums organized so far has reached 29. In addition

to that, there are also research and discussion circles, discussion of issues, and

publication of economic books, academic research, and journal.

It is compulsory on the other Islamic financial institutions to emulate this practice,

because with the scale of their projects, the amount of their assets and the

extensiveness of their financial instruments, more research needs to be conducted.

The Islamic financial institutions must also develop financial instruments and

products, so that the new products can match the growth of the industry. This is

because without suitable products, problems such as defects may occur. May Allah

protect us against such things.

On several occasions, I have approached those concerned to channel a percentage

of their profits to research centres, so that the said centres are able to conduct

comprehensive research that cover all aspects of Islamic banking, Islamic financial

engineering, and the development of products, financial instruments and relevant

tools.

The research should cover all aspects of fiqh, economics, maqasid shari’ah and

credit. The economic symposiums organized by the Albaraka Banking Group are

playing a good role in resolving deep rooted issues relating to Islamic financial

institutions, provide sizeable services for them, useful alternatives, useful products,

simplified fatwas, except that some of them were based on juristic rukhsah and the

removal of difficulty, in consonance with Islamic fiqh and its principles.

At that time, those fatwas were suitable, as the Islamic financial institutions had just

commenced their operations, coupled with limited resources and assets, limited

numbers (no critical mass) and preparation, lack of supportive institutions, non-

recognition by the regulatory authorities and so on.

However, with the following developments, it is now time for the Islamic banks to be

ruled by strict legal implementations in place of rukhsah, ruled with fatwas that have

continuous enforcement and not ones with temporary or based on the stages/phases

of the subject matter of the fatwa:

1. Widespread provision of Islamic banking products and services;

2. Increasing number of Islamic financial institutions;

3. Increasing amount of assets and deposits;

4. Support by many international institutions;

5. Recognition of central banks, e.g. supervision of Islamic banks, in accordance

with specific standards and guidelines;

6. Enactment of special laws for Islamic banks;

7. Introduction of Islamic financial products that can serve the needs of

governments, organizations and individuals; and

8. Islamic banking has expanded globally.

It is also timely for Islamic financial institutions to consider the maqasid shari’ah in

the prohibition of riba and consider the requirements of being a vicegerent, which is

to develop the land (with what pleases Allah). The fatwa (regarding Islamic finance)

should now look beyond mere validity in the Shari’ah and look towards the end result

and the welfare of the ummah.

Due to this, the Albaraka Banking Group has specified part of the 29th symposium to

be on the review of some fatwas, as a response to those standard visions

mentioned, though the review will be completed next year, insha Allah.

Though, as we are confirming those driving factors and guiding principles that are

embedded in the invitation to carry out this research from the honourable head of the

Albaraka Banking Group, Sheikh Salih Kamil, we also value this situation and honour

it, in consideration that it is a sense of fulfilling the greatest responsibility, with regard

to these fatwas and interpretation of the fatwas, on a gradual basis.

This situation is also a gradual movement, alongside the development that leads to

moving forward in the world of ever changing circumstances; if not, then, it will be

lagging behind and suffer backwardness. The following saying of Allah applies:

Quran

74:37

“To any of you that chooses to press forward, or to follow behind”.

In this verse, Allah did not say „or he stop‟ because to stop is inclusive of lagging

behind, while the world is progressing. Besides, all the existing living things did not

know about stay-still in their inward like outward. This is how the activity of human

being ought to be, so that he can actualize the best, which is the progress of

civilization, continuation and moving forward. Allah said in the Qur‟an, surah 67,

verse 2, “that He may try which of you is best in deed”.

Verily, review of fatwas by the same mufti or by others who came after him is a

tradition in this ummah. For example, the four rightly-guided Caliphs reviewed the

fatwas of their predecessors, except if it was within the domain of ijma’ (consensus).

There are many fatwas issued in the era of Umar, or Uthman or Ali that differ from

the fatwas issued by their predecessors. A similar approach was also used by the

tabi’in (the followers of the Companions) and their successors. In addition, even

some of those mujtahidun used to issue fatwa which is contrary to his previous

fatwa. In such a situation, he will say that the former fatwa remains as it is, while the

status of the latter is maintained. This is Imam Shafie, who has two madzhab: the

former in Iraq and Hijaz while the latter in Egypt. Similar situations occurred with

many other mujtahidun, both the classical ones and contemporary ones. This is

prompted by the changing circumstances, conditions, environments and emergence

of new proofs or misappropriations of the previous fatwa or due to taking fiqh

maqasidi into consideration; taking the end result and sad al-zariah into

consideration.

Accordingly, in my view, the review of these fatwas is a splendid effort and brings

great benefits the Albaraka Banking Group and the Islamic financial system. It is

confirmed through experience that fiqh of the original rulings and azimah

(implementation of rulings in their strict legal sense) are the factors that lift up the

ummah towards civilization and development, while fiqh of rukhsah is peculiar to

exemptions, with the aim of removing difficulties, while not moving the ummah

forward or accelerating it towards strength and development.

As we are delighted with this review, we also feel great to contribute to it (the

review), with this humble research. We ask Allah the Exalted in Might to make it

solely for His sake and cover it with the cloth of acceptance and sincerity. He (Allah)

is enough for me. He is my protector, what a Protector He is and what a Supporter

He is!

Introduction to maqasid shari’ah in the Islamic financial business

This part is an introduction to maqasid shari’ah in the Islamic financial business,

understanding the end result and blocking the means that lead to impermissibles

(haram) and the prohibition of tricks and differences between rukhsah made by the

Shari’ah and rukhsah as a result of juristic ijtihad.

This summary is as follows:

The study of maqasid shari’ah has almost become a basic element in contemporary

studies. This is due to its great importance in understanding the Shari’ah texts. For

this reason, it becomes necessary for us to treat something on maqasid shari’ah in

economics in general and in the Islamic financial system in particular.

If we observe the verses of the Holy Quran and the authentic Hadith of the Prophet

s.a.w., we arrive at a conclusion that the maqasid shari’ah in economics and its

system, from Islamic point of view, are the following:

1. Using the soil for benefit and for settlement, with all available means. This is

what the Holy Quran said, “It is He Who hath produced you from the earth and

settled you therein”....1 Allah the Exalted in might has enjoined in this verse

that the soil be utilized for any favorable kind of use.  It is because of this that

Allah has enjoined us to move around the earth, in searching of necessities.

This enjoinment is made in the same manner He enjoined prayers,

pilgrimage, fasting and others. Allah says, “And when the prayer is finished,

then may ye disperse through the land, and seek of the Bounty of Allah. And

celebrate the Praises of Allah often (and without stint): that ye may prosper”.2

The enjoinment to get dispersed on the land, to utilize it or benefit from its

bounties through trading, manufacturing and agriculture, in order to actualize

the means of livelihood, is made in the same manner it is enjoined to go for

prayers; to do the remembrance of Allah. This makes it apparent that sourcing

for the needs of life is also considered as worshiping Allah. It is of course, a

different types of worshipping. Part of it concerns the reform of human beings,

so that they will be suitable as vicegerents; performing their duties on earth.

The second part is the development of the land, namely for human settlement.

The two parts however, are in agreement because they are both enjoined by

Allah. Besides that, there are many verses in the Holy Quran that mentions

that Allah subjugated this world for humans, including the heavens, the earth

and everything between them; the suns, the moons, the stars, the seas, the

mountains, wind, clouds, rain, the mineral resources in the earth, raw

materials, and bounties and blesses. Islamic economics takes various

benefits from this world, in order achieve virtue, mercy and fortune, in favour

1
 Surat Hud verse 61

2
 Surat al-jumah verse 10

of everyone. It then means that in the course of achieving this, brilliant plans

need be made to achieve the intended goal and this divine objective;

2. Human development must encompass the knowledge and social aspects,

healthcare and human resources. These are done by spending valuable

resources to achieve real developments for humans, who have been

entrusted with the development of the land; the type of development is one

that encompasses all those components, as well as his (mankind) spirit, soul,

intellect, reasoning, imagination, mental faculties, body, material and

immaterial build-up, so that he becomes honoured. Doing this requires the

provision of a suitable atmosphere, in order to actualize his human rights, as

well as freedom, so that he can invent and innovate. This is so because

human beings that is less honoured in his humanity and without a protected

personality is unstable and not firm. This is what the Holy Quran pointed at, as

follows, “Allah loveth not that evil should be noised abroad in public speech,

except where injustice hath been done...” in chapter 4, verse 148. This means

that someone who has been unjustly dealt with may be affected by the

injustice and consequently, he will louden evil speech. Due to this reason,

there will be no room to querying him on doing that. Besides, Allah the

Exalted in might has made it explicit that someone without freedom is not

capable of inventing and innovating, as well as executing affairs in a proper

manner. In this regard, Allah said, “Allah sets forth the Parable of two men:

one a slave under the dominion of another; He has no power of any sort; and

(the other) a man on whom We have bestowed goodly favours from

Ourselves, and he spends thereof (freely), privately and publicly: are the two

equal? (By no means ;) praise be to Allah. But most of them understand not.

“Allah sets forth (another) Parable of two men: one of them dumb, with no

power of any sort; a wearisome burden is he to his master; whichever way be

directs him, he brings no good: is such a man equal with one who commands

Justice, and is on a Straight Way”? The United Nations confirmed a report, i.e.

for more than one quarter of a century, despite the hundreds of millions spent

on the developing countries, the countries did not achieve significant

achievements because of poor human development, lack of human rights and

low quality education. The report emphasized that illiteracy, injustice,

dictatorship, lack of civil liberty and negligence of human rights in those

countries are the major impediments for economic development. It is the

cause for their lagging behind. Therefore, it is incumbent on the Islamic

economic and financial institutions to focus on investing in human

development, through sponsoring educational projects and its development,

social development and health development;

3. Actualization of economic development through the assessment of anything

that will assist in developing sources of incomes for the Muslim ummah (both

nations and the citizens). This is why the Qur‟an repeatedly enjoined the

actualization of profit, which Allah referred to as taking utilization by virtue of

Allah. Allah says in surah Al-jumaat, verse 10, “And when the Prayer is

finished, then may ye disperse through the land, and seek of the Bounty of

Allah...” The mufassirun say that the meaning of the verse is that when we

dispersed on the land for trading and transactions, we should seek profits.

This was repeatedly mentioned in the Holy Qur‟an, using different terms. Allah

also permits using certain places of ibadah, like pilgrimage, for the

achievement of profits. Allah said, “It is no crime in you if ye seek of the

bounty of your Lord (during pilgrimage). Then when ye pour down from

(Mount) Arafat, celebrate the praises of Allah...” What attracts attention in

these verses is that after Allah has commanded that people should disperse

through the land for transactions after finishing the jumaat prayer, He then

continued with the instruction to celebrate His remembrance. It is similar for

hajj. This means that there should be counterbalance between seeking for

sustenance, profits and the remembrance of Allah, which is not supposed to

be neglected in any situation. It is not the aim of Islamic economics to acquire

wealth at all costs, through any means. This is why Allah prohibits riba. He

prohibits riba, even if both parties agree to give and take riba. He cursed the

taker of riba, as well as the giver, who does not appear to be unjust. However,

the fact is that he is unjust to the rights of Allah and the rights of the society.

This is why Allah called it unjust. Allah said, “But if ye turn back, ye shall have

your capital sums: Deal not unjustly, and ye shall not be dealt with unjustly”.

This is because cash by itself does not produce cash. There is no addition

that accrues to it for its circulation through buying and selling. It does not lead

to any role in economics. Rather, it will increase inflation and unemployment,

contrary to running transactions through commodities and services, which will

result to the operations of the market, as well as actualization of development

and getting rid of inflation and unemployment. In addition to the unjust nature

of riba, in a riba-based contract, the lender takes advantage of the borrower.

The lender is guaranteed of his capital and addition to the capital, without

bearing any responsibility and without any work, whereas the borrower is the

one bearing all of these or he spent it for his needs;

4. Alleviation of poverty and hunger, let alone, actualization of well being, as well

as luxury, or what the jurists called actualization minimum standards of living

for individuals. Similarly, group and the generality of the ummah, as

expressed by Imam Shafie in his discussion on the quantity of zakat that

should be given to the poor or the needy. This is because the Qur‟anic verses

and the Prophetic traditions enjoin the investment in agriculture, trade,

manufacturing and the actualization of livelihood and leaving behind a

successor, in addition to the compulsion of giving the rights of the poor and

the needy, as well as achieving the fortunes of this world and the hereafter.

Doing these will warrant setting a strategic plan that will cover investments,

economic projects, social developments (aside from zakah institutions),

sadaqah (charity), cost of living, atonements and waqf (endowment fund). In

line with the juristic principles of starting with the areas of priorities and

counterbalancing, dharuriyyat (necessity) should come first, then followed by

hajiyyat (needs) for individuals, groups, and the ummah, and then followed by

the permissible muhasinnat (complementary). With regard to an individual,

this requires drawing an investment plan that takes men‟s capabilities into

consideration, in order to achieve the limit of sufficient means for living costs,

then, followed by the limits of adequacy of living costs; and then, followed by

the maximum level of adequacy for living costs. Social charitable plans go in

pari passu with investment plans. This is because it is not possible to achieve

the said goal with only an investment plan, or with zakah, sadaqah (charity)

and waqf (endowment fund) only, but with an encompassing plan, with each

tool having its own role in all concerned areas. What we are concerned with in

this approach is for the Islamic financial Institutions to play their aspired roles,

to get rid of poverty, backwardness, or make active contribution in reducing

their deadly impact, as well as achieving the fortunes of this world and the

hereafter;

5. Actualization of self sufficiency (independence) and contentment, particularly

in the areas of dharuriyyat and hajiyyat, inclusive of manufacturing, agriculture

and trading. Doing these will make the ummah independent in managing its

affairs, because anyone who relies on another in his strength, manufacturing,

dharuriyyat (the five necessities) and hajiyyat (basic needs) can never be fully

independent in his decisions. In view of the above, it is incumbent on the

Islamic financial institutions to work towards achieving this great objective,

through comprehensive studies. At the very least, they should play an

important role;

6. Objectives exclusively related to Islamic contracts should be actualized based

on assets and landed properties, not on credit and debts. This is because

majority of the Islamic economic contracts rely on the above and also on

actual musharakah (partnership) and investment-based projects (small,

medium and big). Due to this, it is incumbent on the Islamic financial

institutions to observe the objectives of the Shari’ah in every contract. For

example, the objective of the Shari’ah in a sale is to actualize exchange of a

valuable property with another valuable property, with the consent of both

parties. This must be done in a Shari’ah-compliant manner, without riba,

uncertainty, whereas the objective of an ijarah contract is achieved by

exchanging Shari’ah permissible usufructs with a certain payment;

7. Building contracts, financial instruments, tools and sukuk on realities far from

tricks, way-outs that are far from the Shari’ah, its spirit, and its actuality,

standing on juristic views on commercial paper without plunging into the

global stock markets. For this reason, it is compulsory to take into

consideration the jurisprudential principles of the resultants of issues

(consequences of any matter), saddu al-dhariah (blocking the means) that

lead to riba and other prohibited things;

8. Prohibition of tricks: There is no religion or a particular way of life adopted

elsewhere that rivals Islam in its declaration of war against tricks, plot, fraud,

deceit and ways that are not straight forward. Islam established its policies on

the basis of clarity, plainness, transparency, and it provides three means for

the achievement of this -

a. Warning given by Allah to punish in this world and hereafter, those that

indulge in tricks, plots, and are deceptive. There are tenths of verses in the

Holy Qur‟an and Hadith of the Prophet s.a.w. that prohibit tricks, plot, and

deceit, and serve as proofs that they deserve severe punishment in this

world and the hereafter, and that Allah curses them;

b. Expedition of a divine deterrent punishment for the treacherous people,

more than other sins. In this regard, Allah revealed that He had punished

the Jews that used a trick, so that they can catch fish on Saturdays. Allah

transformed them into monkeys and pigs. He did not punish them with this

type of punishment for other sins;

c. Worldly deterrent punishments, based on different types of tazir

(reprimand). For this reason, all tricks used in making that which is haram

lawful or making that which is lawful to be haram and consequently, is not

in agreement with the maqasid shari’ah, are strictly prohibited.

Subsequently, it is incumbent on the Islamic financial institutions to desist

from them and work harder towards achieving maqasid shari’ah and its

ends. This is to keep away from Shari’ah-compliant way outs that will

actualize permissible Shari’ah alternatives, or lift difficulty, but with the

condition that such tricks will remain in the spectrum of exemptions, taken

with gradualism and should not transform to a general fundamental or

affirmative principle or a continuous application.

Difference between Shari’ah rukhsah and the rukhsah prescribed by the

jurists, their way-outs or what is termed as Shari’ah-compliant tricks

The difference between Shari’ah rukhsah and permissible juristic tricks is that

shari’ah rukhsah is from a divine text, peculiar to circumstances of dharurah and

lifting of difficulty; for example, permitting iftar in the month of Ramadan (breaking of

fast) for a traveller and sick person and permitting one forced by hunger to eat a

dead animal that was not slaughtered (and the likes).

These circumstances are not part of tricks and way-outs; rather, they are means of

lifting adversity and difficulty. However, juristic tricks or way-outs are for normal

circumstances and its objective is to achieve a certain aim or goal that could not be

reached through a normal form, based on normal means. According to Ibn al-

qayyim, these way-outs or tricks are divided into two types, i.e. permissibles and

impermissibles.

Buying and selling by an agent, and then selling to himself on cash basis

Two fatwas were issued. They are mentioned in chronological order. The first fatwa

is fatwa no. (6/7), i.e. about murabahah mudawarrah under one roof. The fatwa

reads, as follows:

Question:

From the fiqh perspective, what is the view with regard to murabahah mudawarrah

under one roof, whereby a client is appointed as an agent to purchase something for

the bank? He will then sell the product to himself, at a specified profit margin that is

mutually agreed upon (within a profit margin range agreed by both parties).

Fatwa:

This is a special form of murabahah. In most cases, it is for low transactional value

customers and retailers, whose demand for partitioned goods on a regular basis

makes it difficult for them to continuously return to the bank to process each and

every transaction, and using separate contracts repeatedly.

The authority of the lawfulness of this type of murabahah is the ruling that permits

the bank to appoint their client as an agent to purchase for them, on the grounds that

he (the agent) will sell the item purchased for the bank to himself, at a profit margin

that is mutually pre-agreed upon. This is the opinion of the majority.

The second fatwa, i.e. fatwa no. 1/15, is on the arrangement, where the agent

purchases a product that will then be sold to him.

Question:

Is the following arrangement permissible?

A particular authority is appointed as an agent, to purchase a particular commodity,

at a certain price and to be paid by the principal purchaser. Then, the agent will be

appointed as an agent to sell the commodity, either to himself or to a third party (the

authority referred to is normally one that specializes in transacting the goods that are

specified by the principal purchaser).

Fatwa:

It is permitted to appoint an agent to purchase and sell, if the sale is concluded with

a third party. On the other hand, if the agent is selling to himself, then the sale is

valid, provided that the selling price is determined by the principal.

Observations and guidelines:

The previous fatwa on this topic, i.e. if an agent purchased and sold to himself, did

not prescribe enough guidelines; rather, it went straight to a juristic principle, which

its authenticity cannot be denied.

However, it undermined the risk of misuse and exploitation by the traders, i.e.

transforming an environment based on real assets and commodities to an

environment premised on paper-based arrangements, transform reality to forms,

transform from development to serving natural resources markets and international

commodities, and entails a circumstance, whereby the traders refrain from bearing

reasonable risks, through combined contracts in a special arrangement, which

apparently end up in a result that translates the transaction to riba, which is haram.

All these make it necessary to put in place specific guidelines that will distance this

contract from mere form, prevent exploitation (of the ruling that permit it) and curb

means that can lead to riba, which the Shari’ah has prohibited.

There was absolutism in fatwa (6/7), whereby it permits, by virtue of the ruling of the

majority, that it is permissible for the bank to appoint its client as an agent, on the

basis that he (the agent) will purchase and sell to himself what he had purchased, at

a profit margin predetermined mutually by him and the bank (principal). After the

appointment is concluded, the agent receives money from the bank and buys the

identified product on behalf of the bank. Subsequently, he sells it to himself. With

this, the transaction is completed and the client (who has been acting as an agent of

the bank) becomes liable for the price.

The second fatwa is a confirmation of the first one. It clearly stipulated that it is the

principal who will determine the price (if he is selling for himself). However, the fatwa

did not give attention to guidelines that are specific to the contract of agency, method

of application and execution. Due to this, we will try to shed light on wakalah

(agency) and the methods of applying it, in order to arrive at an arrangement to

appoint one as an agent to purchase and sell to himself, while adhering to the

required guidelines.

Definition of wakalah (agency)

Literal meaning of wakalah (agency) - With fathi (vowel on top of alphabet) and kasri

(vowel under the alphabet), it has various meanings, e.g. protection and delegation

of authority.

The derivatives of wakalah, as mentioned above, appeared in several places in the

Holy Qur‟an and the noble Prophetic traditions. Al-asfahani said, “Conferring an

agency means you rely on another person, you make him your representative, wakil

is on the Arabic morphology, measuring scale of fa’ il, meaning fau’l. Allah says,

“And enough is Allah as a disposer of affairs”, “that is you should feel contented with

Him as the one capable of taking care of your affairs”. Sometimes, agency is taken

to mean guarantor, though guarantor is more general.

The juristic technical meaning of wakalah (agency) - It has been defined by various

definitions, but we choose the following; thus, “A contract, whereby someone

entrusts on another person a task that is permitted to be done on behalf of another,

which he (the one entrusting) was supposed to execute by himself, so that the other

person may perform it in his lifetime”.

The difference between wakalah and relevant terminologies

According to some scholars, wakalah is different from representation, because

representation is more general than wakalah, whereas some scholars see both as

synonymous. Similarly, wakalah is different from wilayah (administrative power)

which in Shari’ah, means legal representation or mandatory representation

(conferred on someone) to be capable of executing a decision, made in respect of

another person, with or without his willingness, whereas wakalah is a representation

made on mutual consent. In the same vein, it (wakalah) is also different from the

appointment of an executor (of will), which is the conferment of the right to execute

the will after death, whereas wakalah is a conferment of representation, exclusively

limited to one‟s lifetime.

The Shari’ah status of wakalah

The jurists unanimously agreed on the permissibility of wakalah, based on proofs

from the Holy Qur‟an and authentic Hadith.

The basic elements of wakalah

Majority of the jurists are of the view that wakalah has three basic elements, as

follows -

1. The two parties to the contract of agency (the principal and the agent);

2. The subject matter of the agency (the object of agency); and

3. The terms of the agency (offer and acceptance).

However, according to the Hanafi School of Law, the only basic element in an

agency contract is the terms (offer and acceptance). It is worth noting here that the

sighah, i.e. terms of the contract (offer and acceptance) in a wakalah contract is not

a condition that should be concluded on the spot; rather, it is valid to conclude the

agreement, while its execution is made pending when a condition is fulfilled. This is

the view of the Hanafi School and the view preferred by the Hanbali School, as

opposed to the Shafie School that also held this view as valid, but not as the

preferred view of the school.

Similarly, it is permitted to complete an agency contract, while its execution is made

pending the maturity of a future period. For example, “I have appointed you as my

agent to sell my house in the month of Ramadhan”. This is the view of the majority,

namely the Hanafis and Hanbalis, without stipulating any condition. Shafies also hold

this view, but with the condition that the contract of agency was concluded on the

spot, while the right to act is made pending a future period.

The nature of a wakalah contract in Islamic fiqh

1. In the view of the jurists, an agency contract is a contract of mutual consent. It

is in need of a specific form. This is why its validity is not confined to writing,

i.e. it is valid to conclude the contract verbally, or by writing and the likes;

2. The original presumption of a contract of agency is that it should be gratuitous

(free of charge). On this ground, if both parties mutually agreed on payment,

the payment then becomes obligatory. If there was an agreement to that

effect, then the agent is not entitled to any payment, according to the view of

the majority. However, the later Hanafi followers ruled this as an exemption to

the ruling of the majority, because there are professionals who are dependent

on payment in the discharge of their profession. For example, a broker who

works and are paid the normal price. Article (1467) of majjalatu ahakam al-

idliyyah clearly mentions that, “If a contract of agency is made on the

agreement to pay the agent, and the agent so discharged the task upon which

he had been conferred to by the agency, he shall then deserve to receive the

payment. However, if there was no agreement to that effect and the agent had

not been known to be one of those who perform such a task based on

payment, he shall be deemed, in such an agency, as one who rendered a

gratuitous service (free of charge), and shall not be entitled to demand for

payment”. On the occasion where there is effect to payment consideration, it

is compulsory that the amount of such payment be known with certainty, and

there shall be no such condition stipulating that the payment is to be taken or

deducted from the subject matter of the agency. This is the view of a group of

jurists, including the Shafie madzhab. Contrary to this, it shall render such a

contract as invalid and the agent shall get a normal reward, as deemed

suitable to the service which he has rendered. In addition, it is a condition of a

valid agency contract that the quantity of the task be made known (not

vague); and

3. The general principle is that in its primary status, an agency contract is not a

binding contract. However, the Hanafi and the Maliki Schools gave an

exemption to this general principle, as follows - If the agency is connected

with another person‟s right, it becomes binding. The Hanafi School cited an

example for this, i.e. agent in judicial suit, with the permission of the principal

litigant. Thus, it is neither permitted for the principal to remove him, nor is it

permitted for the agent to unilaterally resign, if the agency is connected with

another person‟s rights, e.g. if a defendant appoints him as an agent (a

council) in his litigation.

The Shafie madzhab stipulated for the non-binding nature of wakalah, to be free of

any reward and that the contract must not have been made with the expressed term

of ijarah contract; contrary to this turns it into a binding contract.

Imam al-nawawi had elaborated, “What we (the Shafie School) mean by a non-

binding wakalah contract is that it is free from a reward (payment). However, if there

is a stipulated reward and the conditions of ijarah are found in it, it then becomes a

binding contract. If the contract was made with the express term of wakalah, it will

then be worked out; on whether what are to be considered in contracts are the words

or the meanings. This is also the most popular view of the Maliki School of Law.

Ibnu Shas had explained their views, “The third ruling of a wakalah contract is that it

is a non-binding contract to both parties” if it is not accompanied with a reward. This

is the implied meaning of Al-qadhi Abi Al-Hasan‟s statement, “That it is permissible

for an agent to unilaterally resign at any moment”. He (Ibnu Shas) observes, binding

in the statement of the later followers of the Maliki School in the context of agency is

premised on the binding nature of gift, even though the beneficiary has not taken

possession of it. If the wakalah contract is made for payment consideration in the

same manner of making an ijarah contract, it then becomes binding on both parties.

Therefore, it is compulsory then for the task to be known with certainty, as is

applicable in an ijarah contract. If the agency contract is made as a ja’alah, Shaikh

Abu Tahir reported three views, as follows -

1. It binds both parties;

2. It does not bind either of the parties; and

3. To be detailed as saying that, it binds the offeror (in this context, the offeror is

exclusively the originator of the contract) and does not bind the offeree.

The view I see as the prevailing one is that a wakalah contract in itself is not binding,

except when it is connected with the rights of another person, or with a reward and

contained the conditions of an ijarah contract. In that case, it then becomes binding

on both parties. Its rulings will be like the rulings of an ijarah contract, with respect to

the conditions of payment, the work performed, the manner of rescinding the

contract and the likes. This is because in contracts, what are to be considered are

the intents and the meanings, and not the words and structures.

Definition of an agency contract in civil law

Article 699 of the Egyptian Civil Law, Article 665 of the Syrian Civil Law, Article 699

of the Libyan Civil Law and Article 716 of the Qatari Civil Law defined a wakalah

contract and stated clearly that, “Wakalah is a contract in which by its virtue, an

agent undertakes to perform a legal work at the expense of the principal”. On the

other hand, the Iraqi Civil Law defined it as follows, “is a contract in which someone

makes another person to stand on his position to discharge a known permissible

work”. This definition is closest to the preceding one.

The nature of concluding an agency contract in civil law

1. As a general principle, an agency contract is a contract of mutual consent.

However, if the subject matter of the agency has a format, then the format

must be followed. This is the provision of majority of the civil laws. Due to this,

the following are contracts of mutual consent: wakalah (agency) contract in

sale and purchase, ijarah, lending, mediation, contract to construct or to

supply, safekeeping under the auspices of another, suretyship and the like.

On the other hand, giving something as a gift through a wakalah contract, in

respect of the charity maker, must take a written form for it to be deemed as

valid. This is similar to the same requirements of handing out the gift itself.

Also, in an official mortgage, it must be on an official document, as the same

requirement is applied to document the process of mortgage itself. Similarly,

the appointment of an agent in concluding a partnership contract must be

written, even if it is done on normal paper. Non-compliance to these

procedures render those agencies void;

2. That agency contract is a gratuitous contract, except when there is an

expressed or implied condition to the contrary. This is the expressed provision

of Article 729 of the Qatari Civil Law, as well as the entire Arab civil laws, as

they expressly provided that “Wakalah is a gratuitous contract if there is no

agreement to the contrary, or impliedly derived from the circumstances of the

agent”. Relevant to the above is that the original presumption of wakalah is

that it is without fee. If a fee is agreed upon, then the fee is subject to the

valuation of the judge. This is the provision of the civil laws, namely Article

709 of the Egyptian Civil Law, Article 675 of the Syrian Civil Law, Article 709

of the Libyan Civil Law, Article 729 of the Qatari Civil Law and Article 940 of

the Iraqi Civil Law;

3. In general, a wakalah contract is one of those contracts that do not bind the

parties involved. This is the expressed provision of the civil laws. Based on

this, it is permitted for the principal to terminate or put some restrictions to the

contract at any moment, even if there is a prior agreement disallowing that.

However, if the wakalah contract is being discharged on a pre-agreed fee, the

principal is then bound to compensate the agent for the loss incurred, as a

result of such termination or restriction of the terms of the contract in an

unsuitable time or without an acceptable excuse. This is mentioned in Article

715, 681, 715, 810 and 735 of the Egyptian, Syrian, Libyan, Iraqi and Qatari

civil laws respectively. Paragraph 2 of the Article, however, provided some

exemptions, i.e. an agency made for the benefit of the agent himself or for the

benefit of a third party, in which case, it is not permitted for the principal to

terminate or restrict the terms of the agency without the prior assent of the

beneficiary of the wakalah.

The civil law takes into consideration the general principle that permits either the

principal or the agent to terminate the agency. It does not permit making an

agreement to the contrary. This is the provision of the abovementioned articles.

However, the law exempted the abovementioned situation only. The law maintains

the provision of this article, i.e. even when a reward (charge/fee) is stipulated in the

agency contract, the wakalah remains unbinding and the intention of the parties

remains unrestricted.

On the other hand, where there is a predetermined reward and the principal

eventually removed the agent, the following observation applies: If the removal was

done due to an acceptable excuse and at a suitable time, then the principal is free

from any liability. However, if the removal was done without an acceptable excuse

and at an unsuitable time, the removal will still be deemed valid, albeit the agent will

have recourse to recover the loss incurred from the principal. Accordingly, the agent

will be entitled for the reward completely or partially, as deemed appropriate by the

presiding judge. Nevertheless, the agent will bear the cost of the trial because the

original presumption is that he is not entitled to any compensation for his removal.

In the same vein, Article 716, 682, 716, 947, 736 of the Egyptian, Syrian, Libyan,

Iraqi and Qatari civil laws respectively permit the agent (wakil) to unilaterally

withdraw from the agency at any moment, even if there was prior agreement to the

contrary. The agent can effect the withdrawal by informing the principal of the same.

However, if the agency was based on a predetermined reward, the agent is bound to

compensate the principal for losses incurred due to his withdrawal, which took place

at an unsuitable time or without an acceptable excuse.

Nevertheless, there is an exemption, i.e. in a situation where a third party is the

beneficiary of the agency. To this effect, paragraph two (2) of Article 716 and the like

provide that, “It is not permissible for an agent to withdraw from an agency, if the

agency was concluded for the benefit of a third party, except where there are strong

reasons, in which case, he should give prior notice of the intended withdrawal to the

third party and he must give him (third party) enough time to take the necessary

actions to protect his interests”.

Wakalah in civil and commercial contracts

Knowing whether a contract falls under civil contract or commercial contract is

important, so that one know which court will have jurisdiction over the contract. Due

to this reason, with regard to the principal, wakalah may either be a civil contract or a

commercial contract. This is determined by the nature of the legal disposal, which is

the subject matter of the wakalah contract. Thus, if a wakalah contract‟s purpose is

to carry out a commercial transaction while the principal is a trader and appoints a

person to be his agent in commercial transactions or in investments, such as

mudharabah, then it is a commercial agency contract. If it involves a civil issue, then

it is a civil agency contract.

As regard to the agent, if he is a trader and the agency was made to carry out

commercial transactions, then the agency contract is a contract of commercial

agency. In contrast, if he is not a trader, it is regarded as a civil agency contract,

even if it involves his efforts as a professional.

For example, in the case of the appointment of a broker to purchase a residential

house, the contract is regarded as a commercial agency contract (in respect of the

broker) and a civil agency contract (in respect of the principal).

On the other hand, the appointment of a lawyer to solicit and advocate for a

businessman in a commercial issue is regarded as a civil agency contract (in respect

of the lawyer) and a commercial agency contract (in respect of the businessman).

The role of wakalah as an alternative investment tool to mudharabah, musharakah

and murabahah

From the above discussions, it has become clear that wakalah is a process of

assigning or entrusting to another person a certain task, which by virtue of the law, is

permitted to be assigned to another person. We have also stated that the primary

presumption of this contract is that it is a gratuitous contract and that the provision of

a reward is an exception. Thus, it is not deserving, except by virtue of a prior

condition that stipulates that. However, in civil law, if there was a clause providing for

a reward, such a reward will be determined by the judge and that the agreement

between the parties is not enough to determine the amount of the reward.

In recent times, the use of wakalah in investment has gained popularity, specifically

in the contractual relationship between Islamic financial institutions and conventional

banks and other companies based on the conventional system. This type of

contractual relationship is normally a temporary one and is not intended to be

permanent. It is mainly a way to transform financing into receivables, in an obligation

of someone else, at the course of purchasing for oneself.

There are other forms that are applied in these institutions. Therefore, we shall

mention the commonly applied forms and their Shari’ah rulings, as well as the

maqasid Shari’ah, insha Allah.

The first form: Wakalah contracts, with the right to purchase for oneself.

The second form: Wakalah contracts that have a stipulation of undertaking to carry

out investment through murabahah, with the profit of the murabahah transactions

being not less than 7%, for example, or stipulating that it will not fall above two points

and the likes, and the consequences of breaching this condition.

We shall analytically study these two forms, in light of the juristic principles of

wakalah and its collateral contracts.

The first form: Contracts of wakalah (agency) with the right to purchase for oneself

This first form is mainly made up of the following components:

1. Arrangement of duties and rights between the principal bank and agent bank,

whereby they explain the procedures of the transaction, percentage of profit,

the required period for the transaction, guarantees and withdrawal

procedures;

2. The agent bank will purchase the international commodities and minerals

resources for the benefit of the principal bank on cash basis. The principal will

provide the details of the transaction, which the middle person (for example,

the broker in Britain) had sent to it to the agent bank. Due to the fact that both

parties are not willing to bear the risk of waiting, the approval of the principal

is effected through phone or email or fax. There are already papers prepared

for that;

3. Then, the agent will purchase the same mineral resources for itself and sell it

to itself on deferred payment murabahah, either directly, without returning to

the principal, on the premise that it has the right to buy for itself or it will revert

to the principal through modern communication, so that the principal will sell

to the agent on deferred payment, at the cost price plus profit margin, say 7%.

The period and the required details will also be stated;

4. Being that the bank that is acting as the agent and the purchaser is not in

need of commodities, it will sell them immediately to a third party in the stock

market, through the same broker. Sometimes, the bank which is acting as the

wakil (agent) will resell them to the same seller who had earlier sold the

commodities to it; and

5. These contracts (the wakil (agent) purchase on behalf of the principal on cash

payment > the wakil the buys the commodities for itself on deferred payment

> the wakil sells the commodities to another party) must be completed within a

short period, so that the negative consequences arising from waiting too long

and from the fluctuation of prices will not materialize. In order to know the

required sequence of periods between these contracts, it is a condition to

write the date (month and year) of each of the contracts, including its hour and

minutes.

Observations:

This form of contract should not be seen from the wakalah perspective only; rather, it

should be seen as a total arrangement, aiming at one single objective, that is the

wakil gets the money that he needs by adding to the profit (if you like, you can call it

interest). The transaction as a whole is not in line with the objectives of wakalah and

its implications, which are only limited to representation of the principal by the agent,

in carrying out an exercise on behalf of the principal. The agent may accept a

consideration for services rendered, though the original presumption is that he

should not take any remuneration, as mentioned above. With this, the role of the

wakil (agent) is fulfilled.

But in this case, the agent collaborates with the principal to carry out a group of

contract arrangements to secure a certain amount of financing. Here comes the

discussion on the prohibition of two transactions in one bargain. The Hadith came

with various wordings, viz; “the Prophet s.a.w prohibits safqatayni fi safqah (two

transactions in one bargain)”. This Hadith was reported as marfu’ (that is with chain

of reporters up till the Prophet s.a.w.) and mauquf by Ahmad bin Hanbal, Ibnu

Hibban, Al-baihaqi and others. The one reported as marfu’ is weak but it has

corroborative versions. The truth is that it is authentic as mauquf (it has a version

with an authentic chain of transmission, till Ibnu Mas‟ud) on Ibnu Mas‟ud.

There is another version of Hadith, i.e. “is not permitted to combine lending and

sale”, or “is it permitted to have two conditions in one sale”. Al-hakim reported it as

marfu‟ and authenticated the same. Al-dhabi had also corroborated Al-hakim in his

claim of the authenticity of this Hadith. Imam Al-tirmidhi also reported this Hadith and

ranked it as good and authentic. Ibnu Hibban also reported this tradition and

authenticated it. Ibnu Khuzaimah also reported this Hadith and authenticated it. Ibnu

Hazmi said, “This is authentic and we subscribe to it”. Ibnu Taimiyyah and Ibnu Al-

hajar also reported the authentication of Al-tirmidhi, Ibnu Khuzaimah and Al-hakim of

this Hadith. Al-bani also authenticated this Hadith in his authenticated version of a

book of Hadith called Sahih al-Jamie.

There is another version that says, “The Prophet s.a.w. prohibits bai’atayni fi bai’ah

(two transactions in one bargain). Al-tirmidhi reported this Hadith as marfu’, with his

chain of transmitters taking source from Abu Hurairah. He (Al-tirmidhi) said, “Good

and authentic”. Albani also authenticated it in his authenticated version of a book of

Hadith called Sahih al-Jamie. Ahmad and others also reported it with a different

chain of transmitters. In conclusion, the Hadith is authentic.

The scholars differed in their interpretation of these Hadiths, but the prevailing

interpretation is the one that says the meaning of safqatayni fi safqah (two

transactions in one bargain) is to conclude a contract revolving between deferred

payment with higher price and cash payment with lower price and separated without

certainty of which of the two bargains the contract was finalized. This is the

interpretation of the great Companion who reported the Hadith and many other

reporters and scholars. The effective cause is either riba (interest) or uncertainty or

ignorance.

The meaning of prohibition of combining sale and lending, and two conditions in one

sale are the combination of any contract or any stipulation that contains payment

consideration with another contract or a stipulation that contains lending. The

effective cause (for the prohibition) is riba (interest). All these Hadith are collectively

blocking the doors of riba and preventing any means that lead to it.

A contract may stand alone and one stipulation is permitted; there is no confusion

about that. But when another contract enters, it will lace the entire contract

arrangement with riba, e.g. contract of inah, which is composed of two valid

contracts that if executed separately, is valid; however, when they are combined they

collectively result in riba, which is haram.

To this effect, Ibnu Abbas ruled by saying, “One dirham in consideration for two

dirham with harir (silk material) exchanged in form”. Against this background, the

legal aspects of contractual arrangements are not to be examined in isolation; rather,

their end results, their objectives and intents should be taken into consideration.

For this reason, one or more stipulations may be accepted if the stipulations are in

line with the contracts, without any contradiction. In contrast, two conditions may not

be accepted if they are not in line with the contract agreement and they indirectly

lead to riba. Even for man-made laws, the end results of agreements are taken into

consideration. It is to this effect that many forms of hire purchase are seen as sale by

installment.

With regard to this agreement that consists of multiple contracts that is based on the

principle of murabahah in transacting international commodities and mineral

resources, there has been a big confusion to majority of the contemporary scholars

like Shaikh Al-qardhawi, Shaikh Salih Al-hasin, Dr. Husain Hamid, Shaikh Taqi

Usmani, Shaikh Mukhtar Al-sulami and others. This confusion is prompted by the

fact that the purpose of these murahabah contract arrangements are not for the

banks to buy international mineral resources or import it to our countries. The sole

motive behind these arrangements is the acquisition of cash by the agent, through

these transactions.

I have made several tours for the purpose of searching for the reality and myths

about these commodities and mineral resources (which are the subject matters of

the international murabahah contract). I discovered that the contract is of three

circumstances:

1. The first circumstance - The contracts are formulated on pre-prepared

documents and the copies of the certificates are merely ordinary copies sent

here and are only formalities. The broker who is operating in his small office is

the one who prepares all these papers and sends it to all international

agencies. He has become a millionaire at the expense of some banks;

2. The second circumstance - The commodities and minerals that are specified

for these murabahah arrangements are in existence. But due to defects or

lack of market demand, they became redundant. Then, tenths of contracts

would be carried out on them. I visited one of these stores in the West and

found that the subject matter of the special murabahah for the banks exists

and it consists of numerous tonnes of aluminium and I was very much

delighted. Then, I asked the person in charge of the store, “How long has

these minerals been in this store?” He replied, “About ten (10) years”. My next

question was, “Why hasn‟t the sale and transfer been concluded?” He replied,

“This is Russian aluminium. It has defects. So, nobody wants it. That is why

we keep it here to serve this purpose. We take commission for the

transactions based on it and that earns us good returns”; and

3. The third circumstance - The commodities and the minerals are natural and in

storage, whereby special murabahah transactions are carried out on them.

Here comes another question, “From the many international murabahah

transactions that are undertaken by both the Islamic and the conventional

banks every day and for so many years, have they ever taken delivery of

these commodities and mineral resources? If yes, where are the

commodities?” Thus, these transactions are characterized by a certainty, i.e.

the owner of the minerals knows that even though the commodities are

bought and sold, in the end, it will return to him.

In a nutshell, there are ambiguities and Shari’ah issues surrounding international

commodities. In addition to this, there is another question, i.e. what are the economic

benefits of these transactions to the ummah? Are these international commodities

and minerals brought to the ummah? If the answer is yes, then the Islamic banks

have contributed to development, creating competitive prices for commodities and

making them easily affordable. Assuming these are done, it would have been

possible to overlook some of the defects that are not seen as strict requirements.

At the beginning, many Shari‟ah Councils permitted international commodities

trading because of the need for liquidities, as well as protecting the interest of Islamic

banking. However, it should not be a norm or remain continuously.

Thirdly, these international murabahah transactions conclude when the mineral

resources are resold to the original seller, which constitutes bai’ ‘inah, which is

prohibited by the Shari’ah. This happens because neither the agent bank nor the

principal bank and the broker are in need of the commodity. There is also an issue

with regard to the foreign bank that arranged this transaction and is paid for the

price. Where does it (the price) go? The answer is that it goes back to the origin, if

the mineral resource is available.

It is because of this the Shari‟ah Councils used to stipulate a condition and

restrictions on it. We used to follow-up deeply and we eventually find that the last

purchaser, according to the papers, is another party that is different from the seller.

Due to this, we used to stipulate that the last purchaser should be one of the

factories or a company that is doing a work related to such minerals or commodities.

However, it was difficult to apply this condition, as the banks used to face challenges

before they are able to fulfill the condition.

Fourthly, as to the issue of an agent purchasing for himself, the jurists held two

different opinions:

1. The first opinion is that it is absolutely not permitted. This is the view of the

majority of the fuqaha (the jurists), i.e. the Hanafis, the Shafies, the Hanbalis

and the Malikis. They supported this view by saying that the interests of

human beings conflict with one another. The interest of the agent, while he is

purchasing for himself is that he wants to buy at the cheapest price possible,

while the interest of the principal is undoubtedly, to have his item sold at the

highest price possible. It is possible to contest this view by saying that the

grounds of this view could be circumvented if the principal fixed the price?

This is why those legalizing it restricted it with restrictions that will neutralize

this conflict of interest; and

2. The second opinion is that it is permitted for an agent to purchase for himself,

but with restrictions. However, the proponents of this view differ in their

opinions of those restrictions. The Maliki School held that it is permitted if the

agent does not try to favour himself, while the Hanbali School held that it is

permitted if the agent adds to the initial price or he appoints another person

(subagent) to sell the goods, whereby he is one of the purchasers. With this,

the aim of the principal (selling at the best price) is achieved. It is as if the sale

is concluded with a third party. The author of Al-muqni said that it is not

permitted for someone appointed as an agent in a sale contract to sell to

himself. He also mentioned, “It is permitted if he adds to the original price or

he appoints another person as an agent (subagent) to sell and he becomes

one of the purchasers. In the book titled „Sharahi al-kabir‟, al-qadhi said that it

is likely that the appointment of another person to conduct the negotiation is

compulsory, it is also probable that it is recommended, though the first view

that says it is compulsory is closer to the meaning of his statement”.

Despite the fact that I prefer the second opinion if the wakalah is a just and

independent, consequently, in my own view, there is no problem in the appointment

of an agent in a separate and independent contract. But if such an appointment is

combined with this arrangement, then it weakens the validity of the transaction. The

specific Shari’ah standard on wakalah in article 6/11/2 prevents contracting with

oneself. For this purpose, it ought to be honoured in Islamic banking contracts, which

these standards are meant for.

Fifthly, in principle, there is nothing in the Shari’ah that prevents the payment of

incentive to an agent, in addition to his fee. This could be in the form of granting him

part of or the entire premium above a certain benchmark profit. This is the ruling

contained in the Shari’ah standard on the appointment of an agent, which states the

permissibility of such an incentive in article 4/2/5.

The second form: Appointment of an agent to manage an investment, with a certain

percentage to be given through a murabahah contract that stipulates as a condition

that, “The loss should not be less than this and that percent...”

In order to make this form more understandable, let us mention one of the contracts

applied by one of the Islamic banks within the limit of what we need to discuss:

Preamble - A second party communicated his interest to appoint the first party to

manage his properties in areas both determined and agreed upon by both of them

and with conditions mutually agreed upon. Hence, they agreed, as follows -

1. The preceded preamble is considered as part and parcel of this contract, a

requisite of its completion and an interpreting note to the clauses in the terms

of the contract;

2. The first party agreed to be an agent of the second party to manage the

investment of the second party‟s properties, in accordance with the nature of

investment and as so defined in this contract, and with the venture capital of

the sum of this amount XXXX (in Kuwaiti Dinar only and nothing else).

Thereafter, on 1/1/2007, the second party channels the venture capital, on

lump sum basis, to the first party. The second party, by virtue of this

entrepreneurship arrangement, will deposit the capital in a current account

(account no. XXXX and branch XXXX);

3. The second party (the principal and the owner of the capital) has appointed

the first party as an agent to invest the said amount stated thereof in section

(2) of this contract agreement, in a business so favoured by him and deemed

suitable. The first party is conferred a general agency, with the rights to enter

into a contract with himself, in accordance with the permissible means which

have been agreed upon;

4. The first party, in abiding by the contract agreement, will undertake not to

invest the properties of the second party, except when he is sure of realizing a

return which is not less than (% annually) of the venture capital. The first party

is deemed to have breached and neglected the contract agreement if he

invests this money in a business having a return less than this percentage.

Accordingly, he will undertake to pay the capital plus the stipulated

percentage of return after the tenure of the investment, if he had breached the

condition without unforeseen circumstances that were seen to be out of his

control;

5. For his agency services on the management of the capital, the first party (the

agent who manages the capital) shall receive remuneration from the second

party, with the following variations:

A. A constant and certain amount of annual remuneration. It will be

paid in advance, i.e. when the contract is signed or when it is

renewed;

B. Any premium above the percentage stipulated in 4, if realized, will

be deemed as the incentive for the first party for performing his part

of the contract diligently;

6. The first party shall undertake to deliver the venture capital plus the return in a

lump sum basis on 1/1/2008.

There are two delicate fundamental aspects in this business arrangement:

1. This first aspect is that there is not an iota of relevance between this contract

and wakalah in Islamic law and the civil law, except by mere name. The agent

is doing it just to obtain liquidity. He is working for his own interest, while the

principal is only waiting to get back his capital and his profits (which should be

rather called, his interest) on a specified period. Then, the activities of the

agent are investment activities, which the principal has provided because he

is not confident of the following contracts -

a. The first one, i.e. the Shari’ah original form of contract is the joint venture

contract of sharing profits and losses among the parties to the contract

(mudharabah and musharakah). However, the principal does not want to

bear risks;

b. The second one is the contract form of real wakalah (agency) on

investment. This means that the funds will be given to the agency for the

purpose of trading with it. The loss will be borne by the principal.

Conversely, he enjoys the profit (if any), while the agent receives a fixed

amount of remuneration. There is no prevention in granting part of the

profit to the agent, as an incentive. Where there is problem is erasing the

wakalah efficacy in reality and end result; and

c. The third one, the implication of this form (as mentioned in the immediate

preceding one) is lending with guaranteed interest. If the arrangement was

explicitly made, the transaction will not gain acceptability in Islamic

banking and accordingly, the Shari‟ah Council would have opposed it. This

is why this product is created, which is driven by riba-oriented mentality.

Such a product guarantees the capital and sets a fixed profit, e.g. 9%. In

this case, only the name is changed, from lending with interest to

appointment of agent to manage an investment, in which the repayment of

the capital and the profit are guaranteed. Supposing a change of name

was enough to attain lawfulness and unlawfulness, then changing of the

name „usury‟ to „interest‟ would have been enough (but that was not the

case). To this effect, I have read from the newspapers and the entire mass

media that one of the Arab countries is proposing to enact a law to change

the term lending with interest to „an investment contract‟ or „contract of

agency to manage murabahah investment with a percentage of this or

that‟. If this door is opened, it will immediately open the door of widespread

evil, as there will be no justification to prohibit the bank‟s interest if the

form is made on agency on investment through murabahah, on fixed profit.

If this transaction is combined with the right to enter into a contract with oneself, then

there would have been no problem. This is because the agent buys the commodities

for himself with the mentioned percentage and the amount becomes debt and he is

liable for it. This is why we ask, “Is it the Shari’ah law that Allah prohibits riba based

on the name and the form only or based on the reality, the occurrence, the

implications and the gross injustice in it, as mentioned by Allah? Allah says, “But if ye

turn back, ye shall have your capital sums: Deal not unjustly, and ye shall not be

dealt with unjustly”.

Of course, there is no refusal on the importance of mentioning the terms and the

type of contracts, as long as they are real and the parties bear the responsibilities.

However, no matter the extent to which the terms have reached, they are not

capable of nullifying the realities and the maqasid that are to be considered in any

contract.

The second issue; requirement for the agent to guarantee payment of the fixed

percentage, as stated in the contract, in case he is unable to achieve the minimum

profit requirement. This is the expressed provision of section 4 of the said contract.

This express provision makes the agent liable for the capital and the stipulated profit.

He is bound by that.

Some issues regarding this contract were brought to the Shari‟ah Council of

Sharikatu a‟yan. Let us examine some of it:

1. Question 1/2/2000 - The text is as follows - To what extent does it comply with

the Shari’ah, if an agent is made liable for the loss incurred by the principal,

because the agent violated the conditions of the contract? Answer - The

Council has seen some jurisprudential texts of both the Maliki and the Hanbali

Schools, where the followers ruled that the agent be made to pay the

difference between the price determined by the principal and the selling price

concluded by the agent. In the book (of Maliki School) called „Taj wa al-iklil‟, in

part 7, the book of wakalah contains the chapter of the pillars of wakalah, its

legal status and the differences in it. In the said book, the author reported, as

follows, “If he sold at the rate below the selling price given by the principal, he

(the principal) has an option to approve the sale or rescind it. If the principal

chooses to approve it, he should collect the price. If he opted to rescind it,

then if the commodity is retrievable, he should take possession of it. However,

if it is not retrievable, then he should request the value from him if he did not

mention any price. But if he gave him a specified price, the scholars differed

whether he should request for the price he had specified earlier or the value

price (market value)? Also, in the book titled kashaf al-qina (part number 3 of

the chapter on wakalah section: it is not permitted for the wakil to sell on

deferred payment. The text reads, as follows; “If the wakil (agent) or a

mudharib sold at a price lower than the normal price, if no price was stipulated

for him or he has sold at a price lower than what was determined by the

principal/the rab al-mal, then the sale is valid because any one whose sale

was executed at the normal price, the sale is also valid with less than the

normal rate like, as in the case of a sick person. They (the wakil and the

mudharib) will be liable for any deficit in the price, if the sale in question is not

something that can usually be manipulated. This is because there is share for

the buyer by not rescinding the contract and share for the seller, therefore, the

liability becomes compulsory. But the share of the wakil is not taken into

consideration because he was neglectful. However, if it is something in which

people manipulate one another, e.g. one dirham out 10 dirham, it is

overlooked. So, the wakil/mudarib shall not be held liable because it is not

possible to escape such a responsibility. This ruling applies to a situation

where the principal did not specify a certain price. If the principal had specified

the price, both the wakil and mudharib shall be held liable for any deficit in

price, regardless whether it is something people can normally manipulate one

another or not. If he (the principal) said, sell (it) at 10 dirham and the

wakil/mudharib sells it at 9 dirham, the the wakil/mudharib would be liable for

the deficit of one dirham. For this reason, the Council is of the opinion that the

liability for the normal price or value of the price is the original presumption.

Therefore, if the company determined to uphold the resolution made by some

Maliki and Hanbali School in making the wakil liable for the payment of the

price specified for him by the principal if the agent sold below such a price,

there is no prevention in making him liable.

2. The committee was asked about making the wakil liable absolutely

(regardless of whether the act is caused by him or otherwise OR was there

negligence or not), as it is popular today in the contracts of wakalah? It is not

permitted to make an agent liable in an absolute manner. An agent is not

liable, except where he had transgressed or neglected his duty. This is

because his hand is hand of trustkeeping and not hand of liability. I have the

following observations on this contract and this fatwa - This contract is a

component of collection of contracts that form a transaction to achieve one

goal, as explained before. Having known that in contracts, what is to be

considered are the intents and the meanings, this contract cannot be taken to

be wakalah; rather, it is an investment and trade. Therefore, the principles of

mudharabah will be applied on it, if possible. However, the stipulated

condition in the mudharabah renders it a void mudharabah because the hand

of a mudharib is a trustkeeping hand. Secondly, the act of the wakil (agent) to

guarantee both the capital and a stipulated profit. The Council has appraised

this issue and based their observation on the grounds that the wakil has

violated the price fixed by the principal. This is where the Council said, “If the

company determined to uphold the resolution made by some Maliki and

Hanbali School in making the wakil liable for the payment of the price

specified for him by the principal, if the agent sold below such price, there is

no prevention in making him liable”. I am saying that making an analogy of

this contract (i.e. appointment of an agent to manage an investment) on what

the Hanbali madzhab said is not correct. This is because what they (the

referred madzhabs) discussed about is an agent whom a principal has given a

commodity (animal or other) and said to him, do not sell it, except at the sum

of 1,000 dinar, for instance. Then, the wakil deliberately sold it at the sum of

900 dinar, and so, he was made liable for the 1,000 dinar. This is a real

wakalah. In spite of this, the majority of jurists are at variance with the opinion

mentioned in the above fatwa of the Council. The case of this contract is

different (from the type of wakalah ruled upon by the two schools of law), as

the bank had given the capital to the agent and stipulated that he must make

a certain profit. It is a principle in Islamic jurisprudence that what a ruling of a

particular madzhab implies is not taken to be the opinion of the madzhab.

Also, the analogy of a new issue that is contemporary on another issue which

is not related to each other is not valid. Moreover, even some points of view

extracted from within a particular madzhab are not to be attributed to the

founder of the madzhab; rather, they are to be attributed to the one who

extracted it. This ruling that is extracted by the Council is a product of the

Council and not the opinion of some Maliki and Hanbali Schools. They did not

even give such a ruling. Thirdly, that this issue of agent selling below the price

stipulated for him is contested by the scholars into three opinions, after they

have unanimously agreed that it is not permitted for the agent to sell below

the price stipulated for him. The first opinion is that the sale is subject to the

approval of the principal. This is the opinion of the Hanafi and Maliki Schools

of Law. They said that the principal is given the option of either approving or

rescinding. If he approves it, then the sale becomes binding upon him. If he

does not approve it, then it will not bind him. He is also at liberty to retrieve the

commodity if it still retrievable, and he will take the value of the price, if is not

retrievable. However, the Maliki School, as mentioned by Ibnu Shas, added

that if the agent said, “I will complete the deficit”, do we accept from him so

that the sale will be approved or should not be accepted? The first view says it

is correct to do that because the aim is achieved. The other view said it

should not be accepted from him because he violated (the conditions) of the

sale. So, it is compulsory to retrieve it. The second opinion is that the sale is

void. This is the ruling of the Shafie and Hanbali Schools of law, in the version

upheld by the author of Sharh al-kabir and others. This ruling is based on the

reasoning that the principal was not pleased to release his ownership, except

the ownership which he has permitted on him (wakil). Moreover, the agent

gets the authority from the approval given by the principal. He is just the

principal‟s deputy. The third opinion is that the sale is valid but with the liability

of the agent for the price deficit. This is the view of the Hanbali School.

However, they disputed on the method of determining the value of the deficit

into two opinions: The agent is liable for the difference between the normal

price and the selling price. The second opinion is that the agent is liable for

the rate between what people normally manipulate one another with and the

rate which they are not manipulating one another with. This is because it is

permitted to sell at the rate with which people normally manipulate one

another; therefore, he is not liable. In the book called sharh al-kabir, it is said

that if the agent sold below the normal price, in which  people do not usually

manipulate one another with, or he sold below the rate that has been

estimated for him, the legal status is akin to the status of one who has not

been permitted to sell. It is reported from Imam Ahmad that the sale is valid

but the agent is liable for the price deficit. They disputed in the estimate into

two opinions: The difference between the normal price and the price at which

he had sold the commodity. The difference between the rate with which

people normally manipulate one another and the rate with which they do not

normally manipulate one another. This is because at the rate with which

people normally manipulate one another, the sale is valid, and so, the agent is

not liable. The first one is more analogical because it is a sale that was

executed outside the sphere of permitted authority; for that, it resembles sale

that was executed by someone who was a foreigner to the sale. In principle,

every action in which the agent has violated the instruction of the principal has

the same legal status as the status of action made by a foreigner (that is, an

intruder). Then, he explained what is meant by what people normally

manipulate one another with, is about one out ten, this is permitted in

muamalah. It is also in the book of insaf, “He is liable for the price deficit.

However, there are two views as to the estimate of what he is liable for. In the

books, al-mughni, al-sharh, furu, al-faiq and al-kafi, the first is that his liability

is the difference between the price at which he sold and the normal price. The

commentator said this is more analogical. Ibnu akil preferred this. He reported

it in qawaid al-fiqhiyyah. Ibnu Zarin also preferred it in the sharh. Therefore,

there is nothing in madzhab Ahmad (Hanbali) that says, in all the reliable

books of the madzhab that the wakil is liable for any instruction and stipulation

given by the principal, like practised today. Rather, the prevailing view in the

madzhab of Imam Ahmad is that, either the voidance of a contract of agency

that had violated the stipulation made by the principal or subject to the

approval of the principal or valued by the normal price. This is more analogical

to the general principles and justice. This is because the wakil is representing

his principal. If he violated the principal, the legality of the representation has

been eroded and consequently, it becomes void. If we validate the contract,

how are we justified in holding the wakil liable in a valid contract? More

importantly, the Muslim jurists normally resort to the normal price upon the

occurrence of any defect in a contract. The second opinion is that what is to

be considered is what people normally manipulate one another with. In spite

of this, I did not find from madzhab Hanbali, any opinion or view that is

considerable, which required that the wakil be made liable in a manner of

absolutism. Notwithstanding this, whether his violation is in what people

normally manipulate one another with or not. Despite my acknowledgement

that there is relevance in the Hanbali and Maliki School of Law, except that

such relevance could not be used to circumvent the opinion of the majority, as

well as the implication of wakalah.

All that I have said (in the above) is on the actual wakalah, whereby the principal

gives his commodities to the agent and stipulated the required prices for him, but he

(the agent) violated the principal by selling at a price less than what the principal had

stipulated. But the contract in this issue, as in the fatwa above is not a wakalah,

whether its reality or its substance. Rather, it is a void mudharabah or loan with

interest through arrangement of transaction that lead to that, because the contractual

relationship is investment. It is not a relationship of representation of the agent in

doing some of the tasks of the principal. Or, the original motive is to secure loan with

guaranteed interest. This is one aspect. In another aspect of application for this

contract based on my experience is that a principal will never ask his agent, which

period is he going to kick-off the transaction? Also, he will never ask if the

murabahah has been concluded or otherwise. The most important thing is that the

amount mentioned together with the profit (interest) will enter the account of the

principal in the fixed time.

There is an empirical event that occurred, whereby one investment company

secured several million through this means and engaged them in its private benefits

in majority of the period. Until it remains only one month, it did not find who will

purchase at the cost value that will give it the huge percentage that was stipulated,

and then it asked its Shari‟ah Board, which gave an answer, i.e., “A special section

will aid you by contracting with yourself, whereby you purchase international

commodities for the benefit of the principal, then you purchase it from the principal at

the rate that will give you 7% annually”.

When the calculation of the return was made, the percentage of the murabahah was

very huge because it was accumulated within a period of one month and yet, it was

enough for the annual percentage that was agreed upon. This form of murabahah is

mostly executed through international murabahah that is joined with the right to

contract with oneself and of course we have mentioned its Shari’ah issues earlier

and mentioned also that there are various transactions within one bargain.

The valid alternative Shari’ah-compliant mode

The alternative Shari’ah-compliant mode is the contract of mudharabah and

musharakah or local murabahah that is real and not premised on fallacies or the

contract is executed with financing companies that specializes on local murabahah.

It is possible to arrange a contract of wakalah to manage investment (together with

the murabahah). But there should not be any clause stipulating guarantee of

principal and certain percentage in the contract, and with the view of taking the

remaining required conditions into account.

Selling by an agent and purchasing for himself

1/1 The original presumption in uqud al-mua’wadat (contracts of exchange) is that

each party to the contract formulates his own part of the contract (as to executing the

offer and acceptance and any factor that constitutes a valid contract). This is

because in contracts, both parties have conflicts of interest. This will also help to

sideline any possible defect in the procedures of formulating a contract, as well as its

conditions and its guidelines.

1/1/1 There is nothing preventing the formulation of contract between two parties;

one of them being the principal while the other being the agent, if the conditions and

guidelines of a valid contract are fulfilled.

1/1/2 It is not permissible for one party who is the agent to formulate the purchase for

another person and in turn sell it to himself without making a recourse to the other

party. This will transform the contract into mere form, defective in the intention,

conditions of contract and its procedures.

1/1/3 It is permitted for (not applicable to the just preceded one) an agent to arrange

a collection of contracts, which fulfilled the elements and conditions of the contract

and the enabling circumstances, purchase goods for the principal (financial

institution) as representative of the principal, with a fee charged or without any

charges. Then, he will in turn go back to the principal to formulate the contract to sell

to himself with him/it directly, through any reliable means of modern communication.

This is subject to the following conditions and guidelines:

1. The object of the contract must be in existence and known and already been

taken into possession (in accordance with the Shari’ah) by the principal, so

that the actual selling process to the agent can been concluded, and with the

view that at the time of concluding this sale, if the principal was determining to

put it under his/it custody, he/it could do that. In view of this, it is not

permissible to arrange contract through mere papers, while the commodities

are not actually in existence in the commercial world;

2. The documents relating to the purchase (invoices, bill of lading, and certificate

of the product) must bear the name of the principal, and consequently, he (the

principal) will bear the loss and damages of the object of the contract, until it is

completely sold to the agent;

3. The conditions agency and the price related issues and the payment should

be specific and clearly known, whereby there is no ignorance and uncertainty

in it; and

4. It is preferably and more far from haram, if these contracts are carried goods

and commodities locally available or the one available in the primary market, if

these contracts are connected with mineral resources or international

commodities, it is compulsory to ascertain the existence and possession of

the owner. The deal is with the companies that own them, or that use them or

companies that do business in stock market that that has a legal right to act. It

is not enough to arrange papers and copies of certificates. Allah Knows best.

The OIC Fiqh Academy has earlier issued a resolution in its fifth session, where it

stipulated as conditions for a valid murabahah for the one who orders for purchase,

that the commodity must have entered into the ownership of the one whom the order

was placed with, as well as taking possession by him, in accordance with the

Shari’ah.

This is a valid sale contract, since the one who the order was placed with is

responsible for any loss/damages before the delivery is completed. Also, the

consequence of returning a purchase item if subsequently found with hidden defects,

and fulfilled conditions of a valid sale contract and found not with factors that prevent

the sale from becoming valid.

Selling by an agent and purchasing for himself and a type of murabahah called

murabahah akasiyyah (reflexive murabahah)

The spectrum of wakalah with the right to purchase for oneself has become very

broad. It comprises various products arranged on a (juristically) dangerous

transaction. The most dangerous of these is the one called murabahha akasiyyah

(reflexive murabahah). This product is hailed as a new initiative and a creative

development.

We read in the newspapers, specifically the Arab economic newspapers, at the

headline of the newspaper is „Initiation of New Product: al-murajahah‟.

100% guaranteed deposits with its specified profits, approved by the Shari‟ah

Council

Actually, without exaggeration, I was anxious to know these two terminologies, which

I have never heard since my involvement in Islamic jurisprudence and Islamic

economics (even in civil law) for more than 45 years. I said in my mind, I am familiar

with murabahah, but this is the first time I am hearing something called murabahah

akasiyyah, I have never heard of murajahah.

Because of this, I immediately started to learn about them, so that I will know what

they are all about. This is because knowledge is from cradle to grave. When I was

furnished with both contracts, I discovered that they are murabahah by name, but the

name has been changed and covered with this new „cloth‟. It is popular in one of the

banks in Qatar under the name murajahah, whereas in Burgan Bank in Kuwait, it is

popularly known as murabahah akasiyyah.

A member of the Shari‟ah Council of Burgan Bank has written to justify this type of

murabahah. He said, “The Burgan Bank has developed a new product. It is a

situation, whereby the bank invests the funds of the depositors through a contract of

wakalah (agency) on the investment (of a depositor‟s deposits in the bank)”.

Contract of wakalah is one of the more widespread contracts used by the various

financial institutions. However, the uniqueness of Burgan Bank‟s new wakalah-based

product is that this principle is used for the purpose of investing the depositors‟

funds.

Throughout the past years, mudharabah is the normal principle that is used for the

investment of depositors‟ funds. The fact that Burgan Bank has started using this

type of principle (wakalah) is considered an improvement and represents a

diversification in investment principles.

Our observation on this newly initiated principle

This principle is not a newly initiated one and there is nothing new about it. It is

nothing but a combination of a number of funds, which will result in a product that will

symbolize the Islamic banks (only be Islamic in form) and differentiate it from the

conventional banks and open cash flows for the Islamic banks. It combines some

precepts that are objects of sharp criticisms by friends and foes. It consists of

organized tawarruq, which has been given the ruling of prohibition by the OIC Fiqh

Academy, which is under the auspices of the Muslim World League in Makkah. It

also consists of international murabahah, which is mired with ambiguities from all

angles and problems from various aspects. It also consists of contracting with

oneself, which has been prohibited under AAOIFI‟s Shari‟ah standard, obliging of an

agent with specific profits and capital based on a predetermined amount.

It tries to get rid of the last wall of mudharabah that remained, i.e. investment

deposits. Some Islamic banks and Islamic windows have tried to get approval from

the Qatari Central bank to operate murajahah/murabahah akasiyyah. The central

bank did not grant the approval; rather, it sent a letter dated 30/04/2007 to all

Shari‟ah Councils, enquiring about the Shari’ah compliance aspect of the product.

There was a good word (the letter), as follows; If the Islamic banks change their

normal way of accepting deposits from customers and investing them based on

mudharabah, which is premised on profit and loss sharing to murabahah akasiyyah,

which is all about creation of constant obligations guaranteed by the banks over a

period of time and with specified return, what will be the consequences?

Actually, it is a strange legal device! Instead of moving towards the actualization of

the fundamental objectives of Islamic economics regarding encompassing

development, implementation of its musharakah tools and the penetration of the

global market in reality (both in form and substance), some Islamic banks and

Islamic windows want to follow to the footsteps of riba-based banks by merely

changing names and terminologies.

The situation now has gone to the extent that if the riba-based banks enter into the

hole of a dab lizard, some of these (Islamic) banks would follow suit. This is why they

(some Islamic banks) are searching for similarities in all things with the conventional

banks. With regard to this, one of the great scholars said, “The saying of Allah in

respect of the Israel is almost applicable to them”. Allah says, “they (Israel) said “O

Moses! Fashion for us a god like unto the gods they have." (Quran 7:138). The

surprising thing is that the Islamic banks are not emulating the good attributes of

conventional banks; not in creativity in development and serving the interest of the

customers; rather, it is just like what the Prophet s.a.w. said of entering the hole of a

dab lizard, which is very disorganized. The emulation is not with respect to the good

qualities or with respect what could attract the quotation of the popular saying,

“Wisdom is the lost property of the Muslims”.

Instruments and procedures of murabahah akasiyyah

A customer will come to the bank, intending to acquire enough guarantees of the

money that he deposited with the bank. He will know accurately the percentage of

his return. But the reality is that it was this bank, the owner of the new product that

requested from the customers to do that, whereby it announced to them that

whosoever is interested to invest in a product that guarantees the capital and returns

should forward an application. In any case, the fact is that the customer comes to the

bank and follows the following procedures:

1. The customer will appoint the bank as his agent to purchase international

commodities by cash and in the account of the customer, and then appoint

the bank to sell the commodities to itself, within a specified period, at a

specified return, using the principle of murabahah;

2. The customer gives the necessary funds to the bank (this procedure may be

done in advance or delayed);

3. The bank purchases commodities on cash basis using the customer‟s funds

and in turn sell the commodities to itself using a murabahah contract, in which

the investment duration and the returns are specified;

4. In order to obtain liquidity, the bank sells the commodities which it has bought

from the customer; and

5. The bank uses the acquired funds together with its other original assets, i.e.

assets that are owned by the bank (its general murabahah portfolio) for

financing and investment.

The practical procedures that were recorded by the Qatari Central Bank are shown

below:

A. The bank engages in organized tawarruq, which has been ruled negatively by

the OIC Fiqh Academy, under the auspices of Islamic World League in

Makkah;

B. The purchase of commodities by the bank, which is in turn immediately sold to

itself is barred from the Shari’ah point of view, as mentioned in the Shari’ah

standards regarding wakalah, “It is not befitting for an agent to take charge of

both sides of the contract...”;

C. Murabahah in international commodities, which we have already highlighted

its problems in the first part of this research; and

D. Changing the Islamic banking system, as underscored by the Qatari Central

Bank, in its letter to the Shari‟ah Councils. This is because the apparent

difference (product differentiation) that we focus on is that investment deposits

in the Islamic banks is based on profit-sharing mudharabah and that profit

must not be pre-specified, but in accordance with the outcome of the

investment. This is why the Islamic banks were distributing 8% in some years

and more or less in other years. But this new product removes this principle

altogether. This is because the customer has made an agreement with the

bank at 5%, for example. So, he has no right to request for more, no matter

how much profit is generated by the investment. In the same vein, he is not

subject to loss, even if the investment suffers losses. Is this not the same as

with lending with interest, with two fundamental differences, as described

below?

1. Lending with interest is clear and obvious. It does not bear the name of

Islam. It did not „wear‟ a jubbah (garment) or a turban. However, this new

product bears the name of Islam, its mark and its title; and

2. The second difference is that a conventional loan facility does not require

from the customer anything more than depositing the funds and signing a

contract of lending with interest. But this new product requires long

contractual procedures, fees and the signing of many contracts. We seek

Allah‟s refuge from this legal device that may get rid of the Islamic banks.

E. This new product requires the agent to purchase on murabahah basis at a

specified percentage, coupled with his obligation to indemnify if he violates

(the stipulated conditions). Consequently, what we have said earlier on this

type of murabahah is applicable to this product.

The summary:

This product comprises some other contracts, which if each was to made stand on

its own, we might not have ruled on its prohibition. It contains prohibited contracts,

acts and conditions. These are; the bank‟s type of organized tawarruq, purchasing

for oneself. For this purpose, when these contracts and procedures are combined,

they gave the result of a perfected transaction, which could not be approved by a

jurist that observes the maqasid as-shari’ah.

It is like lending with interest, except for two aspects, as mentioned above. But the

most dangerous element of this product is that this product strikes at the very bone

joint from among the joints of the Islamic banks; that is, the joint of investment

deposit which has been based on mudharabah, of which the bank is not responsible

for losses, except when it transgresses or the losses are due to its negligence.

However, under the new product, the bank becomes the debtor, whereas under the

ideal Islamic banking scenario, the customer is the rab al-mal, whereby he bears the

risk of losing his money and shares in the profits, based on a predetermined

percentage, as per the agreement.

Mudharabah is one of the elements of an Islamic economic system that is formed on

the foundation of ownership and partnership and the principle of alkharaj bi adhaman

(one who bears liability deserves to gain from the rewards that emanate from

assuming that liability. This is because if that something that yields the reward was

damaged/lost, he would have been liable for such misfortunes. Similarly, he should

enjoy the rewards of bearing that liability), and the principle of al-ghurmu bi al-

ghunmi (there is no reward/profit without bearing losses). But under this new

product, he (previously rab al-mal) has become the creditor, i.e. the bank guarantees

the customer‟s capital and the interest/returns.

In terms of credit, how is it possible for the Islamic bank, whose capital is only one

million riyal, for example, bear the liability of twenty million or more? Due to the great

risks that are involved in riba-based loans that are guaranteed by the conventional

banks, the capitalist economic system completely prevents the Islamic banks from

conducting normal trading business or any other contract that involves risk, as

regards to the deposits. The conventional banking system has no interest in the

deposits, except to lend it at the rate of interest higher than the rate at which it

borrowed. This barring that stands on counterbalance is the basis of conventional

banks. Without it, they will be vulnerable to big risks and consequently, they will go

bankrupt. Similarly, the depositors‟ funds are in danger.

Due to this, I want to direct my question to these banks that are practising

murabahah akasiyyah. Suppose these banks take all their deposits or majority of

their deposits on this basis, what are they going to do with them? Are they going to

enter into contracts that involve risks, coupled with guaranteeing the funds and their

interest? Will the central banks allow this product called murajahah, and without

counterbalance (balance between the capital of the bank, i.e. the shareholders fund

and the deposits that it garners from its customers?) Ideal Islamic banks are

counterbalance and stand on the scale of justice, whereby they take deposits on the

basis of mudharabah, in which the rab-mal bears the loss. Then, the banks enter into

sale contracts, istisna’ (order to manufacture) and partnerships on the same basis of

participating in the profit and sharing the loss incurred.

However, in a situation where Islamic banks practise double standards, i.e. following

the practice of conventional banks in guaranteeing the capital and the interest of the

deposits and applying Shari’ah-compliant practices by investing the funds on the

basis of sharing loss and participating in the profits, I think this will cause a big defect

at the monetary and economic level. Needless to say, it will also cause bankruptcies

and following the scale (standard/practice) of the riba-based banks in granting loans

also.

The Qatari Central Bank has issued a resolution in which it absolutely forbids the

recognition of murabahah akasiyyah as a means of investment, specifically amongst

Islamic financial institutions and individuals. The resolution continues that

murabahah akasiyyah is also not permitted for inter-banks transactions, except in

circumstances of dharurah. This is also the resolution issued by AAOIFI.

Alhamdulillah.

The second topic: Appointment of the ordering customer as an agent in a

murabahah sale

On the above, fatwa number 9/7 was issued, as follows: In light of the

recommendation made by the OIC Fiqh Academy, Jeddah, in its resolution number

80/7, the 9th session, the fifth recommendation:

“Minimization, to the best possibility, of the use of murabahah for the customer who

orders to purchase, so that it should be limited to the bank‟s implementations, with

the view of guaranteeing adherence to Shari’ah principles. The recommendation also

mentioned that the scope of other terms of investment, like mudharabah,

musharakah and ijarah, to be regularly monitored and evaluated. The benefits

generated from all acceptable aspects of mudharabah ought to be exploited, that

allows for compliant mudharabah and the accurate auditing of its results”.

The committee examined the first fatwa of the Albaraka Banking Group‟s first

symposium, which permitted the appointment of an agent to purchase a particular

commodity and then, in turn sell to himself with the price fixed by the principal. The

committee noticed that such agency is a general one in an absolute sale (absolute

sale here refers to a genuine sale). It does not concern the situation of murabahah

where the banks appoint the customer as its agent. This is because murabahah has

special features that are different from a normal sale, whereby in murabahah, the

bank must play an apparent and fundamental role in purchasing the commodities for

itself first and take delivery of the commodities. The said commodities will only be

sold to the customer after the bank has taken delivery of it, in order to avoid riba-

based form of financing, as well as preserving the form that makes the seller

responsible for any future defects of what he has sold. Consequently, the profit

becomes a profit that is valid from the Islamic point of view.

Due to this, the committee chose to adopt the opinion that ruled against this type of

agency in murabahah. I am in support of this fatwa that considers the fundamentals

of/and the actualization of the maqasid as-shari’ah. I support it and see that it is time

to put it into effect and execution. Allah Knows best.

The third topic: murabahah mudawwarah under the same roof: fatwa 6/7 was

in its regard

Question:

What is the fiqhi view (jurisprudential view) in what is termed as murabahah

mudawwarah under the same roof, whereby the customer will be appointed as an

agent to purchase (a commodity) on behalf of the bank and in turn sell the

commodity to himself at a specified profit rate (with a maximum profit rate), which is

agreed upon by both parties?

Fatwa:

The presented form of murabahah with this attribute is a peculiar situation to small

clients and retailers that want to purchase single materials repeatedly, of which it is

difficult for them to:

1. Repeatedly go to the bank for each transaction; and

2. Enter into a separate contract for each transaction.

The proof of permissibility of this form is the permissibility for a bank to appoint its

client as an agent to purchase on behalf of it, on the grounds that he (the agent) will

sell to himself what he has purchased, at a specified profit, as pre-agreed upon,

which will not exceed a certain profit ceiling.

This fatwa is no different from the fatwa of the preceding topic because it is based on

the permissibility for a bank to appoint its client as its agent in purchasing on its

behalf, so that the customer will in turn sell the product to himself (which he had

bought on mark-up profit, as predetermined).

The distinction of this contract (murabahah mudawwarah) is the repetitive factor, i.e.

the transactions are repeated through a special murabahah under the same roof.

However, there are problems and the contract is subject to doubts, such as „Is the

contract mere form rather than substance?‟ and the lack of reflection of (real)

wakalah intention, whereby mistakes are encountered as when the client operates

multiple murabahah mudawarah, he might not have performed any transaction; he

just comes to the bank to calculate profits, with the price as a debt obligation on

him.

The most important thing that he (the customer) may perform is signing papers that

will then be handed over to the financing bank (the bank that has assigned the agent

to perform the murabahah). For instance, for a client that has secured funding

amounting to USD100,000 and then went to another place and performed several

murabahah, will the time and exposure be at his aid, even by formality (will he know

the peculiarities of a certain place to enable him to comply with the Shari’ah, even if

it is only compliance in form?) to understand the conditions and the required

guidelines that were outlined by the scholars that legalized the arrangement of sales

by an agent and then purchasing the subject matter for himself?

Due to this, I am of the opinion that this form should be barred absolutely for the

reasons mentioned here and in the preceding topic. Fatwa number 9/v above had

also discussed murabahah and barred the above form. Praise is to Allah. We have

mentioned in the conclusion of the first topic the procedures for performing

muarbahah for the purchase orderer.

The fourth topic: Sale of commodity on cash before taking possession

Question:

What is the fatwa for the following arrangement?

Agencies that request from companies and banks which will purchase commodity

that it has no ownership of, the companies/banks will communicate with the industry

and purchase the commodity from it and then sell the commodity to the requesting

agency?

Fatwa:

This is lawful if the said commodity is not food because the prohibition of selling what

you do not possess is restricted to food.

Comments:

This summarized fatwa relied on one of the juristic views to be mentioned later, after

mentioning the confirmed fatwa. I am of the view that the permissibility should be

restricted by specifying the object of sale and should be limited in scope or restricted

with what is termed as „constructive possession‟, as will be mentioned later.

The transaction mentioned by the fatwa requires the following transactional

procedures, which are peculiar to murabahah for the client who is the purchase

orderer. These are:

1. The first step - The financial institution (bank or the like) will actually purchase

the commodity and take delivery of it in a manner that complies to the

Shari’ah, and the financial institution should bear the responsibility, while the

commodity remains in their possession (this is subsequent to undertaking a

binding promise by the purchase orderer); and

2. The second step - The commodity will be sold and delivered by the financial

institution to the client.

The second one is fatwa number 2/2 about selling the subject matter of salam before

taking possession of it. The text is as follows:

Question -

Is it permitted to sell the subject matter of salam (almuslamu fiihi) before taking

possession of it? If it is not permitted, is it then permitted for the buyer (almuslim) in a

salam contract to sell the subject matter of salam for a consideration (almuslamu

bihi) of a similar type (e.g. paying rice to buy rice) in reliance upon what he is going

to receive in the future (rice) and without connecting between the earlier salam

subject matter and the one to be received in the future? Is it permitted for the buyer

in a salam contract to constitute trading from this type of transaction?

Fatwa -

A. It is not permitted to sell the subject matter of a salam contract before taking

possession of it;

B. However, the buyer is permitted to sell the subject matter of salam with

payment consideration of the same genre, without connecting between the

first subject matter of the first salam and the later obligation in the second

contract;

C. It is not permitted to use this transaction that is ruled to be Shari’ah-compliant

in the second paragraph, as a trading instrument. This is because in the

Shari’ah, salam is permitted on exception basis, so that the demands of the

needy can be met. But if an economic crisis occurs in some Muslim countries,

which may warrant the use of maslahah al-kubrah in trading with it, in some

circumstances and to eliminate an injustice, then it is permitted based on

maslahah al-kubrah which must be determined by the council for fatwa and

Shari’ah compliance monitoring.

Shari’ah ruling on selling something before taking possession of it (in summary)

The jurists disagreed on the issue of selling something before taking possession of it.

The most important views are as follows:

1. A group of fuqaha ruled that such is not permitted completely, citing an

authentic Hadith reported by Ibnu Abbas (may Allah be pleased with him), that

the Prophet s.a.w. said, “Anyone who purchased food should not sell until he

takes possession of it.” In another version of this Hadith, until he measured it;

in another version of this Hadith, until he received it; in another version, if you

purchase something, do not sell it until you take possession of it. Ibnu Abbas,

the reporter of this Hadith said that, “I see every other thing to be similar to

food (i.e. the same ruling applies to everything). This is the madzhab of Imam

Shafie, Muhammad, and Abu Musa‟s first ruling and a version from Ahmad

(Hanbali School of Law). In addition to the Hadith, they also substantiated this

view by saying that the ownership is weak prior to taking possession

(conversely, ownership becomes „stronger‟ after possession has taken place)

because if damage occurs, the sale will be rescinded. Also, there is profit of

something which you have not guaranteed (because you have not possessed

the item sold, you cannot guarantee that it will be possessed by the buyer),

which is prohibited and the existence of double responsibilities (i.e. when a

retailer sells a product that is not in his possession to a customer and

subsequently, the product becomes spoiled, the act constitutes „double

responsibilities‟ on the part of the supplier, which is now responsible to both

the retailer and the end customer);

2. Some groups of fuqaha (among them is Imam Ahmad, as the opinion adopted

by madzhab) opine that things that are measured or weighed or counted or

measured by length are not permitted to be sold before one takes possession

of it from the seller. This is reported from Uthman (may Allah be pleased with

him), Said bin Musayyib, Alhasan, Alhakam, Hamad bin Abi Sulaiman, Al-

auzai and Ishaq. They substantiated this with the Hadith that indicates the

prohibition of selling food before taking possession of it, because food is

measured or weighed. Consequently, qiyas (analogy) of things counted and

measured by length were made on them (food), due to their need of taking

possession;

3. Some ulama, out which Ahmad is one of them, held that it is not permissible

to sell anything before taking possession of it, except if getting such a product

is inevitable. In that case, it is permitted to sell it before possession takes

place;

4. In another opinion, Abu Hanifah and Abu Yusuf held that it is invalid to sell

moveable things before possession takes place, whereby they interpreted the

above Prophetic traditions to have referred to moveable things only. In light of

that, on the grounds of istihsan, it is permitted to sell real estate before taking

possession of it;

5. The Maliki School holds that it is permissible to sell anything before taking

possession of it, except for food, as they restricted the prohibition to the

express wordings of the Hadith, whereby only food is mentioned specifically.

The ruling of Ibnu Abbas is an ijtihad from him; therefore, it cannot be used as

a specifying term. In spite of this, two conditions must be present for the valid

prohibition of selling food before taking possession of it -

a. The food must have been one that was acquired through muawadhah

(exchange), like sale or ijarah and the like. So, if the food was acquired by

way of inheritance or gift, the sale of the food before possession takes

place is valid; and

b. The muawadhah must be through measurement or weighing or counting. If

it was bought randomly, i.e. without measurement, he is entitled, from the

Shari’ah point of view, to sell it before possession occurs.

Preference:

The nature of this research does not permit us to analyze all the proofs of each

group with discussions, replies and alternatives. However, what is preferred by us

after observing the proofs and correlating between them and the warrants of

standard of contracts, transactions and their maqasid shari’ah, is to correlate

between two things:

1. Firstly, stipulation of taking of possession of the sold item and taking a

particular sold item to be in the occupancy, i.e. in possession (apart from

salam) (also, apart from bai tauliyyah, that is resale at cost price) and any

other thing that could follow through analogy, like contracts that are based on

muawadhah between two parties, e.g. a specific ijarah, and gift that was

accepted  with payment consideration and the likes -

A. This is because there are many proofs that capitalize on taking

possession, such as the authentic Hadith agreed upon by Bukhari

and Muslim, with the wordings, “Anyone who purchased food should

not sell it until he has taken its possession.” This ruling is further

supported by other Hadith, one of which is the Hadith reported by

Hakim bin Hizam, “If you purchase something, do not sell it until you

take possession of it.”; and his Hadith on the prohibition of selling

what one does not possess; and the Hadith of Ibnu Umar, where the

Prophet s.a.w. said that it is not permissible to combine loan and

sale in one contract or to combine two conditions in a sale; and it is

not permissible to take profit of that which he does not guarantee;

and you cannot sell what is not in your possession. The majority of

the commentators of the Hadith are in agreement that the meaning

of taking profit of that which you do not guarantee is to sell

something before possession take place. This type of sale is batil

(void) and fasid (invalid). Consequently, such profit is unlawful and

is not good for consumption (benefiting from such a profit is not

good). This is because as long as the possession of an item has not

been transferred, it (the item) remains the liability of the vendor.

Also, according to the Hadith of Zaid bin Thabit, the Prophet s.a.w.

prohibited the selling of commodities in the same place of the

purchase until the traders have brought it back to their houses.

Hiyazat means al-qabdh (taking possession). Also, the Hadith of

Uthman, in which he said, “I was buying dates from a Jewish

dynasty called Bani Qaynuqa, and I in turn sell it to get profit. The

information was relayed to the Prophet s.a.w. and he said, „O you

Uthman, if you purchase anything you should measure it, and when

you want to sell the same you should measure it also”. Also, Jabir‟s

Hadith that says, the Prophet s.a.w. prohibits the selling of food until

two cubic measures have passed through it; the cubic of the seller,

the cubic of the buyer. Also, the saying of Ibnu Umar, “I saw those

buying food at random, i.e. without measurement being

reprimanded in the era of the Prophet s.a.w. for selling it before

taking it to their houses”. Also, he said, “We used to purchase food

from the caravans at random without measurement; the messenger

of Allah prohibits us from selling it until we have transferred it from

its place”. This ruling is also supported by the Prophetic traditions

that prohibit contracts with the elements of uncertainties and

ignorance that may lead to disputes. The rationale of the

impermissibility of selling a commodity before possession takes

place lies in the fact that that commodity may be damaged before

possession is transferred. In such a case, dispute and conflicts

among the buyers and the sellers will arise if such a transaction is

allowed; and

B. Similarly, this ruling could also be supported by many of the sayings

of the great Companions, and their Jurists, like Uthman, Abdullah

bin Umar (may Allah be pleased with him), coupled with the fact that

the narrator of the Hadith, which is Ibnu Abbas, the learned of the

ummah and the interpreter of the Holy Qur‟an, extended the Hadith

of food, through qiyas and effective cause, to cover non-food. This

is because by the view of Ibnu Abbas, there is not enough effective

cause that will have a great impact on food. Therefore, the illah

(effective cause) of the ownership or taking reward of that which has

not been guaranteed or following of two guarantees (double

responsibilities) consecutively, all these are found in food and non-

food is weak, even though food has its own peculiarities that are

taken into consideration as to the nature of taking possession either

through measurement or transferring it or actual occupation

whereas other things are taken into possession by evacuation, or

specifying it or others as will come below.

2. The second thing is that the complement of the first one is that the Shari’ah

does not specify the manner of taking possession in a peculiar way; it is

subject to custom. Any method that people consider to constitute taking of

possession is regarded as taking possession, except in the case of sarf

(exchange of currency). For this type of exchange, there is specific proof that

stipulates that the transfer of possession must be hand to hand, i.e. reciprocal

taking of possession, with the view of taking into consideration the widened

scope of „hand-to-hand‟, as will be mentioned later in the resolution made by

the Fiqh Academy in Jeddah. In this regard, taking possession of food is

completed when it is measured or weighed. But if the food was bought at

random and the seller affirmed it, then the transfer of possession is regarded

as completed. This is because the seller has left it for him (the buyer has

consented); he (the seller) has severed his connection to it (the possession

has been transferred from the seller to the buyer). In the contemporary world,

the delivery of the bill of lading is regarded as taking possession in all

commodities and also specifying certain commodity is regarded as taking of

possession. Similarly is releasing the sold property and allowing it for usage.

In a nutshell, we give preference to the opinion that stipulates the taking of

possession. At the same time, we also give preference to the opinion of

widening the scope of taking of possession to cover every act made by the

seller or the buyer, in which occupation or delivery or allowing for usage or

specifying are consequent to it. In other words, there must be something that

shows that the seller has left the buyer and the sold item, and it is no longer in

his occupation, rather, he has taken it out of his occupation through any act

that customarily shows that. This is for transactions other than sarf (exchange

of money), as mentioned before.

Resolution number (55/4/6) was issued on the issue of transfer of possession; its

forms, specifically the new financial structures and the rulings on those structures.

The resolution is as follows, “The Islamic Fiqh Academic Council organized its sixth

conference session in Jeddah, Kingdom of Saudi Arabia from 17 - 23 of Shaaban or

14 - 20 March 1990. Having looked at the research that were presented before the

Council regarding the topic of taking possession, its forms, specifically the new

financial structures and the rulings on those structures, having  listened to the

discussions that were made about it, it resolved the following -

Taking possession, as it could be effected when it is through delivery by hand, or

measuring, or weighing by scale if it is food, or transporting the sold item, or

transferring it to the possession of the one who takes possession, it is also

actualized by deeming or constructively, by releasing and allowing for usage, even

though there was no physical transfer of possession. The manner of taking

possession differs, depending on the item transacted. Secondly, it is part of

constructive taking of possession that is recognized in the Shari’ah and customarily:

1. The bank registers an of amount of money to be held in an account of a

customer, with the following conditions -

a. When an amount of money is deposited in the account of a customer

directly or through inter-bank money transfer;

b. If a customer executes a contract of money exchange which is

instantaneous between him and the bank, in the sale of currency with

another currency through the account of the customer; and

c. If the bank deducted an amount from the customer‟s account with his

permission, in order for that deducted amount to be transferred to another

account and in a different currency. The transfer may be made to the

same bank or to another bank, for the benefit of the customer or for

another beneficiary. Accordingly, it is compulsory on the banks to take the

Shari’ah principles of contract of money exchange in Shari’ah law. Delay

of bank registration is overlooked within the limit that will allow the

beneficiary to have actual taking of possession, in view of the period that is

known in the market. However, it is not permitted for the beneficiary to use

the money in that period, until there is implication of the bank‟s registration

that allows for the actual possession.

2. Taking delivery of checks if there is balance that is withdrawable in the

currency that it is issued with when it is received and the bank booked it.

The fifth topic: Accepting payment for the issuance of letters of guarantee

(LGs)

Question:

Is it permitted for a bank to accept payment (fee) for the issuance of LGs, either on

the basis that the transaction is a agency connected with the payment of certain

amount, or on the basis of the bank‟s goodwill (i.e. the strength and financial stability

of the bank will create confidence)?

Fatwa:

It appears that the topic concerning LGs, particularly on the way it is actually

practised in the banks needs further research and study. This issue has been

debated in many conferences, symposiums and study circles, whereby many fatwas

have been issued. The most significant of these fatwas were the resolution issued by

the International Islamic Fiqh Academy during its second conference.

Resolution number 5 regarding LGs

After that, the International Council of Fiqh Academy, which is an offshoot of the

Organization of Islamic Conferences (OIC), organized its 2nd conference in Jeddah,

from 10 - 16 Rabi‟ Al-akhir 1406AH, corresponding to 22 – 28 December 1985. After

reviewing the research papers and having a thorough discussion with the relevant

parties, it became clear that:

1. The two types of letters of credit (LCs), namely the initial and the final, may

either be with coverage (with cash deposit) or without coverage. If it is without

coverage, it is considered as joining of dhimmah (liability) of the guarantor to

the liability of another person, in an obligation that is to be discharged now or

later in the future. This is actually what is termed in Islamic fiqh as guarantee

or suretyship. If it is with coverage, then the contractual relationship between

the applicant of the letter of credit and the issuer is one wakalah (agency) in

nature. Wakalah (agency) is permissible, with fee and without fee, whilst the

relationship of guarantee still exists in favour of the beneficiary (whose

benefit, e.g. payment is guaranteed.); and

2. Suretyship is a gratuitous contract, which is aimed at providing ease and

benevolence. The Muslim jurists had ruled against taking payment for giving

suretyship because when the guarantor is paying the guaranteed sum. If

payment is taken, then it is like a loan that attracts benefits in favour of the

lender, which is prohibited in Islam.

The Council resolved the following:

1. It is not permissible to accept fees for providing LGs in consideration of

issuing the credit, in which the amount and period related to the letter are

normally taken into consideration, whether it is with or without coverage;

and

2. The administrative charges for issuing the two types of LGs are

permissible in the Shari’ah. However, care must be taken, so as not to

charge beyond the normal charges. In the occasion that full or partial

coverage is given, it is permissible to take into consideration the actual

tasks that need to be done to conclude the issuance of the LGs. Allah

Knows best. However, the practice in many Islamic banks is contrary to

this resolution. This is because it (the Islamic banks) takes commission

that is similar to that of the conventional banks, i.e. in terms of

percentages. Needless to say that it is actually even more than that, on the

grounds that the Islamic banks do not charge interest when it liquidates

the LG, while the Islamic banks paid the value of the guarantee. The only

difference is that the Islamic banks do not charge interest when liquidating

the LGs, whereas the conventional banks include interest in calculating the

amount incurred in issuing the LGs, so long as the guarantee is not

covered with a pre-deposited value due. It is a material difference.

The councils of fatwas and Shari’ah compliance monitoring in those Islamic banks that

charge based on percentages justify it by saying that it is permissible to take

commission charged on wakalah (agency) on percentage basis, in the opinion of some

fuqaha (Muslim jurists), e.g. the Hanafi School of Law, as in the case of brokerage. They

said that the wakalah, in this regard, is found in the administrative work in issuing the

LG; this is the same whether the LG is covered or not. But this percentage may become

a huge amount, whereby it cannot be regarded as a reasonable amount that

corresponds to the actual cost incurred by the bank in issuing the LG. Due to this, the

resolution of the Fiqh Academy Council is clear and decisive, as it connects between the

permissibility to take administrative charges and the non-permissibility to take more than

the normal price (actual cost incurred). Needless to say that, the resolution is express

and clear on the non-permissibility of charging a commission on the issuance of LGs,

which is a percentage of the amount of the guarantee. It stipulated that the banks are

not permitted to take reward on it, in considerationfor the issuance of the guarantee (in

which, normally, the amount and term of the guarantee are taken into consideration).

This is same whether it is with coverage or without coverage.

Some Islamic banks have tried to comply with this resolution by being categorical in the

way they charge the customers for the issuance of LGs. One example is as follows:

Amount guaranteed Fee

$100,000 and below $50

$100,000 - 500,000 $1,000

Referring to the table, if the value of the LG is $100,001, then $1000 will be charged,

which is the same amount that will be charged for the issuance of an LG valued at

$500,000. This is another injustice. Due to this, some see that charging based on

percentage is better or is the lesser of the two evils. However, is it reasonable, for

instance, for administrative charges to be $1,000,000 on an LG that amounts to $100

million or more? (i.e. for the issuance of an LG worth $100 million, is the cost incurred

$1 million? Is this logical?)

The second issue is in respect of the fact that the Islamic banks cannot charge interest

when liquidating the LGs. Because of this, they are „compelled‟ to increase the

percentage of commission that they charge and strictly emphasize on the percentage of

the coverage and the credit. Consequently, this becomes a barrier to the clients of the

Islamic banks. This leads to lack of effectiveness of LGs in many Islamic banks. This

requires a solution. I hope that we will obtain a solution in this blessed symposium.

Another discussion that could be made here is with regard to the formation of mutual

cooperative fund amongst the Islamic banks for these types of circumstances. Also, the

topic of other effective instruments, e.g. the bank may enter into partnership or the like.

Sixth topic: Formula for real estate financing of al-Barakah (London Branch)

Fatwa number 6/4 was issued, as follows:

Question:

A contractual relationship is established between the applicant and the bank for the

acquisition of real estate, in order to sell it for the benefit of both parties, in proportion to

the capital. This proportion is termed as shares, where the value of each share is pre-

agreed upon at the time of contracting.

The amount of each share is only £1. This value remains unchanged throughout the

contract period. However, the real estate is saleable. So, it will be possible for the bank

to sell its shares (in the real estate) periodically (for example, every month) to the

purchaser. Consequently, the ownership will gradually transfer to the purchaser within

the period agreed upon. In view of the fact that it is the purchaser who is the beneficiary

of the real estate, he will be obliged to pay profit or rental to the bank, in consideration of

the usufruct.

The profit due to the bank is determined in proportion to the bank‟s share of ownership

in the real estate. The value is calculated every year, in accordance to a guideline

already laid down; it cannot be changed. In this arrangement, the percentage charged

on real estate financing in London is used as the benchmark to determine the returns.

Based on this, the rentals due on the buyer decreases over time, as the bank‟s

ownership in the real estate decreases, while the ownership of the buyer

increases.  This is effected through the purchase of shares by the buyer until he

becomes the full owner of the real estate. What is the fiqhi point of view of this

transaction?

Fatwa:

The ulama that are participating in this conference discussed the Albaraka Banking

Group‟s method of real estate financing in London, under the relevant laws for this type

of contract. They see it as significant, as Muslims need to own houses to meet their

residential demands. The ulama observed numerous points that are related to this topic,

as follows:

A. Registration of the resident in the name of the partner (the client that is interested in

purchasing the house) at the beginning of the transaction;

B. Obliging the partner, the charges and expenses of registration;

C. Insurance premiums on the residence;

D. Method of calculating the annual rent;

E. Method of liquidating and covering the concession of the bank‟s rights in a situation

where the proceeds of the sold property are not enough.

After the discussion, all the views were unanimously agreed on the following:

A. That registration of the resident in the name of the partner to prevent fraud is a

something permitted by the Shari’ah. The said registration is not in conflict with the

partnership agreement, particularly that the rights of the partner to utilize the asset

remain restricted until he has acquired full ownership. In making this decision, the

ulama took into consideration that the registration is a documentation that is secured

with an official pledge on the ownership, in accordance with the agreement;

B. The obliging of the partner, registration fees, the plot, stamp duty and other minor

expenses related to the joint ownership, without the involvement of the bank, is

permitted based on the mutual agreement of both parties. What is important is to

ensure that the partner will be the owner of the real estate at the end of the

transaction;

C. With regard to insurance, originally, it was stipulated that both partners will bear the

insurance premium because it is considered the expense of the partnership. It is

allowed to take the premiums into consideration at the time of determining the

rentals, so that insurance expenses would be covered;

D. The original presumption in sharikatu al-milk is equality in profit and loss, in

proportion to the percentage of ownership. This is premised on the legal maxim that

says, “Reward is deserved by the one who takes responsibility”. In view of the nature

of laws which do not allow the banks to bear any loss during disassociation of the

partnership of ownership, this requires amendments to the sample of the transaction,

whereby the arrangement of the transaction is made as follows:

1. The bank and the client will jointly purchase a residence, based on percentage

agreed upon by both parties;

2. The bank will sell his shares to the client, i.e. selling to him real ownership, while

preserving its shares of the usufruct till the time the partner has fully paid for the

entire balance;

3. The bank will be claiming the annual rental from the usufruct, in proportion to the

actual amount payable as the price of the sold property; and

4. If the partner delayed in paying his installments, it is lawful for the bank to either

sell the residence and claim the balance from the proceeds, through forceful

means of disclosure OR to rescind the sale and withhold the ownership with the

consent of the partner, but, on the grounds that it will return to that partner what

he had paid. This is because such an action is considered as iqalah (mutual

rescission). This article number 4 was approved by the majority.

Comment:

In my view, this fatwa is peculiar to a particular circumstance and particular environment

and for a specific period. This fatwa was issued at the time when the Islamic banks were

not allowed to play their roles in Britain or apply the Shari’ah laws of financing and

partnership. Due to this, the fatwa will remain as an exception.

However, now, some laws, including British laws have changed and allowed for the

establishment and operations of Islamic banks. It is incumbent on the Islamic banks in

Britain and elsewhere to practise their activities in accordance with the general Shari’ah

principles, and not rely on exceptions. Even Britain‟s Minister of Finance recommended

in his 2007 budget report, and appropriation 2008, which was presented to the House of

Common that the solution to the budget deficit is to adopt the idea of sukuk, which can

solve the problem of deficit, so that it will not lead to additional inflation and

unemployment.

In consideration of this (the British‟s adoption), it is compulsory on the Islamic banks in

Britain and elsewhere to come up with an ideal practice of Islamic economics that is

based on assets, partnerships and aims at encompassing development. To this effect, it

should be noted that the solution to assisting nationals to own real estate, industries,

automobiles and the like are al-murabahah; or partnership that ends with ownership; or

ijarah that ends with ownership; or istisna.

In this regard, the International Islamic Fiqh Academy issued fatwa number 25/1/6

regarding real estate financing for the construction and purchase of residential houses.

The fatwa is as follows:

The International Council of Islamic Fiqh in its sixth conference, held in Jeddah,

Kingdom of Saudi Arabia from 17 – 23 Shaban 1410 or 14 – 20 March 1990, having

observed the research that were presented to the majma‟ regarding the issue of real

estate financing and the construction and purchase of residential houses, and having

listened to the discussions that were made about it, resolved the following:

1. Residential houses are one of the basic needs of human beings. They are ought to

be provided through Shari’ah-compliant means, using halal (lawful) money. The

methods used by the mortgage banks and the like, i.e. lending interest bearing

loans, notwithstanding whether small or huge, are methods that are prohibited from

the Shari’ah point of view, as they contain riba;

2. There are lawful means that are alternatives to the unlawful means to provide

residence for possession. Needless to say, domiciles could also be provided via

renting.

a. The state should provide loans specifically for the acquisition of homes to

those in need of homes, and then it (the state) will reclaim the loans back on a

suitable installment basis, without any interest. This exemption clause is the

same, whether the interest is taken in expressed terms or under the guise of

service charges. However, if there is a need to recover the expenses incurred

in the loan granting process and follow-up, then it is compulsory to limit such

charges to the actual expenses incurred in the loan granting process, in

accordance with what is explained in paragraph (a) of resolution number (1) of

the third session of this Council;

b. Well-off states should take charge of the construction of residential houses

and then sell it to interested parties, to be paid on deferred payment and

installment basis, with the guidelines spelt out in resolution number 53/2/6 of

this session;

c. Well-off individual investors or companies should take charge of building

residential houses and then selling them on deferred payment;

d. It also possible to make residential houses affordable through istisna’

(commission to manufacture), on the premise that it is a binding contract. With

this, it is possible to buy a residential house before building it, in accordance

with the accurate description that will prevent any ignorance that leads to

disputes, but without obliging spot payment of the whole price. Rather, it is

permissible to defer the payment based on installments agreed upon by both

parties, with the view to take into consideration the conditions and

circumstances that were laid down for a valid contract of istisna’, with clear

distinctions, as compared to the contract of salam.

The Council recommends the following:

Other Shari’ah-compliant means of providing ownership of residential houses should

continuously be searched. I hope that the Arab world is not in need of riba-bearing

formulas or legal devices. Rather, it is in need of a productive economy, ethics and

development that combines the interests of both parties. This is what many of its

good thinkers have expressed in many conferences and symposiums.

We ask Allah to grant success to those working in Islamic financial institutions for the

purpose of actualizing the maqasid shari’ah in Islamic economics, and actualizing

maqasid shari’ah in urbanization and civilization and comprehensive development,

and cover all our deeds with the clothes of sincerity and clothes of acceptance. Allah

is the one that grants success and the Guider to the right path.

Written by the needy servant of Allah, Prof. Dr. Ali Algari Dagi.