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INTERNATIONAL COMMODITIES AND THE (SHARI’AH) GUIDELINES ON

DEALING WITH THEM

Prepared by

Dr. Abdusattar Abdu Karim Abu Ghuddah

Head, Shariah Committee, Al-Baraka Banking Group

29th Al-Baraka Symposium on Islamic Economics

Hilton, Jeddah

6 - 7 Ramadan 1429 AH (according to Ummu al-Qura), corresponding to 6 - 7

September 2008

In the name of Allah, the most Beneficent, the Most Merciful. All praises and thanks

are to Allah, the lord of „Alamin (mankind and the jinns, and all that exists). Peace

and blessings of Allah be upon the noble Prophet s.a.w., upon his Household and

his Companions.

This study is a contribution on a sensitive topic that is international commodity, in

connection with the Al-Baraka Symposium on Islamic Economics. In principle, it

(international commodity) is a product that has positive effects, be it in the short or

long-term. Nevertheless, it also has negative lasting effects that may occur over the

long haul. All these call for the effort of formulating criteria for this sort of transaction,

in order to achieve the aim of investing the money and obtaining the needed

liquidity, and of course, avoiding elements that are not in compliance with the

Shari’ah. In the end, these efforts would benefit the Muslim community and prevent

the transfer of savings from Islamic banks to conventional banks, under the guise of

international commodity. It is Allah Almighty that can guide and lead us to the right

path.

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Definition of international commodity

International commodity can be defined as the fundamental commodity that is

traded in the financial market (stock exchange); it (can either be) metal, energy

product (oil and gas), raw materials and manufactured products, which are

transacted in organized commodity markets and traditional ordinary markets, that

will be defined soon. Manufactured products that are ready for consumption and

use are excluded from the definition of international commodity.

The difference between international commodity and international trade

International commodity is a special type of international trade. However, there are

several differences between the two, with the most important being:

The adjective of (international) in international trade, as reported in the Vienna

Convention 1980, is ruled by two criteria:

The first one is subjective - It is when the business centre of the two contracting

parties are found in two different countries; and

The second is objective - It is related to transactions and it requires the existence of

one of the following conditions -

1. The combination of sale and the transfer of commodity from one country to

another;

2. The issuance of offer and acceptance from two different countries; and

3. Delivery of the subject matter (the commodity) is made to a country other

than which the offer and acceptance took place.

These rules and criteria are not stipulated in dealing with international commodity

because it can be practised between two parties in the same country. Usually, (in

transactions involving international commodity), delivery and transfer of commodity

between countries do not happen. However, the word (international) refers to the

international customs that govern these transactions and the fact that it is concluded

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in specific international stock exchanges. (See: Profitable Sales of International

Commodity by Dr. Abdul Haleem „Umar, the works of the Conference of Islamic

Financial Institutions, Emirate University, page 142, and other matters in its

research; page 1423, and from the Review on Financial Markets by Dr. Muniir al-

Hiundi, page 327, and Savings, Investment and Mudharabah in Stock Markets by

Dr. Ja‟far al-Najar, page 231).

Commodity markets

Throughout the world, there are many stock exchanges for the aforementioned

commodities. Some of them are local and a few are of international status. So,

verily, international commodities trading is a set of transactions that have been

subscribed by parties all over the world, amounting to millions of dollars per day.

The most famous of these stock exchanges is the London Metal Exchange,

Chicago Stock Exchange and New York Stock Exchange. The majority of the

international commodity transactions that are conducted by Islamic banks are

concluded in the London Metal Exchange.

The stock exchanges deal with recognized warehouses, including warehouses

that are chosen by the management of the stock exchange, i.e. warehouses that

fulfill the criteria required. There are more than 400 warehouses across 32 places,

including in the U.S., Europe, Middle East and the Far East. The warehouses

would issue the related certificates immediately or through its authorized agent in

London, i.e. where the stock exchange is located.

In the year 1999, the London Stock Exchange developed the Electronic SWORD

System. It is a system that is designed to accord complete protection and

safeguard against disruptions in the day to day dealings. Only the participants

can gain access to the system. In the SWORD system, the information is

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centralized and the issuance of warehouse warrants is centrally executed in

electronic form, i.e. by the warehouse manager. Buying and selling is concluded

electronically. Though this system, the affiliated warehouses would be able to

issue warehouse certificates from anywhere in the world.

Various kinds of sales and contracts have been executed in international

commodity stock exchanges, such as different types of futures and various forms

of options, and the trading on consumer price index and the operations of trading

off swap. However, it is clear that the aforementioned contracts are prohibited in

Islam. Therefore, we are not concerned with those, since Islamic banks do not

engage in those transactions.

With regard to documentation, when the commodity has been deposited in the

specialized commodity warehouse, this warehouse must issue a warehouse

warrant, which is defined as, “A document that confirms the existence and

availability of a specific quantity of a commodity with certain qualities in the

warehouse that issued the document.” This certificate/document will be

considered as the document through which the ownership of the document

holder in the commodity stored will be confirmed. (See: Profitable Sales of

International Commodity by Dr. Muhammad „Ali al-Qurah, Conference on Islamic

Banking Institutions, hosted by Al-Shariqoh University, page 1538-1540).

The differences between organized commodity markets and traditional

markets

In traditional markets, a transaction will usually be concluded upon a true and

visible commodity. This runs contrary to modern commodity markets, where the

dealings are executed based on the samples of products that are not actually

visible and present at the time of transacting. Therefore, the transactions in the

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modern commodity markets extend beyond the transactions that are concluded

in traditional markets.

So, due to its uniqueness, there are specific conditions that must be fulfilled

before a transaction in a commodity market can be carried out, as shown below:

a. The subject matter must be long lasting (not perishable goods) and easy

to store;

b. The subject matter must be within the same measurement domain (e.g. all

in tonnes, not some in tonnes and some in metres), such that its quantity

will be specified by measure, weight or by counting it, with the existence of

its equivalent in the market;

c. The transactions with the commodity must be sizable and recurring, so

that it would constitute specialized trading that are executed by a large

number of participants; and

d. The transportation cost must be relatively small, as compared to the total

value of the transaction.

The transactions in the traditional markets have little or no direct influence on the

price of goods, such that the price is relatively stable, as compared to the

commodity markets. This is due to the relatively smaller volume of transactions

that are spread across many types of commodities. On the other hand, in the

commodity markets (stock exchange markets), there are many recurring

transactions and moreover, the transactions are centralized (transactions

conducted via one body), thus making it possible for someone to influence the

price of commodities. Therefore, it is definitely incumbent upon those who want

to deal with a specific commodity to observe the commodity price during their

dealings. (See: The Deed of Investment Firms in the Financial Markets by Dr.

Ahmad Muhydin, page 223, and from the review of Mahmuud „Assaf - Financial

Activities Management, page 355 - 142, Yasin Mohammad Sayid, Bursat al-Uqud

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and Bursat al-Bidhao‟ah al-Ahdhirah, 2nd edition, Motba‟ah al-I‟itimad, Egypt,1951,

page 29).

Types of international commodity operations

Commodity operations are of two types:

1. International commodity operations in the financial markets - These are

called commodity contracts markets, which is named such to differentiate

it from the money exchange markets, and stock and bond market; and

2. International commodity operations in non-organized markets - These are

called parallel markets. In this market, transactions such as deferred

payment sales (bai’ bithaman ajil) are executed via correspondent banks.

The correspondent bank plays the role as an investment agent, albeit a

restricted agency arrangement, with the requirement for the correspondent

bank (wakil) to refer to the muwakkil (principal/authorized bank) for the

execution of every transaction. Hence, before entering into any transaction,

the correspondent bank will refer to the principal (authorized bank) for

their approval. Then, the correspondent bank will purchase the commodity

from a supplier at spot price. Subsequently, the wakil will sell it to another

party (third party) on deferred payment sale. Upon the conclusion of a

transaction, the correspondent bank will earn a commission, while the

authorized bank is entitled to the profit earned from the said transaction.

As an incentive, a part of the revenue may be dedicated for the wakil. This

may be operationalized in the form of a mudharabah arrangement.

Definition of international commodity sale

It is easy to define international commodity sale in the financial markets as:

1. An organized commodity sale transaction;

2. It is under the supervision of a specific body;

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3. It is done through sale and purchase orders, with the utilization of typical

dealing contracts that contain various conditions and specifications; and

4. It contains a clause on the delivery time and place, the requirement to

deposit a proportion of the transaction value and  the need to open a letter

of credit (LC) with the agent, which includes the execution of the

transaction and the LC.

(Shari’ah criteria no. 30 on the matter of commodity sale in organized markets,

clause 1/2).

International commodity contracts

It has been previously mentioned that international commodity contracts are

executed by utilizing standard contracts, where the distinction between the

contracts are basically just in terms of the price, delivery date and payment,

which may be on cash (spot) or deferred basis.

The parties to the contract will stipulate the delivery period and deposit a

proportion of the contracted amount to guarantee the execution of the transaction.

In terms of the level of quality of the commodity, it will be determined by the

rules/standards in the market.

(Islamic Banks and Financial Markets by Dr. Muhammad al-Khariji, page 23).

Concluding international commodity contracts

The contracts are concluded through any of the following methods:

1. By actual exchange, where the variance between the cost of the

commodity and the corresponding selling price does  is not more than 3%;

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2. By payment through the clearinghouse that are based on concluding the

contracts, where the contracts will be replaced by other contracts. With

regard to this, the clearinghouse may act of behalf of both parties (buyer

and seller) and thus, bear the liability of both parts of the transaction; and

3. In case of disputes, the exchange may act as an arbitrator, especially in

determining the consideration of the transaction.

(Refer to previous reference 7/1/172).

It is imperative for someone who wants to purchase or sell in the like market to

have a current account with the agent bank, so that in the execution of the

contracts, the margin can be deducted. The margin will be held in trust and

must be given back after liquidation. The margin amount must be added to the

account or discounted from it, in case of daily losses, depending on the

commodity price.

The agents must act to coordinate the sale and purchase orders. The stock

exchange will issue the permission to sell for sellers and the permission to buy

for buyers. It is important to note that the name of the third party (seller sells to >

buyer sells to > third party) must not be mentioned in the said documents. In this

regard, the purchase contract is independent of the sale contract. (The Stocks,

Options and Futures Markets, by Dr. Muhammad „Ali al-Qira, Majjalat al-Mujma‟a,

7/1214).

Commodity operations with deferred contracts

Deferred contracts are contracts in which the seller will deliver the commodity to

the buyer at a specific time. The payment will thus be made upon delivery of the

said commodity. In spite of this, the contracts contain a condition that requires

the contracts to be concluded by way of delivery and confirmation of receipt.

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Therefore, this condition differentiates it from the futures market. This method is

called deferring two exchanges (deliver and receipt) or constructing two liabilities

or initiating al-dayn bi-dayn (debt with debt) or bai’ al-kali bi-kali (delayed counter

value for another counter value).

Shari’ah guidelines on commodity operations on the basis of deferring two

exchanges (deliver and receipt)

In the Shari’ah, specifically in the contract of exchanged items (mu’aawadhah), it

is prohibited to defer the exchange of two items. This issue was raised during the

29th Al-Baraka Symposium on Islamic Economics, i.e. for a solution to be

formulated, even if it is based on exceptions. The symposium concluded to

emphasize the following; the deferment of two exchanges in the contracts of

exchanged items, which is establishing debt with debt or constructing two

liabilities, is unlawful. Such a contract constitutes selling something that is not

owned. With reference to a Hadith, it is forbidden to transact on a subject matter

that is not in one‟s possession, except for the contract of salam.

The classical scholars unanimously decided that such a contract is prohibited,

because of the element of speculation, in respect of the dissimilarities in the price

of the goods on the contracting and delivery date. Such a situation would not

satisfy the objective of the contracting parties, such as that the buyer cannot get

access to the commodity purchased, while the seller is not paid for the

commodity sold. The element of gharar is also evident in such a contract.

However, there are two exceptions:

The first exception – When facing a dharurah (state of necessity), it is lawful to

defer two exchanges, in as much as required to conduct productive activities and

services in relation to removing hardship (that is if the productive activities of

general or private institutions depend on this type of contract due to certain

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circumstances, such as the inability to purchase substances on advance

payment and storing them for long periods of time).

The second exception is with respect to the marketing or more precisely, the

salability of products. In situations where bulk purchases are the norm, it is

difficult to require customers to pay in advance something that they will only get

in the future.

Accordingly, the resolution of the symposium included several criteria to restrict

such contracts, as they are based on exceptions, as follows:

To prevent the misuse of the aforementioned exceptions, it is crucial for the

following criteria to be fulfilled:

a. The existence of a provision that stipulates that the exchanged items must

be delivered on the due date;

b. If there is an exchange of commodities of different prices, then there must

be no muqassah (set-off), where one of the two products are not delivered;

c. The presence of the conditions related to the attributes of the commodity,

which is identification of type, quality, amount, period, delivery place, and

the possibility of concluding a sale on the due date;

d. The permission to engage in this contract is restricted to production (or

marketing), and not for trading with the view to earn a profit;

e. This exception must not contravene the rules and criteria of the contract of

salam in normal circumstances; and

f. This exception cannot be used in monetary contracts at financial

institutions.

(The resolution of Al-Barakah Symposium, no. 19/4, p. 336).

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Shari’ah substitute for the deferment of two exchanged items

It was reported in the resolution of the OIC Fiqh Academy that the deferred sale

contract of two exchanged items can be easily modified by applying the well-

known conditions of salam, taking into consideration that it is unlawful to sell a

commodity purchased on basis of the salam contract before that commodity is

received.

If the subject matter of the contract is something that needs to be manufactured,

then it is allowable for the two exchanged items to be deferred on the basis of the

contract of istisna’.

(The resolution of the OIC Fiqh Academy in Jeddah, no. 65 (1/7), clause 3/2,

Shari‟ah Criteria 20 on the issue of the commodity contracts in organized

markets, clause 3/3 and its sections).

Commodity contracts in organized markets

Some of the commodity contracts in organized markets are as follows:

Spot contract (al-‘uquud al-haalah):

It is a contract where price and delivery happens on spot basis. Delays of a day

or two, due to market norms, are allowed, as long as the commodity or

documents evidencing ownership of the commodity is in the hands of the seller.

This contract is lawful in the sight of the Shari’ah, with reference to the following

verse, “O you who believe! Eat not up your property among yourselves unjustly

except it be a trade amongst you, by mutual consent and do not kill yourselves

(nor kill one another). Surely Allah is Most Merciful to you.”

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It is allowed to apply international conventions or the laws of a particular country

on these contracts, as long as there is no element that contravenes the Shari’ah.

Compliance with international conventions is verily required in the Shari’ah, as

Allah said, “O you who believe! Fulfill (your) obligations…”

Fulfilling one‟s obligations come with the exception that one must not legitimize

things that are forbidden or forbid things that are permissible, as evidenced in the

saying of the Prophet s.a.w., “Muslims are obliged to fulfill their conditions,

except a term that legitimates what is forbidden or forbids what is legitimate.”

[Hadith reported by al-Imam Ahmad in his Musnad 1/382 and Ibn Majah in his

Sunnah 2/487, with good authority (isnad hasan), and Imam Hakim, Imam

Bayhaqi and Imam al-Dar-Qutni].

Forward sale (al-„uquud al-aajilah)

This is a contract where the delivery will be made in the future and payment will

be made on delivery. The terms of this type of contract requires that the contract

be concluded through the delivery and collection of money on a certain due date.

Such transactions are unlawful. Although it looks similar to salam, these

transactions are not in compliance with one of the conditions of salam, which is

advance payment. In this case, the payment is deferred.

It is possible to modify this transaction, in order to ensure its compliance with the

essential conditions of the contract of salam. It is nevertheless unlawful to sell the

commodity bought on the basis of salam before that subject matter is procured.

The futures markets (al-mustaqbaliyyah)

It is when the contract is based on the delivery of a commodity on a deferred

date, and payment will be made on delivery, without including the stipulation that

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the contract will be concluded upon delivery of the subject matter; rather,

dissolution is possible through a counter contract with set-off (al-muqassah).

This type of contract is the most widely used contract in the commodity markets.

In its original form, this contract is unlawful, for the reason mentioned above, and

for the reason that although delivery and receipt are contractual requisites, it is

non-existent in this contract. Thus, this will invalidate the contract.

Shari’ah-compliant substitutes for forbidden transactions in commodities

and currencies

The Fiqh Academy has recommended a substitute for the above, as follows:

A Shari’ah-compliant commodity and currency market ought to be established by

using (especially) the contract of salam, sarf (money changing), and al-wa’adu bil

bay’ (the promise with sale) on deferred basis, istisna’ and others.

For the above to be done, the Academy feels that there is necessity to research

on these substitutes and the methods of applying them in an organized Islamic

market.

(The resolution of the International Fiqh Academy, no. 65(1/7) clause 3/4).

The methods of administering international commodity operations

There are numerous methods that have been applied by Islamic financial

institutions in operationalizing international commodities. The main ones are as

follows:

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1- Commodity trading based on agency on investment operations

This is a transaction where another party (agent) is authorized to buy the

specified commodity at the current price and subsequently, the agent sells the

commodity on deferred payment. As consideration for the execution of this

arrangement, the agent will earn a fee, either a fixed fee or a fee that is based on

the price of the commodity (percentage). This is considered agency on

investment operations (al-wakalatu bil istithmar).

a – Investment operations by the agent

After purchasing the commodity for the benefit of the authorizer or principal

(muwakkil), the agent will then purchase the same from the authorizer by

concluding the contract of sale or exchange with two notifications; the first one is

for the agent to inform that the commodity is now in possession, and

subsequently, making an offer to purchase the commodity (al-ijab); the second

notification is for the principal/seller to agree on the sale (qobul). Shari‟ah criteria

no. 8 must be observed on the matter of murabahah lil aamir bi shiraai (mark-up

sale for the purchase orderer), appendix (a) and (b).

b – The importance of two notifications

The argument on the necessity of issuing an offer to buy (ijab) from the

authorized agent, i.e. to buy for himself and the notice of acceptance from the

authorizer (muwakkil) as the seller is based on the need to separate and identify

the liability of the authorizer/seller (before the sale takes place), and the liability

of the agent/purchaser (after the sale takes place).

(The Shari’ah Criteria no. 20 clause 4 and its sections, a research on the

transactions for the researcher 4/245. It comes in clause 4/1/4 from the Shari‟ah

Criteria: It has been stipulated in this applications for the avoidance of ‘inah,

which is when the purchaser sells the goods bought on deferred payment to the

original seller, at spot, at a price that can either be less or more than the former

price).

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2- Commodity trading based on mudharabah (profit sharing-loss bearing)

This constitutes the appointment of a body to administer the purchase of a

commodity at spot price and then selling it on deferred payment, with an

agreement that the profit obtained will be shared between the investors and the

manager (mudharib) of the said body.

3 - Commodity trading that is implemented through institutional bodies

Basically, there are two methods of doing this:

a. An institution purchases a commodity at spot and then sells it to another

party on deferred basis. The second buyer will subsequently sell the

commodity to its customers; and

b. An institution purchases a commodity at spot on behalf of another party

(agency contract). Then, it will buy the commodity from the principal on

deferred basis mark-up sale (al-murabahah al–‘aksiyyah).

4 - Commodity operations for the purpose of tawarruq

The following is a tawarruq contract for the purpose of getting liquidity: An

institution purchases a commodity at spot (at spot price) and then sells it to

another party on deferred basis. The second buyer will subsequently sell the

commodity to its customers (at a higher price than the spot price).

Criteria for transacting in international commodities

Firstly, the General Shari‟ah Criteria no. 20 stated on the matter of commodity

sales (11), where the elements that are required and the elements that are

prohibited in a contract of commodity sales is delineated.

(Refer to a research on the International Trade and International Commodity by

Dr. Abdusattar Abu Ghuddah, published in researches of Section/4, which is a

study on the criteria of the commodity sales. Refer also to the General Shari‟ah

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Criteria no. 2, on the matter of the commodity sales in organized markets, clause

4/2 and its sections).

Secondly, in the conclusion section of his research (3), Dr. Muhammad Abdul

Halim Umar stated some criteria, of which the details can be summarized, as

follows:

1. The purchase and sale of commodities for the customers must involve the

actual delivery of the commodities;

2. The execution of transactions via unlawful means must be avoided, e.g.

futures, derivatives and the utilization of futures and the like for spot sales;

and

3. The Shari’ah principles must be observed, e.g. the legality of the

commodity, the unlawfulness of selling foodstuff at a mark-up (murabahah)

before actual possession takes place and the prohibition of using deferred

cost plus (murabahah) if the subject matter is gold and silver.

(The research on Murabahah in International Commodity by Dr. Muhammad Abul

Haliim Umar, page 1434).

Thirdly, Dr. Muhammad Aliy al-Qiraa mentioned under the title, “The Shari’ah

Criteria for International Murabahah (mark-up sale), as follows, “The criteria

which is compulsory for international murabahah is that the commodities, the

contract and the conditions of the contract must be lawful. Such examples of

unlawful conditions are as follows: Assuming both sides of a contract, the

absence of the condition of possessing before selling, the condition of connecting

the price of the commodity with a certain index, not mentioning the delivery place,

and the repudiation of the right to obtain the warehouse warrant.

(Research on International Commodity Murabahah by Muhammad Aliy al-Qiraa,

page 1544).

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Fourthly, it is appropriate to apply the Shari’ah criteria on the basis of their nature

or relationship with the operations of international commodities trading. The

operations must be based on the Shari’ah criteria for commodity sales.

First: The Shari’ah criteria related to the commodity itself

Transactions must based on lawful commodities

The nullification of dealing with unlawful commodities is in view of the fact that it

is worthless in the sight the Shari’ah. So, it is not appropriate to be made the

subject matter of a sale.

Identifying and distinguishing the commodity bought from the rest of the stock of

the seller:

The act of not allowing the buyer to identify/confirm the commodity that is to be

bought is unlawful. This is because doing so will make it difficult for the rights and

liabilities of both the buyer and the seller to be differentiated. This is related to

two legal maxims, i.e. al-kharaaj bi damaan (to be eligible for revenues, one must

assume the related liabilities) and al-ghunm bil ghurmi (to be eligible for revenues,

one must bear the related risks).

The avoidance of prohibited ‘inah

The following type of „inah must be avoided: A purchases a commodity from B on

deferred basis and then immediately sells the commodity on cash basis to A

(original owner) or to another party that is related or under the control of A.

The avoidance of mere formalism

The following must be avoided: Transactions on commodities without the

presence of the commodities, which are done through illusive documentation or

via multiple sales, i.e. one commodity is sold to many parties at the same time.

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The right to obtain the relevant documents, especially the warehouse warrant

The contractual documents have the role of authenticating certain things. The

documents will determine the legitimacy of the transaction. Therefore, it is

compulsory for Islamic financial institutions to insist on their right to obtain those

documents and reject any condition that prohibits them from doing so, especially

with regard to the warehouse warrant. This is because the warehouse warrant is

a document that proves that the commodity does exist.

Second: The Shari’ah criteria related to information

The necessity of fixing the price and the impermissibility of giving a discount

without declaring the amount

It is unlawful to conceal the information on the agency fee. In other words, it must

be disclosed and not included/‟hidden‟ in the purchase price (that is specified on

general gross amount) without specifying it. Here, transparency is key.

The evidence that supports the prohibition of doing the above is based on the

ruling on ujr, that is, “Whoever employs an employee must inform the employee

of his salary”. So, the rule that is applied on ujr in a leasing contract must also be

applied on the agency fee in the contract of international commodities trading.

After the information on the fee has been disclosed, both parties can agree that

the agent can acquire his fee, either by deducting it from the purchase price

(gross amount) or from the premium that is charged upon the purchase price.

This is because it is allowed to stipulate that the amount over and above the

purchase price would constitute the agency fee.

The necessity of mentioning the delivery place

If the commodities are not present at the time of contracting, then it is necessary

for the delivery place to be specified. Even though the contracting parties regard

the delivery of the commodity as being part and parcel of the contract, this

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element must not be taken for granted. This is because it leads to uncertainty

(gharar). The gharar may manifest itself in many ways. For instance, the contract

may not be concluded with the possession of the commodity transferring from the

seller to the buyer (as no specific delivery place was named). Furthermore, if no

delivery place was specified, there is a risk of dispute with regard to the cost of

delivery, i.e. on the party that will bear the cost of delivery.

The prohibition of the condition of connecting the price with an index

Within the context of international commodities trading, most sales are made on

deferred basis. Sometimes, the contract duration may be long and the price will

be set by taking into account the interest index and its variables. In this regard,

the price of the subject matter must be specified and it cannot be linked to such

an index. However, the contracting parties may refer to the index as a guide.

Nevertheless, they are not allowed to link it to the said index. In such a case, the

price will fluctuate according to the index.

Third: The criteria related to contracts that are not concluded

Concluding contracts based on mere offer or ijab (without full acceptance or

qabul from the counterparty)

It is impermissible for the agent of the institution to purchase the commodity for

himself on deferred payment basis, based on his mere notification to the

institution without full acceptance by the seller (institution). This is because the

offer to purchase is made by virtue of the agency contract and not the sale

contract (here, there is also an issue with regard to the separation of contracts).

So, the offer occurs before full possession on the part of the institution takes

place, which amounts to selling something that is not possessed.

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The conditions of non-delivery

It is unlawful to stipulate in the general operational framework of the commodities

that the buyer has no right to receive the commodities. Therefore, such a

condition must be removed and the contract must clearly state that the buyer has

the right to collect the commodity. This is because stipulating non-delivery will

cause the non-fulfillment of the purpose of the contract. It may consequently lead

to the contract becoming invalid.

Despite that, there are some scholars that opine that the conditions of non-

delivery can be stipulated if the purchase is made not for the purpose of utilizing

it but to conduct trade with it. This is because for a trader, he would like to avoid

paying for the delivery cost; hence, the conditions of non-delivery. This view is

rejected because what are important are the Shari’ah requirements, and not the

intention of the contracting parties.

Stipulating a condition that the bank/institution will only pay if the investment

agent fulfills his promise to purchase the commodity

It is unlawful for the institution to stipulate that payment will only be made if the

agent presents a guarantee (guarantee letter) that he will purchase the said

commodity. This is because the commitment of the principal to pay the price is

separate from his promise to the agent to purchase the commodity for him.

Fourth: The Shari’ah criteria related to guarantee

The prohibition of undertaking two parts of a contract

In international commodities trading where the agent purchases commodities for

the benefit of the institution and subsequently sells the commodities to himself,

the second leg of the transaction (sale transaction) must not be done

without the proper exchange of the notice of offer and acceptance by the agent

and the institution. This is to ensure that the rights and liabilities of each party

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can be distinguished. (e.g. before the institution issues the notice of acceptance,

the customer still assumes the role as the institution‟s agent. Therefore, he is

liable if the commodities are damaged, albeit certain factors must be considered)

The combination of the two guarantees/liabilities is forbidden (i.e. without the

proper exchange of offer and acceptance), as it contravenes the principle of „loss

is burdened on those who have acquired profit‟ (al-Ghunmu bil Ghurmi). There is

also a jurisprudential controversy on the matter of one person undertaking two

roles in a contract, e.g. he is the agent for purchasing a commodity + he is the

buyer that will sell the commodity purchased earlier to himself, without offer by

the principal and acceptance from the agent. This could lead to the abuse of

power on the part of the agent, whereby he will sell the commodity to himself at

the lowest possible price, rather than acting in the best interest of his principal, i.e.

selling at the highest possible price. However, the prohibition of combining both

guarantees will eliminate disagreements and necessitate the exchange of both

notifications (the offer from the agent and the acceptance from the institution), as

mentioned in the Shari‟ah Criteria for Murabahah.

The need to follow the sequence of transactions

It is forbidden for the agent that has purchased certain commodities on behalf of

the institution to subsequently sell it before he enters into a murabahah contract

with the institution, i.e. to purchase the commodities. This is because if he sells

the commodities without first buying it from the institution, then he is actually

selling something that he does not possess. In fact, he has abused the power

that has been given to him. The implication of this is that strictly speaking, the

agent must compensate for his misuse of power (which falls within the ambit of

„causing damage to the commodities‟) by paying to the institution an amount that

is equal to the current value of the commodities, and not the contracted price.

This is because the amount is compensatory in nature and not judged within the

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context of a sale contract. (See: The Shari’ah Criteria no. 20 on the matter of

commodity sales in organized markets, clause 4/2 with its sections, page 342).

The prohibition of stipulating that the agent must guarantee the debts of the

clients

Stipulating that the agent must guarantee the debts of the clients is in any

circumstances, forbidden. On the other hand, it it allowed to stipulate that the

agent is liable for negligence and violations of the conditions within the agency

contract. Nevertheless, in the interest of risk management, it is permissible to

stipulate that the clients must present a guarantee, such as collateral. Please

refer to Shariah Standard no. 5 in relation to guarantees.

 [The resolution of the International Fiqh Academy, no. 59(10/6) dated 1990, with

reference to the symposium held in Ar-Ribaat in the year 1989 on Financial

Markets. See: The Fiqh Academy Journal (no. 6, volume 21, year 1373 AH) and

(no.7 volume 1, year 1373 AH)].

The necessity of reforming the international commodities market

The non-compliant practices in the international commodities market do not

mean that the market itself is unlawful from the Shari’ah perspective. In this

matter, it is appropriate to mention the resolution of the Fiqh Academy

concerning the issues prevalent within the financial markets, as follows:

In light of the Shariah Standard that is premised upon permissible revenue,

investment of liquidity, promoting reserves that is based on the Islamic

partnership of risk and rewards, facing risks, such as risk of indebtedness.

For the role of financial markets in the exchange of fungibles and their role in

promoting investment; the studies that are done with respect to the rules on

fungibles will be done in response to the urgent needs of the people, to make

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them understand their religion as regards to contemporary issues and be in line

with the classical scholars‟ prudent efforts in clarifying the monetary rules, in

particular the rules of markets and the system of hisbah (weights and measures

control) in the market.

This will include the secondary markets that paved the way for the investors to be

familiar on how to enter the primary market and it will present an opportunity to

acquire liquidity and give them more confidence in their ability to invest, with the

ability to leave the market when necessary.

After knowing about the studies that have been done with respect to the system

and the laws of the financial markets, and their mechanism and tools, the

Shari‟ah Committee has decided on the following:

Firstly, the financial markets have a duty in preserving capital and as an

investment avenue, with the purpose of satisfying the general needs of the

society and fulfilling money-related goals, such as with respect to religious or

worldly needs.

Secondly, the current practices of the conventional centric financial markets are

not good examples of how Shari’ah-compliant investment should be undertaken.

So, collective research efforts between the modern jurists and economists need

to be implemented to review the bases in which the current system is built upon.

Doing so would ensure that they would attain the knowledge of the mechanism

and tools that are currently used in the existing markets and subsequently modify

them in light of the resolutions of Islamic law (the Shari’ah).

Thirdly, financial markets are premised upon managerial and procedural systems.

To ensure compliance with the Shari’ah, the application of those systems will

depend on the application of the maxim masalih al-mursalah (extended analogy),

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as long as it is based on the general sources of the Shari’ah and not contrary to a

text or to a Shari’ah maxim (qawa’id Shari’iyyah). It is understandable that

establishing financial markets is such a huge undertaking, such that it cannot be

done by individuals but by the government. Having said that, it is unlawful for

anyone to dissent against the government„s orders, as long as the financial

markets adhere to the criteria and principles of the Shari’ah.

Perils of extending the operations of the international commodities trading

The intensiveness of the operations of international commodities trading is

considered as one of the shortcomings that requires immediate systematic

rectification, as is stated in the introduction of the recommendations made during

the 24th session of the Al-Baraka Symposium, as follows:

There is lack of effort towards addressing the issues that are faced by the

ummah, including poverty, unemployment and underdevelopment. At the same

time, the Islamic banks do not perform this role; rather, they conduct transactions

which effectively transfer the funds of depositors and investors to other countries,

i.e. through international commodity markets and through dealings in the stock

markets.

Thus, the following recommendation (tawsiyyah) is reported in resolution (qarar)

2/24 of the 24th Session of the Al-Baraka Symposium:

Collectively, there are many banks that invest in a number of sectors. So, when

these financial institutions establish certain rules and regulations to ensure that

the investments are carried out in a Shari’ah-compliant manner and ensure that

proper risk management practices are in place, this will assure the investors that

their money is protected and they will earn some returns on their investment.

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Hence, this will serve towards preventing the outflow of money to other markets,

such as the international commodity markets.

This recommendation includes a request for the creation of an entity that will be a

substitute to the current conventional-based markets. The experience of certain

financial institutions in this area will help towards realizing this. For instance, we

can benefit from the experience of the Islamic Development Bank, the Liquidity

Management Centre in Bahrain, At-Tawfeeq Funds and Investment Company,

and others.

In light of economic analysis, it is reported that, “The transactions of Islamic

financial institutions in international commodities, in its complete form, will work

towards exporting the savings (mudakharoh) of Muslims (who is in serious need

of the commodities) to outside parties.

The Shari’ah boards of Islamic financial institutions have also been cautioned

against dealing in international commodities, as the related contracts are full of

Shari’ah discrepancies. Based on that forewarn, the resolutions and legal

opinions are as follows:

1. What has been stated in the fatwa of the Shariah Board of Islamic

Western Bank in Sudan, “As for the famous international commodity

transactions in international stock markets, their transactions are mere

form and not in compliance with the Shari’ah. Therefore it is compulsory to

avoid them, except if the transactions are not mere form and it complies

with the Shari’ah;

2. The Shari’ah adviser of the Al-Baraka Group of Companies said, “The

speed of the investment operations casts more doubts on the international

commodities, which in itself are full of uncertainties.”

3. In one of the researches of one of the jurists, it was reported that when he

mentioned the illegitimate forms of international commodities trading in the

26

Shari’ah, namely futures and derivatives, he said, “These transactions

include spot sales that do not fulfill the conditions set by the Shari’ah, such

as identifying the subject matter (mahallul ‘aqd), distinguishing between

subject matter and non-subject matter and fulfilling the condition of

ownership before sale. Nevertheless, several sales happen through the

exchange of papers. In most cases, these operations do not represent a

specific commodity;

4. The Shariah Board of Al-Rajhi Investment Company issued several fatwas

on the issues of dealing in international commodities; it was stated in the

last verdict, i.e. no. 153 that the Board looked at the provision in the

contracts of international commodities with wariness, “Deferred sale:

commodities, metals and livestock. Verily, the board fears that if a great

percentage of sales are concluded through dealings that involve the

exchange of commodities, then this activity would not be compatible with

the conditions stated in resolution no. 135 in the year 1412 AH, that is

transactions/activities that are allowed based on exception must only be

undertaken in as much as necessity demands it (not more than that). This

is because the excessive application of such transactions will result in the

non-realization of the main functions of Islamic banks and the non-

realization of the aims of Islamic economics, despite the fact that those

transactions (in form) may seem to be in line with the Shari’ah. We must

also remember that fatwas may differ, due to differences in time, place

and circumstance. The reality of it is that the stock exchange causes

damages that are uncalled for.

(Muraabahaat as-Sila‟u ad-Dawliyah, by Dr. Muhammad Abdul Haleem „Umar,

„former reference‟ p. 1432-1435).

Translated and edited by:

Sa'id Adekunle Mikail and Mohammad Ashadi Mohd. Zaini (ashadi@isra.my)

mailto:ashadi@isra.my


429 Too Many Requests

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