Resolutions of the
Securities Commission
Shariah Advisory Council

Second Edition

Contents

i

RESOLUTIONS OF THE
SECURITIES COMMISSION

SHARIAH ADVISORY COUNCIL

SECOND EDITION

Resolutions of the Securities Commission Shariah Advisory Council – Second Edition

ii

Securities Commission
3 Persiaran Bukit Kiara
Bukit Kiara
50490 Kuala Lumpur
Malaysia
Tel: 03-6204 8000  Fax: 03-6201 1818
www.sc.com.my

Copyright
© Securities Commission

All rights reserved. No part of this publication may be reproduced, stored in or
introduced into a retrieval system, or transmitted in any form or by any means
(graphical, electronic, mechanical, photocopying, recording, taping or otherwise),
without the prior written permission of the Securities Commission of Malaysia.

First Edition 2002
Second Edition 2006
Second Edition, First Reprint 2007

Perpustakaan Negara Malaysia                      Cataloguing-in-Publication Data

Resolutions of the Securities Commission Shariah Advisory Council
ISBN 983-9386-60-3
1. Capital market--Malaysia.        2.   Securities--Malaysia.
3. Investments (Islamic law)--Malaysia.        I.   Title.
332.0415088297

Contents

iii

FOREWORD BY DATO’ ZARINAH ANWAR v

FOREWORD BY DATUK SHEIKH GHAZALI vii
HAJI ABDUL RAHMAN

SHARIAH ADVISORY COUNCIL OF THE SECURITIES 1
COMMISSION

RESEARCH METHODOLOGIES IN THE ISLAMIC 7
CAPITAL MARKET

SOURCES AND RESEARCH MANHAJ IN THE ISLAMIC 8
CAPITAL MARKET

PRINCIPLES OF MUAMALAT IN THE CAPITAL MARKET 13
MUSYARAKAH MUTANAQISAH 14
BAI` DAYN 16
BAI` `INAH 20
BAI` MA`DUM 23
BAI` WAFA’ 26
BAI` MUZAYADAH 29
SUFTAJAH 32
BAI` `URBUN 35
BAI` BIMA YANQATI` BIHI SI`R 37
KAFALAH ON MUDHARABAH CAPITAL 39
UJRAH FOR GUARANTEES 44
IBRA’ CLAUSE IN A DOCUMENT OF AGREEMENT 46
IQTA` 52

CAPITAL MARKET PRODUCTS ACCORDING TO ISLAMIC 59
JURISPRUDENCE

CONTENTS

Resolutions of the Securities Commission Shariah Advisory Council – Second Edition

iv

CALL WARRANTS 60
TRANSFERABLE SUBSCRIPTION RIGHTS (TSR) 64
ASSET SECURITISATION 67
REGULATED SHORT SELLING AND SECURITIES 71
BORROWING AND LENDING
CRUDE PALM OIL FUTURES CONTRACT 75
COMPOSITE INDEX FUTURES CONTRACT 79
ISLAMIC BENCHMARK BOND 84
FINANCE LEASE AND OPERATING LEASE 89
PREFERENCE SHARES 92

CAPITAL MARKET ISSUES ACCORDING TO ISLAMIC 95
JURISPRUDENCE

RIBA: PRINCIPLES AND DIVISION 96
GHARAR 100
GAMBLING 104
GHALAT 106
SPECULATION 109
QABADH 113
DHA` WA TA`AJJAL 119
`UMUM BALWA 123
TA`WIDH 125
HIBAH RUQBA 129
CONDITIONAL HIBAH 134
WHEN ISSUE PROCESS 136
PRICE FIXING BASED ON FORWARD PRICING 139

SHARIAH CRITERIA FOR LISTED SECURITIES 143
SHARIAH CRITERIA FOR LISTED SECURITIES 144
MIXED COMPANIES 150
IMAGE AS CRITERIA FOR LISTED SECURITIES 164

GLOSSARY 171

BIBLIOGRAPHY 177

Foreword by the Chairman Securities Commission

v

Assalamu’alaikum warahmatullahi wabarakatuh and warm greetings.

I thank God almighty that this book on the Resolutions of the Securities
Commission Shariah Advisory Council is now published to serve as a reading
and reference material for those wishing to understand Shariah products
and concepts applied in the Islamic capital market in this country.

It cannot be denied that the Islamic capital market, which complements the
Islamic banking system and Takaful in this country, is growing rapidly. This
positive development began in the early 1990s when many corporate bodies
used Islamic capital market instruments to fund their economic activities.
Investors, too, began to show interest in investing in Shariah-compliant
securities and Islamic unit trust funds. The issuance of private debt securities
based on Shariah principles, too, began to gain acceptance and popularity in
the country’s capital market.

In this context, the Securities Commission (Commission), which is the
regulatory and developmental body for the capital market, will continue to
focus its efforts towards further developing the local Islamic capital market.
The establishment of the Islamic Capital Market Department (ICMD) in the
Commission and the Shariah Advisory Council (SAC) in 1996 is seen as the
pioneering effort towards creating a more organised and efficient Islamic
capital market. The SAC, assisted by the ICMD, is responsible for advising
the Commission on issues related to the Islamic capital market to ensure its
consistency with Islamic principles. The SAC analyses Shariah principles
which can be used for introducing new Islamic capital market products and
services, as well as evaluates existing conventional capital market instruments
to determine the extent to which these instruments comply with Shariah
principles. The SAC is also responsible for analysing specific issues that are

FOREWORD BY DATO’ ZARINAH ANWAR
CHAIRMAN OF THE SECURITIES COMMISSION

Resolutions of the Securities Commission Shariah Advisory Council

vi

related to the operation of the Islamic capital market to provide guidance
and advice to investors, the government and industry.

In addition, the Commission also emphasised the need to determine the
Shariah-compliance status of listed companies on Bursa Malaysia and, as a
result, the list of Shariah-compliant securities by the SAC is published twice
a year to provide a guide to investors who wish to invest in investments
which comply with Shariah principles.

At the same time, the Commission also formulated short-term and long-
term plans for the development of the Islamic capital market. The Capital
Market Masterplan outlines the objectives in making Malaysia an international
Islamic capital market centre. Thus, in order to achieve the objectives,
comprehensive knowledge and education on Islamic capital market must be
given attention to and nurtured in all investors, market intermediaries, the
regulatory body and everyone directly involved in the Islamic capital market.

The role of the Commission is not only restricted to regulatory oversight but
also encompasses initiating developmental activities, and educating investors
and the general public in developing the country’s capital market. In the
context of the Islamic capital market, various efforts have been initiated by
introducing investor education programmes, such as conducting seminars
and workshops, as well as publishing reading materials. Thus, the publication
of this book is part of the Commission’s continuous efforts to educate investors
on all the resolutions adopted by the SAC in their series of meetings. All
views of the Shariah are presented in a brief and simple manner so that it
can easily be understood by all walks of life.

In conclusion, I would like to thank the SAC, ICMD staff and everyone
involved, directly and indirectly, in the production of this book. It is hoped
that this book will be a useful guide to everyone and can help generate
more intellectuals and investors who are knowledgeable and informed of
the Islamic capital market.

Wassalam.

Dato’ Zarinah Anwar

Foreword by the Chairman Securities Commission

vii

Assalamu’alaikum warahmatullahi wabarakatuh and all praises to Allah the
great merciful and the great compassionate who has bestowed upon human
beings the enlightenment and knowledge. Prayers to God and peace be
bestowed on Prophet Mohamed s.a.w.

After the publication of the Resolutions of the Securities Commission Shariah
Advisory Council book in 2002, numerous comments and feedback were
received. The second edition of this book is published to provide updates
and the latest Shariah Advisory Council (SAC) resolutions for general
information and reference.

To develop an Islamic capital market is not an easy task. It requires an in-
depth understanding of the operations of the current capital market and
contemporary analyses to fulfil the present-day needs of Muslims who wish
to participate in economic activities in accordance to Shariah principles.

Members of the SAC who are well versed in the fields of muamalah and
Islamic financial system have collaborated to resolve issues directly and
indirectly related to the Islamic capital market. Collaborative efforts and ideas
of people with different educational backgrounds have resulted in practical
solutions for developing the Islamic capital market, in particular, and the
country’s capital market, in general.

It cannot be denied that there may be several SAC resolutions that differ
from the opinions of Shariah experts in other countries. These variations
exist due to the difference in time and place, and also divergence in needs
and background of a country. If we look at the history of Islamic legislation
development, such varied opinions with regards to certain principles are not
uncommon among the founders. Even Imam Shafi`i, the founder of the Syafi`i
Mazhab had two divergent opinions on a single particular issue depending

FOREWORD BY DATUK SHEIKH GHAZALI
HAJI ABDUL RAHMAN

CHAIRMAN OF THE SECURITIES COMMISSION
SHARIAH ADVISORY COUNCIL

Resolutions of the Securities Commission Shariah Advisory Council

viii

on whether it occurred in a different environment, background, time and
place.

Indeed, these differences in opinions should be seen as a blessing for Muslims
because, whether consciously or not, they provide a way out for every problem
and ensure that Shariah is able to satisfy the needs of local communities
from different geographical locations and cultural backgrounds. What is
needed is that we respect any opinion offered so long as it is based on
Shariah arguments.

Within the context of the Islamic capital market, differences in opinion among
Shariah experts are those on matters involving peripheral issues and
implementation of methodologies. These differences in opinions are not on
fundamental matters that have to be strictly complied with in muamalah
such as avoiding the practice of riba, cheating, gharar elements and other
practices forbidden by Shariah.

As such, the SAC hopes that these differences in opinion will not obstruct
the development of the Islamic capital market in this country. As the national
SAC for the country’s Islamic capital market, it is imperative for the SAC to
accept only one practical view as the general and sole reference for
implementing Islamic capital market activities. This will give rise to an Islamic
capital market that is organised, uniform and accessible to all layers of society.
This also helps reduce the community’s confusion over the various divergent
opinions of the Shariah.

Through the publication of this book, the SAC hopes to provide clarity on
the resolutions and views of the SAC, as well as the arguments used as the
basis for the formulation of such resolutions. Nevertheless, the SAC always
welcomes views from all parties that would contribute towards a more robust
and dynamic Islamic capital market. It is hoped that efforts made so far have
met with Allah’s pleasure and to Allah we seek guidance and enlightenment.

Wassalam.

Datuk Sheikh Ghazali Haji Abdul Rahman

1

Shariah Advisory Council of the Securities Commission

SHARIAH ADVISORY COUNCIL
OF THE SECURITIES COMMISSION

2

Resolutions of the Securities Commission Shariah Advisory Council

INTRODUCTION

The Securities Commission (Commission) is a statutory body set up under
the Securities Commission Act 1993 (SCA), reporting directly to the Minister
of Finance. It is the sole regulatory body for the regulation and development
of the capital market in Malaysia. It is directly responsible for the regulation
and supervision of the activities of the market institutions, including the
stock exchanges, clearing houses, and monitoring of licensees under the
Securities Industry Act 1983 (SIA) and Futures Industry Act 1993 (FIA).1

The Commission, in developing the national capital market, has identified
the development of the Islamic capital market as one of its main agendas.2

This agenda was later incorporated into the Malaysian Capital Market
Masterplan, launched on 22 February 2001. One of the main objectives set
by this plan is to establish Malaysia as an international Islamic capital market
centre.3

SHARIAH ADVISORY COUNCIL OF THE
SECURITIES COMMISSION

1 Securities Commission Act 1993, section 15.
2 Refer to the Securities Commission Business Plan 1998–2000 which lists in its agenda, among others, the

development of the equity market, streamlining the development of Islamic debt securities, developing
Islamic investment group activities and introducing new Islamic capital market products.

3 In meeting the objective of establishing Malaysia as an international Islamic capital hub, a number of
strategic initiatives were outlined as follows:
• Facilitate the development of various competitive products and services related to the Islamic capital

market;
• Create an independent market to mobilise Islamic funds effectively;
• Ensure an appropriate and comprehensive accounting, tax and regulatory framework; and
• Enhance the international recognition of the Malaysian Islamic capital market.
See Securities Commission, Capital Market Masterplan, February 2001, pp. 57, 108–114, 173–184.

3

Shariah Advisory Council of the Securities Commission

The Commission has taken the following two approaches in meeting this
objective:

(a) Supply the necessary infrastructure for research, discussions and
dialogues; and

(b) Undertake specific efforts to develop and strengthen the market.4

Using these approaches, a dual market system will be created similar to the
existing banking and insurance sectors. The Commission has taken numerous
steps in priming the infrastructure for the development of the Islamic capital
market. These include:

(a) Establishing the Islamic Capital Market Department (ICMD, formerly
known as Islamic Capital Market Unit);

(b) Establishing the Islamic Instrument Study Group (IISG); and

(c) Establishing the Shariah Advisory Council (SAC).

The following is an elaboration of the above-mentioned measures.

ISLAMIC CAPITAL MARKET DEPARTMENT

In its effort to develop the Islamic capital market, the Commission established
a department under the Market Policy and Development Division called the
Islamic Capital Market Department (ICMD). Its responsibilities include
conducting research and developing Islamic capital market products in the
equity, debt and derivative sectors, as well as analysing the securities of
listed companies. It employs full-time officers with Shariah education
background, especially in the disciplines of fiqh muamalat (Islamic commercial
law) and modern finance. The combination of professional personnel from
these two different backgrounds is essential in creating a working group
capable of meeting the set objectives.5 Its research findings are then presented
to the SAC for approval.

4 Nik Ramlah Nik Mahmood, “Regulatory Framework and the Role of the Securities Commission in
Developing the Islamic Capital Market”, National Conference on Islamic Banking and Investment”, Kuala
Lumpur, 19 November 1996, p. 5.

5 Khairil Anuar Abdullah, “The Issues and Prospects of Establishing a Sound Islamic Capital Market”, Labuan
International Summit on Islamic Financial and Investment Instruments, Financial Park Complex, Labuan,
16–18 June 1997, p. 5.

4

Resolutions of the Securities Commission Shariah Advisory Council

ISLAMIC INSTRUMENT STUDY GROUP

The Commission established the IISG in 1994 with a membership comprising
Shariah consultants and corporate figures. The group discussed and made
decisions on issues related to the Islamic capital market in Malaysia. Eight
meetings were held throughout 1995–1996.

The following is a list of the IISG members (from 1994 to 15 May 1996):

(a) Dato’ Sheikh Azmi Ahmad;

(b) Dato’ Mohd Khudzairi Dainuri;

(c) Associate Prof Md Hashim Yahaya (now Datuk);

(d) Dato’ Dr Abdul Halim Ismail;

(e) Nor Mohamed Yakcop (now Tan Sri and Second Finance Minister);

(f) Dr Abdullah Ibrahim;

(g) Ustaz Hassan Ahmad (now Dato’); and

(h) Ustaz Md Nurdin Ngadimon.

SHARIAH ADVISORY COUNCIL

The ICMD carries out research activities and functions as the secretariat to
the IISG. The latter succeeded in exploring the foundation for developing an
Islamic capital market in Malaysia. Thus, the Commission viewed that it was
important for the IISG to expand its role, and consequently, it was upgraded
to a more formal body called the SAC on 16 May 1996. Its establishment
was endorsed by the Minister of Finance and it was given the mandate to
ensure that the implementation of the Islamic capital market complied with
Shariah principles. Its scope of jurisdiction is to advise the Commission on all
matters related to the comprehensive development of the Islamic capital
market and to function as a reference centre for all Islamic capital market
issues.6

6 Nik Ramlah Nik Mahmood, “Regulatory Framework and the Role of the Securities Commission in
Developing the Islamic Capital Market”, National Conference on Islamic Banking and Investment”, Kuala
Lumpur, 19 November 1996, p. 5.

5

Shariah Advisory Council of the Securities Commission

In introducing the Islamic capital market instruments, the SAC adopted two
approaches. The first approach was to study the validity of conventional
instruments used by the local capital market from the Shariah perspective.
The study focused on the structure, mechanism and use of the instruments
to ascertain whether they were against Shariah principles. The second
approach entailed formulating and developing new financial instruments
based on Shariah principles.

The SAC is also responsible for issuing a list of Shariah-compliant securities
(formerly known as list of Shariah-approved securities). Up to 28 October
2005, 857 securities were classified as Shariah-compliant securities by the
SAC. This represented 85% of securities listed on Bursa Malaysia. The list is
constantly updated and the Commission announces the updated list twice a
year. It is essential for helping Muslim investors identify Shariah-compliant
securities and at the same time, increase their confidence when making
investments.

The list of Shariah-compliant securities was used as the basis for developing
the Shariah Index launched by Bursa Malaysia on 17 April 1999. With the
launch, investors will be able to monitor the performance of their investments
more efficiently and effectively. Although the SCA does not expressly state
the formation of the SAC, section 16 of the SCA stipulates that the
Commission has full jurisdiction in carrying out its duties based on securities
laws. Moreover, section 18 of SCA specifies that the Commission is
empowered to form a committee to help it carry out its duties based on the
Act, and the Commission is also permitted to appoint anyone it deems fit to
be a member of such a committee.7

Members of the SAC are appointed by the Commission once every two
years. The table on page 6 lists past and present members of the SAC.

7 Securities Commission Act 1993.

6

Resolutions of the Securities Commission Shariah Advisory Council

Name/ Designation 1996– 1998– 2000– 2002– 2004–
1998 2000 2002 2004 2006

1. Dato’ Sheikh Azmi Ahmad √ √

2. Dato’ Dr Abdul Halim Ismail √ √ √ √ √

3. Dato’ Dr Othman Ishak √ √

4. Dato’ Dr Haron Din √ √

5. Datuk Md Hashim Yahaya √ √ √ √ √

6. Dato’ Hassan Ahmad √ √ √ √ √

7. Dato’ Sheikh Ghazali Abdul √ √ √ √
Rahman

8. Dato’ Dr Abdul Monir Yaacob √ √ √ √

9. Tan Sri Nor Mohamed Yakcop √

10. Dr Mohd Daud Bakar √ √ √ √ √

11. Associate Prof Dr Abdul Halim
Muhammad √ √ √

12. Dr Mohd Ali Baharum √ √ √

Members of the Securities Commission Shariah Advisory Council

7

Research Methodologies in the Islamic Capital Market

RESEARCH METHODOLOGIES
IN THE ISLAMIC CAPITAL MARKET

8

Resolutions of the Securities Commission Shariah Advisory Council

RESOLUTION

At its third meeting on 30 October 1996, the Shariah Advisory Council (SAC)
discussed Shariah research guidelines in the capital market and passed a
resolution to accept all sources and manhaj (methodology) of the esteemed
Islamic jurists. These sources of research consist of primary and secondary
sources adopted in Islamic jurisprudence.

PRIMARY SOURCES

The primary sources used by the SAC in conducting research on the capital
market are the Quran and the Sunnah. This is based on the fact that Islam
urges its followers to refer to these sources in solving problems that occur in
their daily lives as commanded by Allah s.w.t.

Allah s.w.t. said:

Meaning: “O you who believe! Obey Allah s.w.t. and obey the
Messenger, and those charged with authority among you. If you differ
in anything among yourselves, refer it to Allah s.w.t. (Quran) and His
Messenger (Sunnah).”

(Surah al-Nisa’: 59)

SOURCES AND RESEARCH MANHAJ IN THE
ISLAMIC CAPITAL MARKET

9

Research Methodologies in the Islamic Capital Market

Allah s.w.t. also said:

Meaning: “So take what the Rasulullah s.a.w. (the Messenger) assigns to you,
and deny yourselves that which he withholds from you.”

(Surah al-Hasyr: 7)

SECONDARY SOURCES AND RESEARCH MANHAJ

Apart from the two primary sources i.e. the Quran and the Sunnah, the SAC
also passed a resolution to use secondary sources and other Islamic
jurisprudence manhaj, such as ijmak, qiyas, maslahah, istishsan, istishab,
sadd zari`ah, `urf, maqasid syari`ah, siyasah syar`iyyah, ta’wil, istiqra’, talfiq
and others which have already been applied in Islamic jurisprudence. This is
based on a hadith (prophetic tradition) when the Prophet s.a.w. appointed
Muaz as qadhi (judge) in Yaman. He had asked Muaz about certain important
principles. He asked: “Muaz, what references do you use when you make a
decision?”. Muaz replied that he would refer to the Quran. The Prophet
s.a.w. then asked further: “What if the matter in question is not found in
the Quran?”. To which Muaz replied that he would refer to any decision
that had been made by the Prophet s.a.w. The Prophet s.a.w. asked again:
“What if the matter had never been decided by me?”. Muaz then replied
that he would apply ijtihad (reasoning of qualified scholars) using his own
thinking and wisdom to come to a decision. The way Muaz handled the
questions on making judgement received the blessings of the Prophet s.a.w.
He then said: “Praise be to Allah s.w.t. for giving guidance to the Prophet
s.a.w. and his representative (Muaz).”8

Thus, all matters relating to secondary sources are included in ijtihad, as
stated in the hadith.

Ijmak

Ijmak means unanimous agreement among the mujtahidun (see Glossary)
of the Muslim community on Shariah rulings imposed during a particular
period after the death of the Prophet s.a.w.9

8 Hadith as narrated by Abu Daud and Tirmizi.
9 Abu Zuhrah, Usul al-Fiqh, Dar al-Fikr, Cairo, p. 185.

10

Resolutions of the Securities Commission Shariah Advisory Council

Nevertheless, the extent of approval of a particular hukm (Shariah ruling)
being categorised according to the ijmak is difficult to ascertain because of
the wide territories covered by Islam and there are various trends of thoughts
among Muslims. Thus, the majority of ulama’ (Islamic scholars) believe that
ijmak only occurred during the time of the companions of the Prophet s.a.w.
before they moved to other territories and that the claim of ijmak after that
period is quite difficult to accept.10

Qiyas

This refers to likening an original hukm having nas (explicit legal text) with a
new matter having no nas but having the same illah (cause). Thus, Imam
Syafi`i considered qiyas as the basis for ijtihad.11 It is regarded as a source of
legislation which has significant contribution in solving new issues that have
not been debated.12

Maslahah

This means making a judgement based on the principle of general benefits
on matters that have no clear nas from the Quran or the Sunnah.13

In general, Islamic jurisprudence applies the maslahah (public interest) in the
implementation of a ruling. As such, for anything that is beneficial and
necessary to the general public, it would establish dalil (indicative legal text)
in the form of directives. However, for anything that is detrimental to the
general public, Syara’ will establish dalil that prohibits its implementation.14

Istihsan

This refers to disregarding a hukm that is backed by dalil and applying another
hukm that is more convincing and stronger than the former, based on Syara’
dalil permitting the act in question.15

10 Abu Zuhrah, Usul al-Fiqh, pp. 188–189.
11 Abu Zuhrah, Usul al-Fiqh, p. 204.
12 Al-Zarqa’, Al-Madkhal al-Fiqhi al-Am, Dar al-Fiqh, Beirut, 1968, vol. 1, p. 68.
13 Al-Zarqa’, Al-Madkhal-al-Fiqhi, vol. 1, p. 90.
14 Izz al-Din bin Abd al-Salam, Qawa`id al-Ahkam, Dar al-Makrifah, Beirut, vol. 1, pp. 2–4.
15 Al-Zuhaili, Usul al-Fiqh al-Islami, Dar al-Fikr, Damascus, 1986, vol. 2, p. 738. Abu Zuhrah, Usul al-Fiqh,

p. 245. Abdul Wahab Khallaf, Masadir al-Tasyri` al-Islami fi ma la Nassa fihi, Dar al-Qalam, Kuwait,
1982, p. 71.

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Research Methodologies in the Islamic Capital Market

Istishab

This refers to the maintenance of the previous hukm as long as there is no
other dalil that can change that particular hukm.16

Sadd Zari`ah

This refers to the approach used to curtail anything that can cause a Muslim
to do the forbidden. It is considered an early preventive measure to prevent
a Muslim from doing what is forbidden by Allah s.w.t.17

`Urf

This refers to the norms of the majority of a society whether applied in speech
or deed.18 It is considered as ‘adat jama`iyyah (customs that are collectively
acceptable) and can be used as a legal basis so long as it does not contradict
the Syara’.19 In the context of the Islamic capital market, `urf tijari refers to
customary practices in business that are considered a basis for guidance and
hukm.

Maqasid Shariah

This refers to the desired objectives of the Shariah when determining a hukm
aimed at protecting human maslahah.20

Siyasah Syar`iyyah

This refers to the area in Islamic jurisprudence that explains rulings related to
policies and approaches taken in organising the national administrative
structure (and its people) in accordance with the spirit of the Shariah. It

16 Abu Zuhrah, Usul al-Fiqh, p. 276.
17 Abu Zuhrah, Usul al-Fiqh, p. 268.
18 Al-Zarqa’, Al-Madkhal al-Fiqhi, vol. 1, p. 131.
19 Al-Zuhaili, Usul al-Fiqh al-Islami , vol. 2, p. 828.
20 Ahmad al-Raisuni, Nazariyyah al-Maqasid ‘inda al-Imam al-Syatibi, The International Institute of Islamic

Thought, Herndon, 1992, p. 7.

12

Resolutions of the Securities Commission Shariah Advisory Council

covers the issues of central and regional administration, economy, judiciary,
peace, international relations, etc.21

Ta’wil

This refers to an effort to explain or interpret Syara’ principles through a dalil
without being restricted by its literal meaning. The implicit meaning will
be accepted if it is solidly backed by other dalil which explain what Syara’
requires the meaning to be.22 It is important because it touches on the
extensive meaning of a dalil and understands the requirements of Syara’ for
the dalil, because a dalil sometimes requires more than its literal meaning. In
this case, it requires proof that a particular dalil has a meaning different from
the literal meaning.

Istiqra’

This refers to a thorough scrutiny of a matter before a conclusive hukm is
made on the matter. This manhaj involves examining the applications of
general dalil on the related branches of the hukm and subsequently making
exceptions, if any.23

Talfiq

This means introducing an approach that has never been used or discussed
by past mujtahid.24 This manhaj will combine two or more opinions of the
mazhab (school of thought) and derive a different opinion that has never
been discussed by the previous mujtahid.

21 Wizarah al-Auqaf wa al-Syu’un al-Islamiyyah, Al-Mausu`ah al-Fiqhiyyah, Kuwait, 1990, vol. 25, pp.
294–310. Ahmad al-Husary, Al-Siyasah al-Iqtisodiyyah wa al-Nuzum al-Maliyyah fi al-Fiqh al-Islami,
Maktabah al-Kulliyyat al-Azhariyyah, Cairo, p. 12.

22 Al-Duraini, Al-Manahij al-Usuliyyah, Muassasah al-Risalah, Damascus, p. 189.
23 Al-Mausu`ah al Fiqhiyyah, vol. 4, p. 77. Al-Zuhaili, Usul al-Fiqh al-Islami, vol. 2, p. 916.
24 Al-Zuhaili, Usul al-Fiqh al-Islami, vol. 2, p. 1143.

13

Principles of Muamalat in the Capital Market

PRINCIPLES OF MUAMALAT
IN THE CAPITAL MARKET

14

Resolutions of the Securities Commission Shariah Advisory Council

MUSYARAKAH MUTANAQISAH

RESOLUTION

At its 7th meeting on 1 December 1995, the Islamic Instrument Study Group
(IISG) passed a resolution to accept musyarakah mutanaqisah as a concept
that can be used to develop instruments for an Islamic capital market.

INTRODUCTION

Another term for musyarakah mutanaqisah is musyarakah muntahiyah bi
tamlik.25 It is a form of partnership contract whereby the financier allows his
partner to buy assets in one payment or in instalments based on terms agreed
by both parties.26

An illustration of musyarakah mutanaqisah in the capital market is: ABC
company buys a building worth RM80 million and sells it to its customers for
RM100 million based on the principle of bai` bithaman ajil (BBA) within 120
months. As ABC company requires liquidity, it can get the project investors
involved by issuing sukuk27 based on musyarakah mutanaqisah. For that
purpose, ABC company puts in its share (the smaller part, say 10%) in
musyarakah mutanaqisah for the purchase of the building (which costs
RM80 million). The investors hold the majority part (90%). ABC company

25 Muhammad Solah al-Sowi, Musykilah al-Istithmar fi al-Bunuk al-Islamiyyah, Dar al-Wafa, Cairo, 1990,
pp. 619, 621.

26 Al-Sowi, Musykilah al-Istithmar, p. 619.
27 Sukuk is a form of financial note. Please refer to al-Mausu`ah al-Fiqhiyyah, vol. 27, p. 46.

15

Principles of Muamalat in the Capital Market

will then buy back all the shares from the investors every month according
to the amount and duration agreed upon i.e. 120 months. This will end at
the point when ABC company owns all the shares.

ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF
MUSYARAKAH MUTANAQISAH

Musyarakah mutanaqisah is a new instrument for musyarakah products and
was introduced in Egypt.28 The majority of the current Islamic jurists are
unanimous in accepting it as one of the instruments in the capital market.29

This is because it has features that do not contradict the nas and general
principles of the Shariah. These features are as follows:

(a) `Inan company (form of partnership, in which each partner contributes
both capital and work);

(b) Promise from the financial institution to sell its share of the company
to its partners; and

(c) The institution sells all of its shares to its partner fully or partially.30

28 Abd al-Sami` al-Misri, Al-Masraf al-Islami: ‘Ilmiyyan wa ‘Amaliyyan, Maktabah Wahbah, Cairo, 1988,
pp. 69–70.

29 Dalil al-Fatawa al-Syar`iyyah fi al-A’mal al-Masrafiyyah, Markaz al-Iqtisad al-Islami, Cairo, 1989, pp.
66–67.

30 Al-Sowi, Musykilah al-Istithmar, pp. 619–627.

16

Resolutions of the Securities Commission Shariah Advisory Council

BAI` DAYN

RESOLUTION

At its 2nd meeting on 21 August 1996, the Shariah Advisory Council
(SAC) unanimously agreed to accept the principle of bai` dayn i.e. debt
trading as one of the concepts for developing Islamic capital market
instruments. This was based on the views of some of the Islamic jurists
who allowed this concept subject to certain conditions. In the context of the
capital market, these conditions are met when there is a transparent regulatory
system which can safeguard the maslahah (interest) of the market participants.

INTRODUCTION

From the Islamic jurisprudence point of view, dayn encompasses a wide
scope, including payment for product, qardh (loan) payment, mahr (dowry)
payment before or after cohabitation, that is mahr which has not been
given after the marriage `aqd (contract), rental, compensation for crime
committed (arsy), compensation for damages, money to be paid for divorce
(khulu`) and for purchase orders which have not yet arrived (muslam fih).31

In the context of the Islamic capital market, bai` dayn is the principle of
selling the dayn which results from mu`awadhat maliyyah contracts (exchange
contracts), such as murabahah, bai` bithaman ajil (BBA), ijarah, ijarah
munthiyah bi tamlik, istisna` and others.

31 Wahbah Al-Zuhaili, Al-Fiqh al-Islami wa Adillatuhu, Dar al-Fikr, Damascus, 1989, vol. 4, p. 432.

17

Principles of Muamalat in the Capital Market

ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF
BAI` DAYN

The bai` dayn principle has always been a point of contention among past
and present Islamic jurists. However, there is no general nas or consensus
(ijmak) among those who forbid it.32

In general, the majority of Islamic jurists are unanimous in allowing the
activity of selling debts to the debtor.33 They only differ in opinion about
selling the debt to a third party for the reason that the seller will not be able
to deliver the sold item to the buyer.

At its 8th meeting on 25 January 1996, the IISG identified the `illah (reason)
for why some Islamic jurists do not allow bai` dayn. The ̀ illah generally touches
on the risks to the buyer, gharar,34 absence of qabadh35 and riba.

Opinions of Past Islamic Jurists

The Hanafi Mazhab looked at bai` dayn from the aspects of potential risks
to the buyer, debtor, and the nature of the debt itself. They were unanimous
in not permitting this instrument because the risks cannot be overcome in
the context of debt selling. The debt is in the form of mal hukmi (intangible
assets) and the debt buyer takes on a great risk because he cannot own the
item bought and the seller cannot deliver the item sold.36

The Maliki Mazhab allowed debt selling to a third party subject to certain
conditions to facilitate the use of this principle in the market. The conditions
are as follows:

(a) Expediting the payment of the purchase;

(b) The debtor is present at the point of sale;

(c) The debtor confirms the debt;

32 Ibnu Qayyim al-Jauziyyah, I`lam al-Muwaqqi`in, Dar al-Fikr, Beirut, vol. 1, p. 388.
33 Al-Zuhaili, Al-Fiqh al-Islami, vol. 4, p. 433.
34 Please see the resolution on gharar for further explanation.
35 Qabadh means the control and ownership of the item bought. It depends a lot on `urf or the normal

recognition of the local community. Please see the resolution on qabadh for further explanation.
36 Al-Kasani, Badai’i` al-Sana’i`, Dar al- Fikr, Beirut, vol. 5, p. 148.

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Resolutions of the Securities Commission Shariah Advisory Council

(d) The debtor belongs to the group that is bound by law so that he is
able to redeem his debt;

(e) Payment is not of the same type as dayn, and if it is so, the rate should
be the same to avoid riba;

(f) The debt cannot be created from the sale of currency (gold and silver)
to be delivered in the future;

(g) The dayn should be goods that are saleable, even before they are
received. This is to ensure that the dayn is not of the food type which
cannot be traded before the occurrence of qabadh; and

(h) There should be no enmity between buyer and seller, which can create
difficulties to the madin (debtor).

The conditions set by the Maliki Mazhab can be divided into three categories:37

(a) To protect the rights of the debt buyer;

(b) To avoid debt selling before qabadh; and

(c) To avoid riba.

The Syafi`i Mazhab was of the opinion that selling the debt to a third party
was allowed if the dayn was mustaqir (guaranteed)38 and was sold in exchange
for `ayn (goods) that must be delivered immediately. When the debt was
sold, it should be paid in cash or tangible assets as agreed.

Ibnu al-Qayyim was of the opinion that bai` dayn was permissible because
there was no general nas or ijmak that prohibited it. What was stated was
the prohibition of bai` kali’ bi kali’.39

37 Al-Dusuqi, Hasyiah al-Dusuqi ‘ala al-Syarh al-Kabir, Dar Ihya’ al-Kutub al-Arabiyyah, Cairo, vol. 3, p. 63.
38 Dayn mustaqir is redemption-guaranteed debts, e.g. compensation value of damages and properties of

the debtor. Please refer to Al-Syirazi, Al-Muhazzab, Dar al-Fikr, Beirut, vol. 1, p. 262.
39 Ibnu Qayyim, I`lam al-Muwaqqi`in, vol. 1, p. 388. Bai` kali’ bi kali’ is bai` nasi’ah bi nasi’ah which means

a debt sale that is paid by debt. For example, one buys food on credit for two months. When the time
comes, he should redeem his debt. However, he says to the seller: “I still have no food to pay my debt,
so sell it to me for another period.” The seller then sells it to him for another period and increases the
price. In this case, the buyer did not receive anything in exchange when being charged for extending the
period of payment.

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Principles of Muamalat in the Capital Market

Results of the study showed that the main reason for the clash of opinions
on bai` dayn among the past Islamic jurists centred on the ability of the seller
to deliver the items sold. This was stated by Ibnu Taimiyyah himself and was
also based on statements made in the great books of the four mazhab.

The argument of the Islamic jurists that prohibited bai` dayn to a third
party for fear that the buyer will have to bear great risks (Hanafi Mazhab)
has some truth in it. This is especially true if there is an absence of supervision
and control. In this context, the buyer’s maslahah should be safeguarded
because he is the party that has to bear the risks of acquiring the debt
sale while making the sale contract. In the Malaysian context, the debt
securities instruments based on the principle of bai` dayn are regulated by
Bank Negara Malaysia and the Commission to safeguard the rights of the
parties involved in the contract. Therefore, the conditions set by the Maliki
Mazhab and the fears of risks by the Hanafi Mazhab can be overcome by
regulation and surveillance.

Thus, it can thus be concluded that although there are differences in opinions
on bai` dayn among the Hanafi and Maliki Mazhab, there is a convergence
point which states that bai` dayn can be used if there is a regulatory system
that protects the buyer’s maslahah in an economic system.

The fifth condition set by Maliki Mazhab relates to the exchange of ribawi
goods. In the context of the sale of securitised debt, the characteristics of
securities differentiate it from currency, and hence, it is not bound by the
conditions for exchanging goods.

20

Resolutions of the Securities Commission Shariah Advisory Council

BAI` `INAH

RESOLUTION

The SAC, at its 5th meeting on 29 January 1997, passed a resolution that
bai` `inah is a principle that is permissible in the Islamic capital market in
Malaysia.

INTRODUCTION

Bai` `inah refers to trading whereby the seller sells his assets to the buyer at
an agreed selling price to be paid by the buyer at a later date. After that, the
buyer immediately sells back the assets to the seller at a cash price, lower
than the agreed selling price.

The majority of Islamic jurists state that there are three forms of trading40

categorised as bai` ̀ inah, whereby it can be concluded that all the assets sold

40 Forms of bai` `inah are as follows:

The seller sells a product to the buyer at a higher price on a deferred payment basis. After delivery
to the buyer, the seller buys back the product in cash at a much lower price.

A third party is involved, the seller sells a product that is delivered later on for, say RM200. After delivering
it to the buyer, the buyer then sells it to a third party for a lower price, say RM100. The third party then
resells it to the first party (original owner) for RM100. This means the original owner obtained RM100
from the trade.

A man wants to borrow, say RM100. The creditor refuses to lend using the qardh principle. Instead he
says: “I am not giving you qardh (loan) but I will sell you this shirt by deferred payment for RM100
although the market price is RM70.” This is to enable the buyer to sell it for RM70 at the market. When
the buyer agrees, the trade is transacted. What happens is the shirt owner makes a profit of RM30 from
the transaction because the buyer will pay him a deferred payment of RM100.

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Principles of Muamalat in the Capital Market

Please refer to Ibnu `Abidin, Hasyiah Rad al-Mukhtar, Dar al-Fikr, Beirut, 1992, vol. 5, pp. 273 & 325.
Al-Syaukani, Nail al-Authar, Dar al-Fikr, Beirut, 1994, vol. 5, p. 294. Al-San’ani, Subul al-Salam, Dar
al-Kitab al-Arabi, Beirut, 1987, vol. 3, pp. 76–77. Yusuf al-Qaradhawi, Bai` al-Murabahah li al-Amir bi
al-Syira’, Maktabah Wahbah, Cairo, 1987, p. 64. Al-Zuhaili, Al-Fiqh al-Islami, vol. 4, pp. 466–467.

41 Ibnu `Abidin, Hasyiah Rad al-Mukhtar, vol. 5, pp. 273 & 325. Al-Syaukani, Nail al-Authar, vol. 5, p. 294.
Al-San’ani, Subul al-Salam, vol. 3, pp. 76–77. Yusuf al-Qaradhawi, Bai` al-Murabahah, p. 64. Al-Zuhaili,
Al-Fiqh al-Islami, vol. 4, pp. 466–467.

42 The Hanafi, Maliki and Hanbali Mazhab.
43 Ibnu `Abidin, Hasyiah Rad al-Mukhtar, vol. 5, pp. 273 & 325. Al-Shaukani, Nailul Authar, vol. 5, p. 294.

Al-San’ani, Subul al-Salam, vol. 3, pp. 76–77. Yusuf al-Qaradhawi, Bai` al-Murabahah, p. 64. Al-Zuhaili,
Al-Fiqh al-Islami, vol. 4, pp. 466–467.

44 Al-San`ani, Subul al-Salam, vol. 3, pp. 76–77.

come from the financier. The financier will sell a product to the buyer at an
agreed price to be paid later. The financier then immediately buys back the
asset at a cash price lower than the deferred selling price.41

ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF
BAI` INAH

Opinions of Past Islamic Jurists

Past Islamic jurists had differing views on determining the hukm on bai` ̀ inah.
The following were their views:

The majority42 were of the opinion that bai` ̀ inah was not permissible because
it was the zari’ah (way) or hilah (legal excuse) to legitimise riba (usury).

The Hanafi Mazhab was of the opinion that bai` ̀ inah was permissible only if
it involves a third party, which acts as an intermediary between the seller
(creditor) and buyer (debtor).

The Maliki and Hanbali Mazhab, on the other hand, rejected bai` `inah and
considered it invalid. Their opinion was based on the principle of sadd zari’ah
that aims to prevent practices that can lead to forbidden acts such as, in this
case, riba.

The basis for the opinion of the majority of the Islamic jurists was the hadith
dialogue between Aishah and the slave Zaid bin al-Arqam which showed
the prohibition of bai` `inah.43 They also held to the hadith of the Prophet
s.a.w in which he warned that those who practised bai` `inah would suffer
scorn.44

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Resolutions of the Securities Commission Shariah Advisory Council

The Syafi`i and Zahiri Mazhab viewed bai` `inah as permissible. A contract
was valued by what is disclosed and one’s niyyah (intention) was up to Allah
s.w.t. to judge. They criticised the hadith used by the majority of the Islamic
jurists as the basis for their argument, saying that it (the hadith) was weak
and therefore could not be used as the basis for the hukm.45

From the study done on the opinions of past Islamic jurists on the issue of
bai` `inah, the SAC decided to accept the opinions of the Syafi`i and Zahiri
Mazhab in permitting bai` ̀ inah. Therefore, it can be developed into a product
for the Islamic capital market in Malaysia.

When institutions or individuals are in need of capital for a specific purpose
they can utilise this method of payment, using their assets as mortgage. As
they still need the assets, this method allows them to liquidate without losing
the asset.

45 Please refer to footnote no. 43 on page 21.

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Principles of Muamalat in the Capital Market

BAI` MA`DUM

RESOLUTION

The IISG and SAC discussed the bai` ma`dum issue in a series of meetings in
1995 and 1997 in relation to warrants and futures contracts on crude palm
oil, and concluded that bai` ma`dum is permissible.

INTRODUCTION

According to the theory of contracts in the Islamic jurisprudence, one of
the conditions is that the mahal al-`aqd or ma`qud alaih (objects in trade)
to be traded must exist when the contract is being made.46 Purchase of
an object that does not exist when the contract is being made is considered
bai` ma`dum.

ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF
BAI` MA`DUM

The bai` ma`dum issue was discussed by past Islamic jurists when they were
debating on the condition of an object in a contract of sale. An in-depth
study is necessary to look for the `illah (reason) for the prohibition of bai`
ma`dum in a vast majority of past Islamic jurisprudence literature to ensure
that no error is made when applying the prohibition rule in many modern
business transactions.

46 Al-Zuhaili, Al-Fiqh al-Islami, vol. 4, p. 172.

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Resolutions of the Securities Commission Shariah Advisory Council

Opinions of Past Islamic Jurists

The Hanafi and Syafi`i Mazhab pronounced that the object of sale must
be in existence at the time the contract is made. Otherwise, the contract will
be deemed invalid because anything that is ma`dum cannot be owned. This
was based on the prohibition by the Prophet s.a.w. on the sale of an unborn
baby camel and a sale of a non-existing object. However, exemption was
made to the salam, ijarah, musaqah and istisna` contracts based on the istihsan
principle.47

The Maliki Mazhab echoed the opinion of the Hanafi and Syafi`i Mazhab
regarding mu`awadhat maliyah (exchange contract), while for the tabarru`at
(ownership contract on voluntary basis) such as hibah, they did not impose
any condition for an existing object. What was important was that it was
expected to exist in the future.48

The Hanbali Mazhab, on the other hand, did not stipulate this condition.
What was important was that a contract did not contain elements of
gharar, which is forbidden by Shariah. Ibnu Taimiyah and Ibnu Al-Qayyim
analysed the question of bai` ma`dum and concluded a sale was forbidden
not because of ma`dum during the contract making, but rather because of
the existence of gharar, which is a forbidden element. This was based on
two arguments:49

(a) Neither the Quran, the Sunnah nor the Prophet’s companions stated
that bai` ma`dum was not permissible. There was, however, a hadith
prohibiting the sale of certain goods with features that did not exist.
The prohibition was also for goods that are available but simply did
not exist at the point of trade. This showed that the prohibition was
due to the existence of the gharar element in the trade. Gharar means
the inability to deliver the goods sold regardless of whether they exist
or not. An example is the sale of a runaway slave or an animal that
ran loose. Although the goods exist, the seller is not able to deliver
them to the buyer, despite the fact that it is his obligation to do so
once the sale and purchase agreement is completed. This failure to
fulfil his obligation implies the presence of the forbidden element of
gharar; and

47 Al-Kasani, Bada’i` al-Sana’i`, vol. 5, pp. 138–139, Al-Zuhaili, Al-Fiqh al-Islami, vol. 4, pp. 427–428. Ali
al-Khafif, Ahkam al-Mu`amalat al-Syari`yyah, Dar al-Fikr al-Arabi, Cairo, pp. 230–231.

48 Al-Kasani, Badai’i` al-Sana’i`, vol. 5, pp. 138–139. Al-Zuhaili, Al-Fiqh al-Islami, vol. 4, pp. 427–428.
Al-Khafif, Ahkam al-Mu`amalat al-Syar`iyyah, Dar al-Fikr al-Arabi, Cairo, pp. 230–231.

49 Ibnu Qayyim, I`lam al-Muwaqqi`in, vol. 2, pp. 8–10.

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Principles of Muamalat in the Capital Market

(b) There are specific situations where bai` ma`dum is permissible by
Syara’ and considered valid. An example is the sale of fruits and
grains, which are about to mature. This is allowed by the Prophet
s.a.w. This is considered bai` ma`dum because the buyer cannot take
delivery of the goods and has to wait until the fruits or grains mature.
The salam, istisna`, and ijarah contracts are other examples of bai`
ma`dum which are permissible based on the principle of istihsan.50 All
these examples show that selling something that has not yet existed
or is not yet in the seller’s possession at the point of the sale transaction
is not forbidden merely because of its ma`dum nature.

Hence, the study shows that the `illah for the prohibition of bai` ma`dum is
gharar51 and not the non-existence of goods. Gharar occurs when the seller
is unable to deliver the objects for sale.

50 Istihsan means disregarding a ruling that has dalil over a matter and replacing it with a stronger ruling
with dalil based on the Syara’.

51 Please refer to further explanation on bai` ma`dum in the SAC resolution on transferable subscription
rights (TSR) and gharar.

26

Resolutions of the Securities Commission Shariah Advisory Council

BAI` WAFA’

RESOLUTION

At its 11th meeting on 26 November 1997, the SAC passed a resolution that
bai` wafa’ is permissible under Islamic jurisprudence and can be developed
as a principle for formulating products in an Islamic capital market.

INTRODUCTION

Bai` wafa’ is also known in other terms, such as bai` thanaya (Maliki Mazhab),
bai` `uhdah (Syafi`i Mazhab), bai` amanah (Hanbali Mazhab) or bai` to`ah or
bai` jaiz. The Hanafi book named it bai` mu`amalah.52

Section 118 of Majallah al-Ahkam al-`Adliyyah defined it as a sale with a
condition that when the seller pays back the price of the goods sold, the
buyer returns the goods to the seller.53

According to al-Zarqa’, it is ‘aqd tauthiqiy (security contract) in the form of a
sale based on the fact that both parties to the contract have the right to
reclaim the exchanged goods.54 This means that when there is a wafa’ sale,
the seller has the right to reclaim the goods sold by paying the buyer the full
price of the goods sold. It is called wafa’ because of the obligation to fulfil
the condition in the contract, i.e. returning the goods sold when the seller
decides to reclaim the goods by paying back the amount.55

52 Nazih Hammad, Mu`jam al-Mustalahat al-Iqtisodiyyah fi Lughah al-Fuqaha’, The International Institute
of Islamic Thought, Herndon, 1993, p. 86.

53 Ali Haidar, Durar al-Hukkam, Dar al-Jil, Beirut, 1991, vol. 1, p. 111.
54 Al-Zarqa’, Al-Madkhal al-Fiqhi, vol. 1, p. 554.
55 Nazih Hammad, Mukjam al- Mustalahat al-Iqtisodiyyah fi Lughah al-Fuqaha’, p. 86.

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Principles of Muamalat in the Capital Market

The main features of bai` wafa’ include:56

(a) The seller and buyer can terminate the contract at any time;

(b) The asset traded according to wafa’ is not an asset obtained through
musya`;57

(c) The buyer can utilise and benefit from the property bought through
wafa’;

(d) The buyer will be liable if there is any damage caused to the property
by his own carelessness and negligence; and

(e) The buyer cannot transfer the right of ownership of the property to
another person via a sale. However, there are some Hanafi Mazhab
scholars who consider the transfer of ownership to a third party
permissible on the condition that the asset can be reclaimed.

Based on the above explanation, it can be concluded that the financier
acts as the buyer of the asset from the individual who needs capital.
These attributes also show the presence of rahn (pledge) characteristics in
bai` wafa’ despite its execution as a form of sale. For that reason, Al-Zarqa’
in an analysis of the features of bai` wafa’ stated that it is a combination of
rahn and bai` (sale). Thus, it is considered a contract in itself and not fully
bound by bai` or rahn.58

To illustrate bai` wafa’: A sells a property to B on the condition that if A pays
back the cost of the asset, B will return the asset to A. The price is fixed by
both parties, and the buyer can use the asset and enjoy its benefits as long
as he does not transfer the ownership right to a third party.

To illustrate the application of bai` wafa’ in a capital market – ABC company
gets a ship building contract and the order is estimated to be ready in two
years. The company can issue sukuk using the bai` wafa’ principle by
securitising the two-year dayn (debt). By issuing the sukuk, the company can
obtain liquidity to run other projects using the existing capital. The sukuk
issued is a joint funding effort by investors of the ship building project. When

56 Haidar, Durar al-Hukkam, vol. 1, pp. 432–433.
57 Musya’ refers to jointly-owned property. Please refer to Nazih Hammad, Mu`jam al-Mustalahat, p. 248.
58 Al-Zarqa’, Al-Madkhal al-Fiqhi, vol. 1, p. 544. Majallah Majma` al-Fiqh al-Islami, OIC, Jeddah, no. 7,

vol. 3, p. 12.

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Resolutions of the Securities Commission Shariah Advisory Council

the project is completed, ABC will buy back the sukuk from the investors
plus the profits, as agreed. For this type of sukuk, the profits are already
known by the investors because the capital and costs have been determined.

ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF
BAI` WAFA’

Opinions of Past Islamic Jurists

Past Islamic jurists were divided on determining the ruling on bai` wafa’. The
Maliki and Hanbali Mazhab, and mutaqaddimun (the earlier generation)
of the Hanafi and Syafi`i Mazhab considered bai` wafa’ as not permissible
because trading is not the main purpose of the bai` wafa’ contract. They
concluded that its main purpose is to legitimise riba which is forbidden.59

The mutaakhhirun (the later generation) of the Hanafi and Syafi`i Mazhab
permitted bai` wafa’ on the grounds that it is an effort to prevent the
occurrence of riba. They permitted it due to society’s demand and because
it had become the social `urf in many places.60

Some of the Islamic jurists of the Hanafi Mazhab were of the opinion that
both the seller and buyer can sell the wafa’ goods to a third party on the
condition that both parties (seller and buyer) had agreed to the transaction
of the other party.61 In fact, some Islamic jurists such as Al-Ba`lawi from the
Syafi`i Mazhab and Al-Sadr al-Shahid Omar Adul Aziz and Al-Marghinani
from the Hanafi Mazhab even permitted the buyer to sell the wafa’ goods to
a third party without referring to the wafa’ seller.62

59 Yusuf Kamal, Fiqh Iqtisad al-Suq, Dar al-Wafa’, Cairo, 1996, p, 195. ’Ali al-Khafif, Ahkam al-Muamalat,
p. 399.

60 Ba’alawi, Bughyah al-Mustarsyidin, Dar al-Ma’rifah, p. 133. Ibnu Nujaim, Al-Bahr al-Ra’iq, vol. 6, pp. 8–9.
61 Haidar, Durar al-Hukkam, vol. 1, p. 432.
62 Ba’alawi, Bughyah al-Mustarsyidin, p. 133. Ibnu Nujaim, Al-Bahr al Ra’iq, vol. 6, pp. 8–9.

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Principles of Muamalat in the Capital Market

BAI` MUZAYADAH

RESOLUTION

At its 10th meeting on 16–17 October 1997, the SAC discussed the concept
of bai` muzayadah and passed a resolution that it was permissible according
to Islamic jurisprudence. Thus, this concept can be used as a reference for
developing an instrument in the Islamic capital market in Malaysia.

INTRODUCTION

Bai` muzayadah is the offering of goods for sale in a market by a seller with
a number of interested buyers who compete to offer the highest price. This
process ends with the seller selling the goods to the highest bidder. In other
words, it is similar to an auction.63 Other names for this principle used by
past Islamic jurists are bai` fuqara’, bai` man kasadat bidha`atuhu,64 bai`
mahawij, and bai` mafalis.65

This concept is relevant to many issues in the Islamic capital market, especially
those related to the behaviour of market participants profiteering from price
differences. It is also used as an argument to permit speculation so long as it
is not contrary to Shariah principles.

63 Nazih Hammad, Mu`jam al-Musthalahat, pp. 245–246.
64 Al-Hummam, Al-Fatawa al-Hindiyyah, Dar al-Fikr, Beirut, 1991, vol. 3, p. 210.
65 Nazih Hammad, Mu`jam al-Mustalahat, pp. 245–246.

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Resolutions of the Securities Commission Shariah Advisory Council

ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF
BAI` MUZAYADAH

Bai` muzayadah is a form of trading that has existed and been applied in the
muamalat system for a long time. It was a topic of debate to determine its
status among past Islamic jurists. Thus, in evaluating its status from the Shariah
aspect, the opinions of the past Islamic jurists were studied.

Athar as Basis

The following are the athar (practice based on the Companions of the Prophet
s.a.w.) supporting bai` muzayadah:

(a) Imam Bukhari had written a specific topic on the concept and views
of `Ata’ who said that bai` muzayadah was practised by society in the
sale of war booty;66 and

(b) Anas had reported the Prophet s.a.w. selling a carpet and a water
vessel and was calling out for customers. A man offered to buy them
for one dirham. The Prophet s.a.w. then asked for a higher bid. Another
man offered two dirham and so the Prophet s.a.w. sold the wares to
him.67

Opinions of Past Islamic Jurists

There were two opinions of the Islamic jurists in determining the hukm of
bai` muzayadah.

The majority viewed it as permissible by Shariah, while the minority thought
otherwise. The main reason for the difference in opinion was the interpretation
of the hadith of the Prophet s.a.w., which prohibited bidding on another
person’s bidding (saum ‘ala saum akhihi).68

66 Al-Bukhari, Al-Jami` al-Sahih, Dar Ibn Kathir, Beirut, 1987, vol. 2, p. 753.
67 Hadith as reported by al-Tirmizi and al-Nasa’i. Al-Tirmizi, Sunan al-Tirmizi, Dar Ihya’ al-Turath al-Arabi,

Beirut, vol. 3, p. 522. Al-Nasa’i, Sunan al-Nasai’i, Maktabah al-Matbu’at al-Islamiyyah, 1986, vol. 7,
p. 259 (hadith no. 4518).

68 Ibnu Rusyd, Bidayah al-Mujtahid, Dar al-Jil, Beirut, 1986, vol. 2, pp. 270–271.

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Principles of Muamalat in the Capital Market

Al-Kasani, a jurist of the Hanafi Mazhab, said that bai` muzayadah is not
prohibited because the Prophet s.a.w. himself practised it.69

Ibnu Humam, another jurist of the Hanafi Mazhab, also permitted the principle
using the same argument.70

Ibnu Juzaiy, a jurist of Maliki Mazhab permitted this principle because it is
different from saum ’ala saum akhihi which is forbidden, and there is no
element of unfairness in choosing goods.71

Ibnu Qudamah, a jurist of the Hanbali Mazhab, stated that bai` muzayadah
is permitted accordingly to ijmak based on what was practised by the Prophet
s.a.w.72

69 Al-Kasani, Bada’i al-Sana’i`, vol. 5, p. 232.
70 Ibnu Humam, Takmilah Fath al-Qadir, Dar al-Fikr, Beirut, vol. 6, p. 479.
71 Ibnu Juzay, Al-Qawanin al-Fiqhiyyah, Dar al-Qalam, Beirut, p.175.
72 Ibnu Qudamah, Al-Mughni, Dar al-Fikr, Beirut, 1994, vol. 4, p. 302.

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Resolutions of the Securities Commission Shariah Advisory Council

SUFTAJAH

RESOLUTION

The SAC had discussed this issue in a series of meetings and made a resolution
to permit this concept as a way of risk management in the Islamic capital
market. The features of this product do not contradict the Shariah principles
and benefit both parties, the creditor and debtor.

INTRODUCTION

The word suftajah originated from the Persian language and has been adopted
by the Arabs. It means a document written by a person to his representative
or debtor instructing him to pay a certain sum of money to his creditor.
There is little difference between its meaning in Arabic and its Islamic
jurisprudence terminology, which is a credit instrument in the form of financial
notes given to someone to enable the creditor to use it at another
predetermined venue. The benefits given by the debtor using this method
are from a risk management aspect. A creditor does not run the risk of
losing money during his journey as he is only carrying suftajah notes.73

Among the applications of suftajah in a modern financial world is the process
of money transfer, i.e. telegraphic transfer, traveller’s cheque and money
order. In the context of the capital market, it is related to financial notes.

73 Nazih Hammad, Mu`jam al-Musthalahat, p. 154, Sa’di Abu Jaib, Al-Qamus al-Fiqhi, Dar al-Fikr, Damascus,
1988, p. 173. Ibnu ̀ Abidin, Hasyiah Rad al-Mukhtar, vol. 5, p. 350. Al-Dusuqi, Hasyiah al-Dusuqi, vol. 3,
p. 224.

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Principles of Muamalat in the Capital Market

ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF
SUFTAJAH

This concept is not new in financial risk management as seen in the writings
of past Islamic jurists. From a study undertaken by the SAC, it was found
that the concept was based on the following:

Athar as Basis

There are many narrations in al-Sunan al-Kubra by al-Baihaqi that showed
that suftajah was practised by the companions of the Prophet s.a.w. and
tabi`in (successors), such as Ali bin Abi Talib, Ibnu Abbas, Abdullah bin Zubair
and Ibnu Sirin.74

Opinions of Past Islamic Jurists

The Islamic jurists held opposing views on permitting suftajah to be used as
a financial instrument because it contains elements of hawalah (debt
assignment contract) and benefit. Generally, their views can be divided into
two:

Views Not Permitting Suftajah

Those who held this view related the concept to elements of riba because of
the increased value in the form of benefit for the creditor. There is a hadith
of the Prophet s.a.w. that prohibited qardh which gives returns to the creditor
in the form of profits. The hadith means:

“Every qardh that benefits the creditor is riba.”

Views Permitting Suftajah

The Maliki Mazhab gave some flexibility in permitting this instrument in daily
dealings, with a condition that dharurah (necessity) must exist whereby

74 Al-Baihaqi, Al-Sunan al-Kubra, vol. 5, p. 352.

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Resolutions of the Securities Commission Shariah Advisory Council

suftajah is used as an instrument to avoid the risk of losing money while
travelling.75

Some jurists of the Hanbali Mazhab, such as Ibnu Taimiyah, Ibnu Qayyim
and Ibnu Qudamah, were of the opinion that the instrument of suftajah
does not contradict Shariah principles because its benefits are enjoyed by
both creditor and debtor.76

75 Al-Dusuqi, Hasyiah al-Dusuqi, vol. 3, p. 225. Al-Khurasyi, Hasyiah al-Kurasyi, Dar al-Fikr, Beirut, vol. 4,
p. 141.

76 Ibnu Qayyim, I`lam al-Muwaqqi`in, vol. 1, p. 391. Ibnu Qudamah, Al-Mughni, vol. 4, pp. 390–391.

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Principles of Muamalat in the Capital Market

BAI` `URBUN

RESOLUTION

In its 13th meeting on 19 March 1998, in a discussion on composite index
futures contract, the SAC passed a resolution permitting bai` `urbun from
the Islamic jurisprudence perspective.

INTRODUCTION

It can be mentioned as `urbun, `arabun and `urban. It is a deposit given by
the buyer to the seller in a buying and selling contract. If the sale proceeds,
the deposit will be part of the price of the goods. Otherwise, it will be
considered as hibah (gift) from the buyer to the seller.77

For example, A wishes to buy a car costing RM40,000 from XYZ Company.
A is asked to pay ̀ urbun of RM4,000 as booking fee, and there is a condition
that this money will not be returned to him if he cancels the order. However,
if he proceeds with the purchase, the deposit will be considered as part of
the cost of the car. This means A needs to pay only RM36,000 for the balance.

ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF
BAI` `URBUN

Based on a study done by the SAC, this concept is permissible from the
Shariah perspective, based on the following arguments.

77 Nazih Hammad, Mu`jam al-Mustalahat, p. 196. Al-Zuhaili, Al-Fiqh al-Islami, vol. 4, p. 448. Al-Zarqa’,
Al-Madhkal al-Fiqhi, vol. 1, p. 495.

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Resolutions of the Securities Commission Shariah Advisory Council

Opinions of Past Islamic Jurists

Past Islamic jurists were divided on determining the ruling of bai` ̀ urbun. The
following is a summary of their opinions:

The majority were of the opinion that bai` `urbun is not permissible as it
contained elements of gharar, gambling and unlawful acquisition of property.
They also discussed the prohibition of bai` `urbun by the Prophet s.a.w.78

Some tabi`in, among them, Mujahid, Ibnu Sirin, Nafi’ bin Haris, Zaid bin
Aslam and the Hanbali Mazhab considered it permissible based on the
practices of Saidina Omar Al-Khattab. He once appointed Nafi’ to be his
representative to buy a house from Safwan bin Umaiyyah in Mecca to be
converted into a prison. Safwan asked Omar for a deposit and laid down the
condition that the deposit would be his if Omar terminated the contract.
Omar agreed to the condition.79 This opinion was strengthened by Kadhi
Shuraih who said that whoever caused ta`attul (delay) and intizar (waiting)
had to pay compensation to the party affected by the termination of the
contract.80

Although there were two opposing views to this method of trading, the
SAC concluded that the concept of bai` `urbun is permissible and can be
developed as an instrument in the Malaysian Islamic capital market. It has
been a common practice in any society to pay a deposit in a business
transaction so that the parties involved will not lose their rights within a
certain given period. This does not contradict Shariah principles because it is
`urf sahih to ensure the smooth running of a muamalah. Bai` `urbun is
permissible because the hadith of the Prophet s.a.w. which indicates the
prohibition is weak.

78 Ibnu Rusyd, Bidayah al-Mujtahid, vol. 2, p. 264. Al-Zuhaili, Al-Fiqh al-Islami, p. 449.
79 Ibnu Qudamah, Al-Mughni, vol. 4, pp. 312–313.
80 A-Zarqa’, Al-Madkhal al-Fiqhi, p. 496.

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Principles of Muamalat in the Capital Market

BAI` BIMA YANQATI` BIHI SI`R

RESOLUTION

At its 10th meeting on 16–17 October 1997 and 11th meeting on 26
November 1997, in discussing the issue of crude palm oil futures contract,
the SAC passed a resolution permitting the concept of bai` bima yanqati`
bihi si`r (BBMYS) which is in accordance with Islamic jurisprudence.

INTRODUCTION

BBMYS, as defined by Ibnu Qayyim is the practice of taking a certain
amount of goods, such as bread, meat and oil from the seller by the buyer
every day and paying for them at market price at year-end or month-end
without fixing the price at the inception of the `aqd.81 This practice will
not give rise to any dispute between buyer and seller because they have
agreed on the method of payment and price determination.

ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF
BAI` BIMA YANQATI` BIHI SI`R

The application of this principle in buying and selling is not something new.
Past Islamic jurists had determined its status based on Shariah principles. The
following sums up their opinions:

Generally, there were two opinions on buying and selling using this principle.
The first opinion came from the majority of Islamic jurists, who rejected it.

81 Ibnu Qayyim, I`lam al-Muwaqqi`in, vol. 4, pp. 5–6.

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Resolutions of the Securities Commission Shariah Advisory Council

This was based on the existence of the element of jahalah (ignorance) in the
price of the contract that rendered it invalid.82

The second opinion came from some Islamic jurists, such as Imam Ahmad
bin Hanbal, Ibnu Taimiyyah, Ibnu al-Qayyim and the Hanbali Mazhab, who
permitted this principle. Ibnu `Abidin of the Hanafi Mazhab also accepted it
through a contract known as bai` istijrar. They permitted it because the price
fixing method prevented any jahalah (ignorance) or dispute.83

The Hanbali Mazhab used qiyas84 in permitting BBMYS. According to them,
this kind of buying and selling was similar to fixing the price according to
mithl or market price which was already permitted by Syara’. Many existing
business transactions are permitted based on the thaman al-mithl (market
price) concept. This was further strengthened by the fact that there is no
clear prohibition in the Quran, the Sunnah, or ijmak or the practices of the
companions of the Prophet s.a.w. against this type of buying and selling. It is
also a social practice that has been unanimously accepted as a facility.85

82 Ibnu Qayyim, I`lam al-Muwaqqi`in, vol. 4, p. 8.
83 Ibnu Qayyim, I`lam al-Muwaqqi`in, vol. 4, p. 8. Ibnu Tamiyyah, Al-`Uqud, Maktabah Ibnu Taimiyyah,

Cairo, p. 223. Ibnu `Abidin, Hasyiah Rad al-Mukhtar, vol. 4, p. 516.
84 Qiyas refers to reconciling a new ruling and an existing one because they have the same `illah. Please

refer to Al-Zuhaili, Usul al-Fiqh, vol. 1, p. 603.
85 Ibnu Qayyim, I`lam al-Muwaqqi`in, vol. 4, p. 8. Ibnu Taimiyyah, Al-`Uqud, Cairo, p. 223. Ibnu `Abidin,

Hasyiah Rad al-Mukhtar, vol. 4, p. 516.

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Principles of Muamalat in the Capital Market

KAFALAH ON MUDHARABAH CAPITAL

RESOLUTION

The SAC at its 35th meeting held on 7 November 2001 resolved that a third-
party guarantee on the capital invested based on the mudharabah principle
is permissable.

INTRODUCTION

Kafalah generally means a guarantee. It is defined as a contract which
combines one’s zimmah (liability) with another person’s zimmah.86

It is a contractual guarantee given by the guarantor to assume the
responsibilities and obligations of the party being guaranteed on any claims
arising thereof. This principle is also applied in loan guarantees whereby the
guarantor assumes the liability of the debtor when the debtor fails to discharge
his obligation. This is also known as dhaman.87

From the aspect of a contract’s objective, kafalah is included in the category
of `uqud tauthiqat (contractual guarantee).88 However, from the aspect of
tabadul huquq (transfer of rights), it conveys the meaning of tabarru` at the
inception of the contract and mu`wadhat at the end.89

Generally, kafalah may be divided into two types:

86 Haidar, Durar al-Hukkam, vol. 1, p. 724.
87 Securities Commission, Guidelines on the Offering of Islamic Securities.
88 Al-Zarqa’, Al-Madkhal al-Fiqhi, vol. 1, p. 583.
89 Al-Zarqa’, Al-Madkhal al-Fiqhi, vol. 1, p. 579.

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Resolutions of the Securities Commission Shariah Advisory Council

(a) Kafalah bi mal is a guarantee to return an asset to its owner; and

(b) Kafalah bi nafs is a guarantee to bring someone to a specific authority,
such as the judiciary.90

As for this issue, the type of kafalah involved is the kafalah bi mal and it may
be divided into three main categories, including:

(a) Kafalah bi dayn is a guarantee for the repayment of another party’s
loan obligation. It means that when a debtor fails to meet his obligation
to repay a loan, then the guarantor will assume this obligation;

(b) Kafalah bi `ayn or kafalah bi taslim is a guarantee of payment for an
item or a guarantee of delivery in a transaction. For example, in a sale
and purchase contract, the guarantor agrees to guarantee the delivery
of the item to be sold to the purchaser. In the event the seller fails to
honour his obligation according to the agreement, the guarantor will
be responsible for the delivery; and

(c) Kafalah bi darak is a guarantee that an asset is free from any
encumbrances.  This guarantee is specific for transactions that involve
the transfer of titles or rights which ensures that an asset is free from
any encumbrances. For example, if A claims and is able to prove that
the item bought by B belongs to A, then it will be the guarantor’s
responsibility to ensure that B gets back the value of his purchase
which has been paid to the seller.91

Mudharabah is a contract which involves agreement between two parties,
namely rabb mal (investor) who provides 100% of the fund, and mudharib
(entrepreneur) who manages the project in accordance with Shariah principles.
Any profit from this investment will be apportioned based on the preagreed
ratio at the inception of the agreement. However, any losses will be fully
borne by the rabb mal.92

90 Al-Zarqa’, Al-Makhal al-Fiqhi, vol. 1, p. 542. Haidar, Durar al-Hukkam, vol. 1, pp. 732–734. Ibnu Rusyd,
Bidayah Al-Mujtahid, Beirut, vol. 2, p. 378.

91 Al-Zarqa’ Al-Madkhal al-Fiqhi, vol. 1, p. 542. Haidar, Durar al-Hukkam, vol. 1, pp. 732–734.
92 Securities Commission, Guidelines on the Offering of Islamic Securities.

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Principles of Muamalat in the Capital Market

ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF
KAFALAH ON MUDHARABAH CAPITAL

The Original Law on Guarantees for Mudharabah Capital

According to the arguments of past Islamic jurisprudence, the jurists were
unanimous in their opinion that when losses occur in a mudharabah contract,
the loss is to be borne by the rabb mal and not the mudharib as the latter’s
status is only amin (trustee). However, if it could be proven that the loss was
clearly due to the mudharib’s negligence or intentional, then the mudharrib
is to make good the capital to the investor.93

Past Islamic jurists were unanimously of the opinion that in a situation where
a loss occurs on a mudharabah, a capital guarantee by the mudharib is not
permissible. However, they have different opinions on the status of the
contract. The Hanafi and Hanbali Mazhab were of the opinion that the
contract is valid and the conditional guarantee should be nullified. The Maliki
and Syafi’i Mazhab, however, were of the opinion that the mudharabah
contract is immediately nullified if there is such a guarantee.94

Contemporary Islamic jurists have made studies on the acceptable level of
capital in mudhrabah contracts that can be guaranteed according to the
perspective of Islamic jurisprudence. The main issue of concern in relation
to capital guarantee is whether the guarantee given will cause the
mudharabah contract to be nullified since it violates the muqtadha ̀ aqd (the
main objective of a contract).95

They have submitted several solutions on mudharabah capital guarantee,
including:

(a) Third-party guarantee based on tabarru` (voluntarily given);

(b) Third-party guarantee based on qardh (debts);

93 Al-Kasani, Badai’i` al-Sana’i`, vol. 6, p. 87. Al-Nawawi Al-Majmu` Syarh al-Muhazzab, Maktabah al-
Irsyad, Jeddah, vol. 15, pp. 194–195, 198. Ibnu Rusyd, Bidayah al-Mujtahid, vol. 2, pp. 303, 305. Ibnu
Qudamah, Al-Mughni, vol. 5, pp. 147–148, 192. Ibnu Najjar, Muntaha al-Iradat, vol. 1, pp. 460, 466.
Ibnu Juzay, Al-Qawanin al-Fiqhiyyah, p. 186.

94 Ibnu Rusyd, Bidayah al-Mujtahid, vol. 2, p. 305. Ibnu Qudamah, Al-Mughni, vol. 5, p. 187. Ibnu Juzay,
Al- Qawanin al-Fiqhiyyah, p. 186.

95 Dallah Al-Bakarah, Fatawa Nadawat al-Bakarah, Jeddah, 1995, p. 71.

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Resolutions of the Securities Commission Shariah Advisory Council

(c) Mudharib yudharib (the entrepreneur channels the investor’s capital
to investing in a third party); and

(d) Guarantee through special funds.

Third-party Guarantee Based on Tabarru`

The OIC Fiqh Academy96 discussed on the matter of issuance of Sanadat
Muqaradhah and summarised that mudharib guarantee on capital and
mudharabah profits are not permissible. However, the guarantee may be
issued by a third party who has no connection whatsoever with the mudharib
if it is done by way of tabarru` and is not included as a condition in the actual
mudharabah contract sealed and signed by both parties.97

The Shariah Council for Accounting and Auditing Organization for Islamic
Institutions (AAOIFI)98 allowed for third-party guarantees other than by
mudharib or investment agent or business partner towards the liability of
investment losses. However, this is on the provison that the guarantee given
is not tied to the original mudharabah contract.99 The basis of their decision
is tabarru` which is allowed by Shariah.100

Husain Hamid Hassan summarised the basis of the permissibility of third-
party guarantees based on the views of the Maliki Mazhab which allow
wa`d mulzim (promises that must be kept). It is further strengthened by
maqasid Shariah (Shariah’s objective) which allows for such action.101

Third-party Guarantee Based on Qardh

The Fatwa Council of Jordan legitimised third-party guarantees based on
debts. This resolution was made as the basis in drafting section 12 of the
Muqaradhah Act which pertains to the guarantee concerned.102

96  4th meeting on 6–11 February 1988.
97 Qararat wa Tausiyat Majma` al-Fiqh al-Islami, Dar al-Qalam, Damascus, 1998, pp. 69–71.
98 6th Meeting on 19–23 May 2001.
99 AAOIFI, Al-Ma`ayir al-Syar`iyyah, Bahrain, 2001, p. 80.
100 AAOIFI, Al-Ma`ayir al-Syar`iyyah, Bahrain, 2001, p. 89.
101 OIC, Majallah Majma` al-Fiqh al-Islami, Jeddah, 1988, no. 4, vol. 3, p. 1875.
102 This section states that “The government guarantees the payment of sanadat muqaradhah upon maturity.

This payment guarantee is in the form of interest-free qardh bestowed by the government for
implemented projects”. Please refer to OIC, Majallah Majma` al-Fiqh al-Islami, no. 4, vol. 3, p. 1980.

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Principles of Muamalat in the Capital Market

However, the OIC Fiqh Academy, disagrees with the basis of third-party
guarantees that are based on debt and resolved that third-party guarantees
have to be in the form of tabarru`. Otherwise, the contract is deemed to be
an interest-bearing debt which is not permissable.

Mudharib Yudharib

Past Islamic jurists also delved on the issue of mudharabah capital guarantee
in the context of mudharib yudharib. The mudharib invests the capital received
from rabb mal to another party. In other words, the mudharib acts as an
intermediary between the first rabb mal and the actual entrepreneur.

Wahbah al-Zuhaili summed up the views of past Islamic jurists on the issue
of mudharib yudharib that all the four fiqh sects collectively agreed that
the first mudharib shall be responsible for the liability of the guarantee
(dhaman) if the capital is invested or handed over to another mudharib
(third party).103

Generally, the mudharib yudharib concept is allowable. If it bears any profit,
the profit should be distributed between the rabb mal and the first mudharib
based on a preagreed rate and the balance is to be distributed between the
first mudharib and the second mudharib.104

For financial institutions and companies that issue financial products based
on mudharabah, the concept of mudharib yudharib may be applied if they
invest part of the capital in other parties. If this happens, the financial
institutions or companies should guarantee the capital based on the views
of majority of Islamic jurists. Hence, in such a situation the interest of investors
is guaranteed.

Guarantee Through Special Funds

Contemporary Islamic jurists also allow the channeling of a portion of
mudharabah profits to a special fund created for the purpose of insuring
against future losses.  This may be done with the concurrence of investors.105

103 Al-Zuhaili, Al-Fiqh al-Islami, vol. 4, p. 860.
104 Ibnu Qudamah, Al-Mudghni, vol. 5, p. 163.
105 Qararat wa Tausiyyat Majma` al-Fiqh al-Islami, p. 70.

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Resolutions of the Securities Commission Shariah Advisory Council

UJRAH FOR GUARANTEES

RESOLUTION

The SAC, at its 36th meeting held on 6 February 2002, resolved that ujrah
(fees) paid for third-party guarantees in mudharabah is allowable on the
condition that the investor cannot claim for any repayment from the issuer
should there be any losses incurred in the investment. The investor is also
permitted to request for collateral from the issuer to cover against any
likelihood of losses due to gross negligence by the issuer.

INTRODUCTION

Ujrah refers to rental or fees for usage of labour and benefits. In the current
economic context, it may be applied to salaries, wages, fees, commission
and the like.106

ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF
UJRAH ON GUARANTEES

Ujrah on Kafalah

The majority of past Islamic jurists were of the view that the charging of
fees on kafalah is not permissible. This view is based on the argument that
a kafalah contract falls under `uqud tabarru`at which is voluntary and
benevolent in nature. Hence, no fee is to be charged.107

106 Securities Commission, Guidelines on the Offering of Islamic Securities.
107 Al-Hattab, Mawahib al-Jalil, Beirut, Dar al-Fikr, 1992, vol. 5, pp. 111, 113.

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Principles of Muamalat in the Capital Market

Wahbah Al-Zuhaili was of the view that to charge ujrah on kafalah is
permissible based on maslahah and society’s needs.108 Syeikh Ahmad Ali
Abdullah was of the view that when there is a condition that the kafalah
bears a fee, the said condition is considered valid. He also emphasised that
kafalah contract is not qardh.109 He supported his views with qiyas, referring
to fees that are permissible to be collected on utilising someone’s reputation
and also on performing incantation using Quranic verses. Some of the past
Islamic jurists allowed both situations and can be used as fees on the
guarantee since it is similar from the aspect of work done.110

The OIC Fiqh Academy and the Shariah Council AAOIFI resolved that ujrah
on kafalah/dhaman is not permissible. However, the guarantor may claim
for actual expenses incurred on the guarantee.111

Imposition of Rahn (Collateral) on the Issuer

Rahn is defined as the act of creating a valuable asset as collateral to amortise
a debt in the event that the debtor fails to fulfil his obligations to the creditor.112

Hence, rahn may be requested as collateral from the issuer to be applied
against a guarantee given by a third party. This permissibility is based on the
resolution of the Fatwa Council of Jordan which views third-party guarantees
in a muqaradhah contract as a form of qardh.113 As such, rahn may be imposed
on each qardh.

Since a third-party guarantee under this ruling is based on the fatwa in a
form of qardh, no element of interest may be levied as this involves riba.
The only costs allowed will be the actual expenses incurred by the creditor
who in this context, is the guarantor.114

108 Al-Zuhaili, Al-Fiqh al-Islami, vol. 5, p. 161.
109 OIC, Majallah Majma` al-Fiqh al-Islami, Jeddah, 1986, no. 2, vol. 2, pp. 1146–1147.
110 OIC, Majallah Majma` al-Fiqh al-Islami, no. 2, vol. 2, pp. 1134–1135.
111 OIC, Majallah Majma` al-Fiqh al-Islami, no. 2, vol. 2, pp. 1209–1210. AAOIFI, Al-Ma’ayir al-Syar’iyyah,

Bahrain, 2002, pp. 75, 88.
112 Securities Commission, Guidelines on the Offering of Islamic Securities.
113 Please refer  to section 12 of Muqaradhah Act, Jordan.
114 OIC, Majallah Majma` al-Fiqh al-Islami, no. 3, vol. 1, p. 305.

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Resolutions of the Securities Commission Shariah Advisory Council

IBRA’ CLAUSE IN A DOCUMENT OF AGREEMENT

RESOLUTION

The SAC at its 30th meeting on 8 November 2000 and its 45th meeting on
7 March 2003, discussed the usage of ibra’ (partial surrender of rights) in
Islamic securities and resolved that:

(a) Holders of Islamic securities may offer ibra’ to the issuer based on
the application made by the issuer of the securities concerned;

(b) The formula for the computation of early settlement may be stated as
a guide to the issuer; and

(c) The ibra’ (rebate) clause and the formula for the computation of early
settlement may be stated in the main agreement of the Islamic
securities contract which is based on `uqud mu`awadhat. However,
the ibra’ clause in the main agreement shall be separated from the
part related to the price of the transacted asset. The ibra’ clause shall
only be stated under the section for mode of payment or settlement
in the said agreement.

INTRODUCTION

Ibra’ refers to the act of surrendering one’s claims and rights, such as a
creditor writing off the debts of a debtor. Ibra’ falls under uqud tabarru`at.115

Among the related Shariah issues in the discussion of ibra’ clause in Islamic
securities contracts include:

115 Al-Zarqa’, Al-Madkhal al-Fiqhi, vol. 1, p. 579.

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Principles of Muamalat in the Capital Market

(a) Bai`atain fi bai`ah (two sales and purchase contracts in one transaction);

(b) Safqatain fi safqah (two sales and purchase contracts in one
transaction);

(c) Combination of contracts in a form of mu`awadhah and tabarru`;

(d) Bai` wa syart (conditional buying and selling);

(e) Inclusion of conditions in the contract;

(f) Dha` wa ta`ajjal; and

(g) Maslahah.

ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF IBRA’

The OIC Fiqh Academy116 deliberated on the issues of reduction of debts
due to early settlement before the due date in bai` bi taqsit. They have
resolved that reducing the debt in arrears due to early settlement whether
at the request of the creditor or the debtor referred to as dha` wa ta`ajjal,
is permissible by Shariah and does not include interest which is prohibited
if it is not based on a prior agreement and only involves two parties that
is the debtor and creditor.  If it involves a third party, then it is not allowed
as it falls under the law of hasm auraq tijariah (discounts on trade bills).117

Contemporary Islamic jurists are still discussing on the issue of amalgamating
two or more contracts into one contract. This issue is included in the issue
of `uqud mujtami`ah (amalgamation of contracts) which is categorised as
`uqud mustajiddah (new contracts).

Bai`atain fi Bai`ah

Bai`atain fi bai`ah is included in prohibited sale and purchase transactions.
The basis of the prohibition originates from the sayings of the Prophet
s.a.w.:

116  The 7th conference at Jeddah on 9–14 May 1992.
117 OIC, Majallah Majma`al-Fiqh al-Islami, Jeddah, 1992, no. 7, vol. 2, pp. 217–218.

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Resolutions of the Securities Commission Shariah Advisory Council

Meaning: “That the Prophet s.a.w. disallowed two contracts of sale
and purchase in one transaction.”118

In another saying, the Prophet s.a.w. declared:

Meaning: “Whoever commits an act of two contracts in one transaction
then there is the least between the two or interest.”

The Islamic jurists were unanimous in declaring that bai`atain fi bai`ah is not
allowed based on the above sayings, but they differ in their opinions in
interpreting the forms of contracts and transactions which are included in
the prohibition.119

Ibnu Rushd120 summarised the types of bai`atain fi bai`ah into three main
categories:

(a) Two items with two prices;

(b) One item with two prices; and

(c) Two items with one price.

The Dallah al-Barakah Shariah Advisory Council interprets bai`atain fi bai`ah
as the amalgamation between tabarru` and `iwadh. For example, A says to
B:  “Sell this item to me and I will provide the price of the item together with
a gift”. This may also be construed as the sale and purchase of one item for
two prices that is, deferred and cash, and sealed with a contract without
determining the price agreed upon by the two parties to the contract. Sales
and purchase contract cannot be amalgamated with several other contracts,
such as musaqah, syarikah, ji`alah, marriage and qiradh.121 Nazih Hammad is
of the opinion that bai` `inah is also another form of bai`atain fi bai`ah.122

118 Al-Syaukani, Nail al-Autar, vol. 5, p. 231.
119 Ibnu Rusyd, Bidayah al-Mujtahid, vol. 2, p. 194.
120 Ibnu Rusyd, Bidayah al-Mujtahid, vol. 2, p. 194.
121 Syarikat al-Barakah li al-Istithmar wa al-Tanmiyah, Fatawa Nadawat al-Barakah, Jeddah, 1997, p. 108.
122 Nazih Hammad, Al-‘Uqud al-Mustajiddah: Dhawabituha wa Namazij minha, Majallah Majma` al-Fiqh

al-Islami, Jeddah OIC, no. 10, vol. 2, pp. 481–482.

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Principles of Muamalat in the Capital Market

Safqatain fi Safqah

The basis for the prohibition of safqatain fi safqah is the sayings of the Prophet
s.a.w:

Meaning: “The Prophet s.a.w prohibited two contracts (sale and
purchase) in one transaction.”

In general, safqah refers to contracts and covers more than just sale and
purchase contracts as it encompasses other contracts as well.123

Past Islamic jurists were of different opinions in the interpretation of the said
sayings and the types of contracts prohibited by the Prophet s.a.w. The
majority of the jurists were of the opinion that safqatain fi safqah refers to
bai`atain fi bai`ah.124

Amalgamation of Mu`awadhah and Tabarru`

Contemporary Islamic jurists discuss in general the law on the amalgamation
of mu`awadhah and tabarru`.125 This is based on the views of past jurists in
interpreting the sayings of the Prophet s.a.w:

Meaning: “It is not allowable to combine debts with sale and purchase,
two conditions in sale and purchase, taking a profit from an item
which is not secured (occurrence of qabdh), and selling something
which is not owned.”126

Some Islamic jurists do not allow the amalgamation between mu`awadhah
and tabarru` type of contract. Ibn Taimiyah also held the same view

123 Al-Mausu`ah al-Fiqhiyyah, vol. 9, p. 266.
124 Al-Syaukani, Nail al-Autar, vol. 5, p. 232. Nazih Hammad, Al-`Uqud al-Mustajiddah, no. 10, vol. 2,

p. 516.
125 Abd Sattar Abu Ghuddah, “Al-Tafahum al-Janibi fi Majal al-`Uqud”, Hawliyah al-Barakah, no. 2,

Dec 2000, p. 30.
126 Al-Syaukani, Nail al-Autar, vol. 5, pp. 261–262.

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Resolutions of the Securities Commission Shariah Advisory Council

because tabarru` is done to facilitate transaction in a mu`awadhah way and
not solely done voluntarily.127

The Hanbali Mazhab also prohibits this amalgamation based on qiyas of the
Prophets s.a.w. on the prohibition of the amalgamation between bai` and
qardh.128 Nazih Hammad was of the view that this qiyas cannot be the
basis for the prohibition of the amalgamation between sale and purchase
contracts and all contracts of the tabarru` type. This is because sale and
purchase and hibah may be amalgamated into one contract.129

The Hanbali Mazhab is the most open of all sects in issues pertaining to
the inclusion of conditions in a contract. However, they clearly do not allow
the amalgamation of mu`awadhah and tabarru`.

Bai` wa Syart

Some Islamic jurists consider bai` wa syart as a prohibited contract as evidenced
by the sayings of the Prophets s.a.w.:

Meaning: “The Prophet s.a.w. prohibited conditional sale and purchase
transactions.”130

However, the authenticity of these sayings is disputed by hadis experts because
its isnad is disputed. This is further strengthened by examples of Islamic
jurisprudence that allow conditional transactions as found in the scriptures
of fiqh mu`tabar.131

Conditions in a Contract

The inclusion of conditions in a contract is a muamalat issue referred to as
“nazariyyah muqtadha `aqd” (purpose of contract theory). The Hanbali

127 Ahmad bin Taimiyah, Majmu` Fatawa, vol. 29, pp. 62–63.
128 Nazih Hammad, Al-`Uqud al-Mustajiddah, no. 10, vol. 2, p. 499. Abd Sattar Abu Ghuddah, Al-Tafahum

al-Janibi fi Majal al-`Uqud, p.30.
129 Nazih Hammad, Al-`Uqud al-Mustajiddah, no. 10, vol. 2, p. 499.
130 Al-Syaukani, Nail al-Autar, vol. 5, p. 262.
131 Al-Syaukani, Nail al-Autar, vol. 5, p. 262. Nazih Hammad, Al-`Uqud al-Mustajiddah, no. 10, vol. 2, pp.

484–485.

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Principles of Muamalat in the Capital Market

Mazhab is regarded as the most open in the issue of muqtadha `aqd where
they allow for the addition of a condition in a contract to safeguard the
interest of the parties to the contract so long the condition does not contradict
the Shariah principles.132

Ibnu Taimiyah formulated a method related to the condition:

Meaning: “The original law on condition is valid and legal unless
otherwise proven.”133

Dha` wa Ta`ajjal

Dha` wa ta`ajjal is a form of ibra’.134 For contemporary Islamic jurists who
allow it, the inclusion of dha’ wa ta`ajjal is not done on the basis of
preagreement between the debtor and creditor. If it was agreed upon earlier,
then it will be considered as hilah ribawiyah (a means of allowing a transaction
that has the element of interest) whereby hilah is not permissable. This is the
view held by OIC Fiqh Academy.135

Generally, an ibra’ clause in a contract under Islamic financing, may be
construed as a form of inclusion of a condition in a contract. Under Islamic
law, the inclusion of a condition in a contract, such as a sale and purchase
contract, is allowed if the inclusion is for the purpose of safeguarding the
interests of the parties under the contract and it does not contradict the
principle of sale and purchase.

The ibra’ clause under Islamic financing is a form of preagreed condition
between the two parties to the contract. The SAC generally allows dha` wa
ta`ajjal without having to look into whether an element of preagreement
exists between the parties or otherwise.

132 Al-Zarqa’, Al-Madkhal al-Fiqhi, vol. 1, pp. 482–491. Al-Buhuti, Kasysyaf al-Qina`, Dar al-Fikr, Beirut,
1982, vol. 3, pp. 188–192.

133 Ibnu Taimiyah, Majmu` Fatawa, vol. 29, p. 346.
134 Please refer to the Resolutions of the Securities Commission Shariah Advisory Council on dha` wa

ta`ajjal for further details.
135 OIC, Majallah Majma` al-Fiqh al-Islami, no. 10, vol. 2, p. 502.

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Resolutions of the Securities Commission Shariah Advisory Council

IQTA`

RESOLUTION

The SAC, at its 39th meeting on 16 May 2002, 41st meeting on 30 August
2002, 47th meeting on 27 May 2003 and 51st meeting on 14 December
2003, resolved several issues on iqta` as follows:

(a) Concessionary rights can be classified as a type of asset that can be
transacted based on the principle of iqta`;

(b) Supply and maintenance contract with the government and
government agencies can be the basic asset in the issuance of Islamic
securities based on the principle of iqta`;

(c) Iqta` can be used in government contracts on assets that are not real
estates; and

(d) The principle of iqta` can be used for state government contracts,
statutory bodies and government-linked companies. The government-
linked companies are entities which are approved by the government
to take-over public agencies and manage them as private companies,
such as the following:

(i) Parent companies and their subsidiaries under the control of
the federal and state government of which the shareholdings
exceed 50%; and

(ii) Companies where the government owns special shares or
special preferential rights shares. Normally special shares or
“golden shares”, in the Malaysian context, exist in companies
in which the government has strategic interests.

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Principles of Muamalat in the Capital Market

INTRODUCTION

The types of government contracts as outlined by the Ministry of Finance are
as follows:136

(a) Work contract;

(b) Supply contract; and

(c) Service contract.

A work contract is a contract which involves construction and civil works,
such as buildings, airports, ports, roads, dams and drainage works. It also
covers mechanical and electrical works.

A supply contract is a contract on items which are supplied for certain activities,
programmes or government agency projects. It is also an input to a certain
work process or service. The supplies are building materials, foodstuff,
clothing, vehicles and office furniture.

A service contract is a contract which involves the services of manual human
labour or expertise/skills to implement and accomplish a particular job. Services
are divided into two types as follows:

(a) Consultancy services. It covers all kinds of studies, such as economic
research, privatisation, management, physical development which
requires input such as architecture, engineering, survey works, legal
management and specialised services in the area of environment and
agriculture; and

(b) Non-consultancy services. It covers services, such as managing training
and courses, maintenance and repair works, cleaning, renting and
management of buildings.

There are various forms of contracts which involve the government in
the privatisation process. According to the “Privatisation Masterplan”
issued by the Economic Planning Unit, the Prime Minister’s Department, there
are four methods of privatisation:

136 Ministry of Finance, 2002, Proses Perolehan Kerajaan, pp. 1–2.

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(a) Sales of assets or equity;

(b) Lease of assets;

(c) Management contract; and

(d) Build-operate-transfer (BOT) or build-operate (BO).

Concession contract in Arabic language is `aqd imtiyaz.137 It is a contract for
implementing privatisation, that is the transfer or sale of assets, organisation,
functions or activities of the public sector to the private sector.138

Generally, concession is a system whereby the government confers special
rights to an organisation (private or semi-government) to build, repair,
check and control and to launch an infrastructural project for a particular
period. It is in a form of contract where the government requires the
company (the concession holder) to invest to provide the services required
with its own financing. It is required to operate the services concerned
and bear all risks from the operations of the project. The company will be
rewarded in the form of payment of the price of the services by the consumers
and/or the government.139

The Malaysian government through the privatisation policy has awarded
concessions to private companies in implementing public projects, such as
the North-South Highway Project (PLUS), Penang Bridge, Kuala Lumpur
International Airport, Express Rail Link and others.

ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF IQTA`

In general, the debate on iqta` in the books of past Islamic jurists has been
discussed under the section ihya’ mawat (developing neglected property).
This is because iqta` is a form of ihya’ mawat.

137 Nazih Hammad, Mu’jam al-Mustalahat, p. 67. Harith Suleiman Faruqi, Faruqi’s Law Dictionary (English-
Arabic), Librairie du Liban, Beirut, 1991, p. 149.

138 Ernst & Young, Privatisation: Investing in State-owned Enterprises Around the World, John Wiley &
Sons, Inc., New York, 1994, p. 4.

139 Franck Bousquet & Alaian Fayard, Road Infrastructure Concession Practice in Europe, World Bank,
2001, p. 3.

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Principles of Muamalat in the Capital Market

There are two ways of ihya’:

(a) Iqta` imam (gift of the ruler); and

(b) Ihya’ mawat thumma ijazah amir (developing the neglected property
and then obtaining the permission from the ruler).140

As such, the majority of past Islamic jurists did not define iqta` in detail, just
clarifying its various forms because it is one of the ways of ihya’ mawat.

There are two approaches by Islamic jurists when giving the definition of
iqta` and they are:

(a) Definition of iqta` which is related to ardh (real estate); and

(b) Definition of iqta` in general that is on mal (assets or properties).

Qadhi Iyadh has defined iqta` as the ruler’s gift of a mal Allah (Allah’s
property) to whoever he feels eligible to manage it. Usually iqta` occurs in
respect of real estates.141

Iqta` is also defined as what is given by the ruler in the form of real estate.
The said gift is either in the form of ownership or rights to derive benefits
from the real estate.142

Iqta` Conditions

Based on the debate of past and contemporary Islamic jurists, one can
conclude that the iqta` conditions are as follows:

(a) Iqta` is only given by the ruler with the objective of maslahah;

(b) Muqta` (one who is conferred with iqta` property) is able to develop
iqta` properties;

(c) Property which has been iqta` is not owned by anybody; and

140 Muhammad Rawwas Qal’ahji, Mausu`ah Fiqh ‘Umar bin al-Khattab, Beirut, Dar al-Nafais, 1986, pp.
34–35.

141 Ibnu Hajar al-‘Asqalani, Fath al-Bari, Beirut, Dar al-Fikr, 1993, vol. 5, p. 323.
142 Al-Mausu`ah al-Fiqhiyyah, vol. 6, p. 81.

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Resolutions of the Securities Commission Shariah Advisory Council

(d) Iqta` which is given does not contradict with maslahah `ammah.143

From the conditions outlined for iqta`, the ruler plays the most important
role in an iqta` gift by taking into account public interest.

Based on the iqta` conditions which have been summarised by Abd
Wahab Hawwas, there is no special condition that says iqta` is limited to real
estate only.

Iqta` on Non-real Estate

Iqta` has gone through changes and modification since the era of Saidina
`Umar r.a. This can be seen from the additional forms of iqta` which has been
recorded in the writings of Al-Mawardi and Al-Buhuti.

The question of whether iqta` can be applied on non-real estate is one of the
Islamic jurisprudence issues which emerged while examining the application
of iqta` in modern times. This is due to the majority of past
Islamic jurisprudence debates on iqta` which stated that this principle was
applicable to real estate. This is related to examples that were given by past
Islamic jurists when debating the issue of ihya’ mawat.

However, Imam al-Syawkani when discussing ihya’ mawat has a special
section relating to the status of neglected animals. This is based on the
sayings of the Prophet s.a.w. which show that such animals can also be
bred. The Prophet said:144

Meaning: “Whoever finds an animal neglected by the owner without
any food, and is taken and bred, then the said animal becomes his.”

In other sayings, the Prophet s.a.w. says:145

143 Abd Wahab Hawwas, Al-Iqta` fi al-Fiqh al-Islami wa Atharuhu fi al-Tanmiyah, Dar al-Nahdhah Al-
Arabiyyah, Cairo, 1994, pp. 25–34.

144 Al-Syaukani, Nail al-Autar, vol. 5, pp. 58–59.
145 Al-Syaukani, Nail al-Autar, vol. 5, p. 59.

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Principles of Muamalat in the Capital Market

Meaning: “Whoever leaves the animal at a place that can destroy the
said animal, and then bred by another person, then the said animal
which is being bred becomes his.”

Abu Yusuf is of the view, iqta` imam in the form of tamlik raqabah (individual
ownership) form is permissible whether on ‘aqar (immovable property) or
manqul (movable property).146 The permissibility of iqta` on manqul shows
that there is room to widen the scope on issues that can be classified as iqta`
by the ruler.

For istila’ (authority) on mal mubah (public property which is not owned by
anybody), Ali al-Khafif stressed that it can be done on an `aqar or manqul
form of property.147

Though iqta` which occurred in the past was applied on real estate148 based
on the above factors, there must be a conclusion in determining the forms
of non-real estate which can be classified as iqta` by the ruler.

The Role of `Urf on Iqta`

Imam al-Syafi`i defined mal as something which has a value. As such, it is
transacted and compensation will be imposed on whoever damages it.149

This definition shows that ̀ urf plays an important role in determining whether
something that has a value can be categorised as mal because it depends
largely on local and current `urf. As such, several forms of new mal, such as
intellectual property has been accepted by contemporary Islamic jurists based
on the above definition.

For ihya’ mawat and iqta`, `urf also plays an important role in determining
the manner and forms because the permissibility of ihya’ was only mentioned
in general by the Prophet s.a.w.150

The above factors can be the arguments for widening the iqta` scope to the
various forms of assets regardless of whether they are based on real estate
or rights of broadcasting, supply, maintenance and others.

146 Ali al-Khafif, Al-Milkiyah fi al-Syari’ah al-Islamiyyah ma’a al-Muqaranah bi al-Syara’i` al-Wad`iyah,
Dar al-Fikr al-`Arabi, Cairo, p. 263.

147 Al-Khafif, Al-Milkiyah fi al-Syari’ah al-Islamiyyah, p. 226.
148 Hawwas, Al-Iqta` fi al-Fiqh al-Islami, p. 37.
149 Al-Suyuti, Al-Asybah wa al-Naza’ir, Beirut, Dar al-Kutub al-‘Ilmiyah, 1994 p. 409.
150 Al-Mawardi, Al-Hawi al-Kabir, vol. 7, p. 486.

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Resolutions of the Securities Commission Shariah Advisory Council

Iqta` in a Modern Form

There are several current studies which attempt to scrutinise current
applications of the iqta` principle which is debated in the books of past Islamic
jurists.

Syeikh Najib Muti`i said that the question of iqta` is similar to tarkhis
(concession/permit/licence)151 whereby, if a businessman or contractor
wants to build a road, he should get permission from the government. Only
upon obtaining permission is he allowed to carry out the works of
construction, maintenance and so on to the road, and can impose a mukus
(toll) to finance the cost and expenditure borne by him.152

Some of the Islamic jurists who attended the Dallah Barakah Symposium
viewed `aqd imtiyaz (concession contract) as a form of iqta` which is
awarded to the concession holder for a certain period of time and thereafter,
will be returned to the government.153

The use of iqta` principle in the context of Islamic investment now is more
suitable compared to `aqd imtiyaz. This is because the adoption of iqta`
terminology reflects the use of Shariah principles in dealing with current
Islamic financial issues.154

151 Hans Wehr, A Dictionary of Modern Written Arabic, Beirut, Librainie Du Liban, 1980, p. 332.
152 Sheikh Najib al-Muti`i, Takmilah al-Majmu`, Maktabah al-Irsyad, vol. 16, p. 149.
153 Fatawa Nadwat al-Barakah, pp. 220–221.
154 Hawwas, Al-Iqta` fi al-Fiqh al-Islami, p. 99.

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CAPITAL MARKET PRODUCTS ACCORDING
TO ISLAMIC JURISPRUDENCE

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Resolutions of the Securities Commission Shariah Advisory Council

CALL WARRANTS

RESOLUTION

At its 4th meeting on 26 July 1995, the Islamic Instrument Study Group
(IISG) passed a resolution permitting the use of call warrants on the
condition that the underlying shares of the warrants in question are Shariah
compliant. This instrument fulfils the features of mal (asset) according to
Islamic jurisprudence as outlined in the haq maliy and haq tamalluk principles.
Haq maliy can be traded if it complies with Islamic principles and conditions
of buying and selling.

INTRODUCTION

A call warrant is a right, but not an obligation, to buy a fixed quantity of an
asset (such as shares) for a specified price within a limited period of time.155

The following are three defining features of call warrants:156

Underlying Asset

Call warrants are issued based on the underlying assets, for example, the
shares of a company. They give warrant holders the right, but not the
obligation, to buy a certain number of shares of the underlying company at
a price agreed upon before or on a future date.

155 Securities Commission, Understanding Call Warrants, p. 2.
156 Securities Commission, Understanding Call Warrants, p. 3.

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Exercise Price

This is the price at which a warrant holder can choose to exercise his right to
buy the underlying shares. The exercise price is fixed at the time the warrants
are issued.

Exercise Period

The validity of the exercise period of a call warrant is limited, after which it
has no value.

ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF
CALL WARRANTS

In determining the status of call warrants, athar and Islamic jurisprudence
are used as a reference. Although there are no such instruments in the
practices of Islamic muamalat, the studies are nevertheless made from the
perspective of general Shariah principles that are relevant to the instruments.
These principles are as follows:

Athar157 as a Basis

There is evidence of practices similar to paying for a right by the companions
of the Prophet s.a.w. The evidences were in the form of sales and purchases,
and rentals.

Holding Rights in Sales and Purchases

According to Imam Ahmad, as narrated by Ibnu Qadamah in his book
al-Mughni, Nafi` bin al-Harith was reported to have bought a house from
Safwan bin Umayyah for Caliph Omar which was to be converted into a
prison. He laid down a condition to Safwan that if the Caliph agreed, then
he would buy the house, otherwise, Safwan would still be paid a certain
sum. In the book, I`lam al-Muwaqqi`in, Ibnu Qayyim said that the cost of the
house was 4,000 dirham, and Safwan would be paid 400 dirham if the
Caliph did not agree to the purchase. In al-Mughni, the reason for the 400

157 Athar refers to a practice based on the companions of the Prophet s.a.w.

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Resolutions of the Securities Commission Shariah Advisory Council

dirham was given so that the house would not be sold to someone else.158

This narration showed that payment was permissible to give holding right to
a property.

Holding Rights in Rentals

There was also a narration on holding rights in rentals. Such activities were
reported in Sahih Bukhari. Ibnu `Aun narrated, a man asked the owner of a
mount-for-hire, “Prepare your mount, if I do not rent it on the promised
date, I will give you 100 dirham”. The tenant did not rent on the promised
date and Qadhi Shuraih said the condition previously agreed upon had bound
the tenant and considered it an obligation.159

This narration shows that holding rights payment in the form of rental is
permissible and the payment ensured that the mount was not rented out to
someone else.

The Haq Maliy Principle

Under Islamic jurisprudence, there are two types of rights:160

(a) Haq maliy are rights on assets with financial values. Examples of such
rights are haq dayn (debt rights) and haq tamalluk (ownership rights);
and

(b) Haq ghair maliy are rights not related to assets with financial values.
Examples of such rights are haq hadhanah (child custody rights) and
haq wali (right to be a wali).

The Mal Principle

The majority of Islamic jurists were of the opinion that something could be
regarded as mal if it could be controlled and benefited from.161

158 Ibnu Qayyim, I`lam al-Muwaqqi`in, vol. 3, p. 402. Ibnu Qudamah, Al-Mughni, vol. 3, p. 313.
159 Al-Bukhari, Sahih al-Bukhari, Dar al-Fikr, Beirut, 1991, p. 243.
160 Abdul Karim Zaydan, Al-Madkhal li Dirasah al-Syari`ah al-Islamiyah, pp. 184–186. Al-Khafif, Al-Milkiyyah

fi al-Syari`ah al-Islamiyah, pp. 8–17.
161 Abdul Karim Zaydan, Al-Madkhal li Dirasah al-Syari`ah al-Islamiyah, pp. 184–186. Al-Khafif, Al-Milkiyyah

fi al-Syari`ah al-Islamiyah, pp. 8–17.

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Meaning: “Something that can be controlled and benefited from
according to customs.”

The Shafi`i Mazhab also provided general guidelines on what can be
considered as a property. This principle strengthens the awarding of the status
of mal on call warrants according to Islamic jurisprudence as outlined by
Imam al-Suyuti.162

Meaning: “Something is categorised as mal if it has value. That is why
it can be traded, and compensation shall be paid by anyone who
causes it to be damaged.”

Opinions of Past Islamic Jurists

There were two opposing opinions of past Islamic jurists on rights and benefits;
some regarded rights as not mal while the rest thought that rights could be
divided into two types; rights that could be categorised as mal and
otherwise.163

According to the Hanafi Mazhab, rights and benefits could not be categorised
as mal.

The Maliki, Shafi`i and Hanbali Mazhab and some jurists of the Hanafi Mazhab
of the later generation regarded rights and benefits as mal, if they are related
to mal, or `urf, if they are regarded as something of value.

The differences in opinions have a great influence on the decisions on rulings
by contemporary Islamic jurists depending on how they strengthened their
arguments based on the views of the Hanafi Mazhab or the majority of the
Islamic jurists.

162 Al-Suyuti, Al-Asybah wa al-Naza’ir, p. 409.
163 Zaydan, Al-Madkhal li Dirasah al-Syari’ah al-Islamiyah, Al-Khafif, Al-Milkiyyah fi al-Syari`ah al-Islamiyah,

pp. 184–186.

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TRANSFERABLE SUBSCRIPTION RIGHTS (TSR)

RESOLUTION

At its 6th meeting on 5 October 1995, the IISG resolved that transferable
subscription rights (TSR) is an instrument permissible from the Shariah
perspective. The characteristics of this instrument fulfil the principle of mal
according to Islamic jurisprudence as outlined in the haq maliy and haq
tamalluk.

The meeting resolved that what is called bai` ma`dum (buying and selling
something that does not exist) does not occur in TSR trading but such trading
is, instead, bai` maujud (buying and selling something that exists).

INTRODUCTION

TSR is a contract that gives its shareholders a right but not an obligation, to
subscribe to new ordinary shares at an authorised price that has already
been preagreed within a stipulated period. It loses its value after the stipulated
period. In other countries, TSR is commonly known as a warrant.

ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF
TRANSFERABLE SUBSCRIPTION RIGHTS

Several issues of Islamic jurisprudence have been studied in evaluating TSR
which include holding rights and bai` ma`dum. The question of rights and
the views of the Islamic jurisprudence will not be discussed as it has been
discussed in the previous chapter on call warrants.

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164 Al-Zuhaili, Al-Fiqh al-Islami, vol. 4, pp. 427–429.
165 Ibnu Qayyim, I`lam al-Muwaqqi`in, vol. 2, pp. 8–10.
166 Al-Kasani, Bada’i` Sana’i`, vol. 5, pp. 147–148.

Bai` Ma`dum

The main focus is on the purchase of something that does not exist
(bai` ma`dum) as it involves a quantity of shares yet to be subscribed by TSR
holders. Many Islamic jurists do not allow bai` ma`dum in general.164 However,
Ibnu Qayyim studied this issue from two dimensions which show the
permissibility of bai` ma`dum based on certain conditions:

First: It is not true that bai` ma`dum is not permissible. This is because there
is no evidence in the Quran, Sunnah and opinions of the companions of the
Prophet s.a.w. which state that bai` ma`dum is not permissible. The only
thing is a hadith prohibiting certain types of buying and selling, and certain
non-existing products. This is similar to the prohibition of the sale and purchase
of existing products that come with certain features.

Therefore, the prohibition on the buying and selling of such products is
not whether they exist or otherwise, but rather because of the element of
gharar which is uncertainty and deceit in a transaction. Gharar occurs when
there is an element or incapability of delivering a product that has been sold
whether it really exists or not. A classic example would be the selling of
runaway slaves and stray animals. Although the product existed, the seller
was incapable of handing it over to the buyer. It was an obligation for the
seller to hand over the product immediately after the `aqd had been
completed. The failure of the seller to fulfil his obligation meant the occurrence
of gharar, the element of uncertainty which was prohibited.

Second: Certain conditions of Syara` allow bai` ma`dum and consider it
legal. As an example, Syara` allows the buying and selling of fruits and grains
that have a high chance of becoming food produce. The Prophet s.a.w.
permitted this type of transaction. It is bai` ma`dum because even though
the `aqd has been concluded, the buyer is still not able to claim the produce
but has to wait until a certain period when the fruits and grains are ready to
be harvested and delivered.165

Al-Kasani stated that among the conditions of a legal transaction is the
capability of the seller to hand over the goods sold. The important point is
the capability to hand over the goods with absolute certainty even though it
is some time in the future.166

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Ibnu Qudamah also addressed the same question by bringing up the issue of
selling fish that are still in the water. According to him, most Islamic jurists
are of the same opinion that such a transaction is illegal. The `illah is due to
the presence of gharar. However, in certain conditions, it is permissible to
sell fish in the water, provided that:

(a) The pond belongs to the seller;

(b) The water in the pond is shallow and the fish in it can be identified;
and

(c) There is a possibility of catching the fish.167

All these conditions must be fulfilled before it becomes permissible to sell
the fish. Otherwise, gharar will be present, as the seller is incapable of
surrendering the goods.

Based on the texts of Islamic jurisprudence, it can be concluded that `illah
bai` ma`dum is gharar. Gharar occurs when the seller is not able to hand over
the goods sold. This means that when bai` ma`dum occurs without gharar –
a sale will be made; its features, rate and price can also be determined; and
the seller is able to hand over the goods within a specific time – then, such a
transaction is legal.

In conclusion, the prohibition of bai` ma`dum is not that the goods do not
exist during the `aqd but because of gharar. Therefore, what is prohibited is
the element of gharar and not the non-existence of the goods.

On the question of subscribing to shares that have yet to be issued, it is not
bai` ma`dum because the quantity, nature, rate, type and price of the shares
have been determined, and the company will create the new shares within a
specific period.

It can be concluded here that TSR instruments do not contradict the Shariah.
In this context, a TSR is approved by Shariah when the shares to be created
are also shares that comply with the Shariah principles.

167 Ibnu Qudamah, Al-Mughni, vol. 4, p. 294.

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Capital Market Products According to Islamic Jurisprudence

ASSET SECURITISATION

RESOLUTION168

At its 7th meeting on 1 December 1995, the IISG resolved that asset
securitisation is permissible if the underlying asset of the instrument is Shariah
compliant.

INTRODUCTION

In general, asset securitisation is a process of issuing securities by selling
financial assets identified as the underlying asset to a third party. Its purpose
is to liquidate financial assets for cash or as an instrument to obtain new
funds at a more attractive cost, compared to obtaining funds through direct
borrowing from financial institutions.

Specifically, financial assets which have a future cash flow will be sold by a
company that needs liquidity or as new funds to a third party known as a
special purpose vehicle (SPV) for cash. To enable the payment for the purchase
of the assets, the SPV will issue asset-backed debt securities to investors,
based on the pledged future cash flow of the assets. Investors will then gain
returns through future cash flows managed by the SPV.

Among the assets with future cash flows that has the potential to be
securitised for the issuance of asset-backed debt securities issues are house
financing receivable account, credit card account, vehicle financing receivable

168 A resolution made was regarding asset securitisation in general. However, several matters related to
this concept specifically are still under study.

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account, highway toll collection, etc. In the Islamic context, assets must be
securitised in accordance with the Shariah.

ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF
ASSET SECURITISATION

The basis for the concept of asset securitisation is already present in Islam
and has been discussed at length by past Islamic jurists, especially on the
securitisation of cash flow. The basis can be examined through the following
principles:

The Mal Principle

The use of assets as collateral in asset securitisation to facilitate the issuance
of an instrument of value is part of the mal principle in Islam. Mal refers to
something that has value and can be gainfully used according to the Shariah.
A clear difference between the concept of mal and an asset lies in the features
prohibited by the Shariah. In Islam, prohibited items such as liquor and pork
are not included in the mal category for Muslims. However, if they are owned
by non-Muslims, these items are mal for them.

Cash flow is also included in the category of mal if its origin is halal (lawful)
according to the Shariah. This is because, cash flow is considered a dayn
(debt) and according to Islamic jurisprudence, a debt with no ambiguity is
haq maliy which is included in mal.169

Bai` Dayn

Asset securitisation is related to the sale of debts, (bai` dayn) which is debated
in Islamic jurisprudence. The IISG, at its 8th meeting on 25 January 1996,
and the SAC at its 2nd meeting on 21 August 1996, discussed this issue.
The SAC, at its 2nd meeting, agreed to accept bai` dayn in the structuring of
Islamic capital market products.170

169 See SAC resolution on call warrants for further elaboration on the mal concept.
170 See SAC resolution on bai` dayn for further details.

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The Rahn Principle

In asset securitisation, a fixed cash flow is the main criterion of the asset. The
cash flow of the asset is packaged and made the collateral for issuing
securities. This form of securitisation conforms to the rahn principle in Islamic
jurisprudence. Rahn is a valuable underlying asset (collateral) used to obtain
funding on credit. A collateral must have the mal feature to enhance the
confidence of creditors to provide the funds. The mal can be used as a
collateral to redeem a debt in the event there is a failure to settle the debt.171

Opinions of Past Islamic Jurists

There is evidence in Islamic jurisprudence that allows the use of cash flow as
a collateral to obtain new funding which enables the creditor to achieve
liquidity. With this available liquidity the creditor can participate in economic
activities or seize business opportunities without having to wait for a long
time to recover the debt. According to a statement from the Maliki Mazhab,
a debt can be used as a collateral for funding. This means that the Maliki
Mazhab established a concept that packaged cash flow as an underlying
asset for obtaining funds.172

The example quoted from the Maliki Mazhab was wages earned by a
mudabbar173 (slave) from services rendered to his master. This meant that
throughout his master’s life, the mudabbar worked and earned an income
for his master. The Maliki Mazhab stated that an income that was going to
be earned by the mudabbar could be packaged by his master as a collateral
of value for raising funds. This proves that a cash flow can be packaged and
accepted as a collateral of value.174 In short, say a mudabbar works to earn a
monthly wage of RM1,000. In a year he is able to earn RM12,000. The
master can turn the cash flow into a collateral of value for raising funds, e.g.
RM6,000, for a period of less than a year.

Cash flows currently in the form of income from toll collection, electricity
bills, water bills, telephone bills, Islamic house financing, and Islamic vehicle
financing can also be packaged as underlying assets. This is because such
cash flows are fixed cash flows for the company.

171 Al-Asfahani, al-Mufradat, Dar al-Makrifah, Beirut, p. 204. Al-Dardir, Al-Syarh al-Saghir, vol. 2, p. 108.
Al-Zuhaili, Al-Fiqh al-Islami, vol. 5, pp. 180–181.

172 Al-Dusuqi, Hasyiah al-Dusuqi ’ala al-Syarh al-Kabir, Dar Ihya’ al-Kutub al-Arabiyah, Cairo, vol. 3, p. 231.
173 Al-Mudabbar refers to types of slaves who will be free when the master dies.
174 Al-Dusuqi, Hasyiah al-Dusuqi ’ala al-Syarh al-Kabir, p. 233.

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Wathiqah Dayn

To enable the public be more actively involved in economic activities through
investments, assets with regular streams of cash flow can be packaged and
used as underlying assets for issuing securities.

The Maliki Mazhab put forward this idea in a term known as wathiqah dayn.175

A paper of value symbolises the total share of ownership of an ongoing
project. It is also known as sukuk (or shahadah).176 Sukuk only acts as a
financial instrument. It is similar to a company share certificate that facilitates
easy transfer of ownership.

Liquidity can be obtained with sukuk, enabling the entrepreneur to inject
capital into the economic cycle. The sukuk issued is based on the system of
mudharabah, musyarakah mutanaqisah, ijarah, etc. It all depends on the
form of business activity that is used as collateral and how the profits will be
distributed.

175 Al-Dusuqi, Hasyiah al-Dusuqi ’ala al-Syarh al-Kabir, p. 231. Al-Khurasyi, Hasyiah Al-Khurasyi, vol. 5,
p. 236. Nazih Hammad, Mu`jam al-Mustalahat al-Iqtisadiyyah, p. 284.

176 Ma’bid Ali Al-Jarihi, Al-Aswaq al-Maliyyah fi Dau’ Mabadi’ al-Islam, Al-Idarah al-Maliyah fi al-Islam,
Al-Majmak al-Malaki, Jordan, 1989, p. 137.

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Capital Market Products According to Islamic Jurisprudence

 REGULATED SHORT SELLING AND
SECURITIES BORROWING AND LENDING

RESOLUTION

At its 13th meeting on 19 March 1998, the SAC resolved to accept the
existing securities borrowing and lending (SBL) principles in the securities
industry. To comply with Shariah principles, SBL will be aligned to ijarah (leasing
contract) principles. Nevertheless, the istihsan methodology is used as an
exception to the general ijarah principle. This means the ijarah relationship
between the lessee and the shareholder is not severed even though in SBL,
the lessee has to surrender the share leased.

In addition, the SAC at its 69th meeting on 18 April 2006 resolved that
regulated short selling (RSS) is in line with the Shariah as the inclusion of SBL
principles in RSS eliminates the element of gharar.

INTRODUCTION

Regulated Short Selling

In general, short selling is the act of an individual selling securities which he
does not own at the point of transaction.177

RSS is the selling of approved securities,178 where the seller does not have an
exercisable and unconditional right to vest such securities in the purchaser at
the time of the execution of the sale. However, prior to the execution of the

177 http://www.bursamalaysia.com/website/education/glossary.htm#S
178 Please refer to Rule 704 of the Rules of Bursa Malaysia Securities Berhad regarding definitions of approved

securities for regulated short selling.

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sale, the seller has executed an agreement to borrow the approved securities
to enable delivery of the same to the purchaser under the sale, in accordance
with the rules relating to delivery and settlement.179

From the above definition of RSS, it can be surmised that RSS is a form of
short selling that is combined with SBL and executed according to the rules
set by Bursa Malaysia.

Securities Borrowing and Lending

The principle of SBL on regulated short selling was first introduced to the
local capital market at the end of 1995. However, it was suspended at the
end of 1997 following the economic crisis which threatened the stability of
the share market activities in the Kuala Lumpur Stock Exchange (now Bursa
Malaysia). However, before SBL was suspended, the SAC had already
conducted studies on this principle from the Shariah perspective and resolved
that it was permissible.

SBL is a securities borrowing and lending activity which involves the borrower
and lender who need to fulfil their temporary needs, and such transactions
must be completed according to specified regulations and guidelines. As an
example, a lender who owns long-term securities (shares) agrees to lend
securities to a borrower for a stipulated period. When the period expires,
the borrower must return the securities either in the original form or
another form of securities of the same type and amount. Meanwhile, the
lender will impose a deposit and service charge on the borrower, as one of
the securities borrowing conditions.

ARGUMENTS PERMITTING REGULATED SHORT SELLING

In general, short selling involves the selling of shares not owned by the seller.
As a result, such transactions fall under the category of bai` ma`dum. Islam
prohibits such transactions involving bai` ma`dum since the delivery of the
subject matter cannot be effected and this brings about the prohibited
element of gharar.

However, the issue of gharar can be overcome in RSS – the inclusion of SBL
principles in RSS eliminates the element of gharar. In other words, the

179 Rule 704.1(1) of the Rules of Bursa Malaysia Securities Berhad.

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introduction of SBL can increase the probability that the shares sold will be
delivered. When the probability of delivery is high, then the element of gharar
will no longer be significant. Consequently, when an obstacle that hinders
the recognition of a certain activity as Shariah compliant is overcome, then
that activity can be classified as Shariah compliant. This fulfils a fiqh
methodology:  which means: “When an issue that
impedes (the permissibility) is removed, then the activity which was initially
forbidden becomes permissible”.180

ARGUMENTS PERMITTING SECURITIES BORROWING
AND LENDING

Because SBL was something new to the capital market, the SAC undertook
research to determine Shariah principles that could be used as arguments in
evaluating the status of SBL. Based on the research, the following principles
were used as a basis for the permissibility of SBL.

Istihsan Principle

The SAC in several of its meetings attempted to identify a Shariah principle
that can be used as a basis for the implementation of SBL. As a result of the
studies and discussions, the SAC decided that the istihsan principle should
be instilled in the ijarah methodology to form the basis for SBL after evaluating
that other methods such as i`arah (asset borrowing), hawalah (debt
assignment contract) and bai` wafa’ (selling and buying back) were found to
be unsuitable for the concept and implementation of SBL.

Istihsan is an exemption of a ruling that is juz’ie (branch) in nature compared
with a general principle decision.181 Al-Syatibi defined istihsan based on the
Maliki Mazhab as accepting maslahah (public interests) that has juz’ie as
compared with accepting dalil kulliy (general).182 In summary, it means the
use of a specific method as an exemption from the general one.

Istihsan that was popularised by the Hanafi jurists and accepted by the
Maliki jurists had become a serious topic of discussion among Islamic

180 Please refer to section 24, Majallah al-Ahkam al-Adliyyah. Haidar, Durar al-Hukkam Syarh Majallah al-
Ahkam, vol. 1, p.39.

181 Al-Zuhaili, Usul al-Fiqh al-Islami, vol. 2, p. 738.
182 Al-Syatibi, al-Muwafaqat, Dar al-Ma’rifah, Beirut, 1986, vol. 2, p. 562.

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jurists from other schools of thought especially the Syafi`i jurists. The Syafi`i
jurists rejected istihsan if it had no basis. Despite that, istihsan is still widely
referred to by those who have accepted it. In truth, many contemporary
problems can be overcome by accepting istihsan. This need is strongly felt,
especially in handling issues that have arisen in a muamalat system which is
always developing and changing from time to time.

Istihsan with Maslahah

The decision taken by the SAC that the selling of borrowed/leased shares to
a third party does not nullify the ijarah `aqd, because the decision is based
on istihsan with maslahah. This gives a clear advantage to the original
shareholder and can provide liquidity to the share market.

Istihsan with `Urf Khas

`Urf iqtisadi khas183 (a customary practice accepted in economic activities)
which occurs in SBL activities is `urf sahih (customary practices accepted
by Syara’). Therefore, the argument employing istihsan with `urf also
strengthens the evidence.

Accepting the Ijarah Concept with Consent to Sell

Istihsan allows the ijarah concept, with the consent of the owner to sell the
leased shares, to be acceptable as a basis for SBL. According to the original
ijarah concept, the relationship between the owner and lessee will be severed
when a transaction involving the sale and purchase of an asset occurs. This
is because the ijarah contract as defined by the ulama` is the contract for
using the asset and paying for its use.184

With the sale of the assets, the ijarah contract will automatically be terminated.
Nevertheless, as the SBL contract is similar to the terms in the ijarah contract
in many situations, such as the authority of the owner recalling the assets,
evaluating the assets according to current market value and so forth. The
SAC members resolved that the ijarah concept, with the consent of the owner
to sell the leased shares can be applied to the Islamic capital market.

183 See SAC resolution on `urf for further details.
184 Al-Kasani, Bada’i`, al-Sana’i`, vol. 4, p. 174. Ibn Qaudar, Takmilah Fath al-Qadir, vol. 9, pp. 57–60.

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Capital Market Products According to Islamic Jurisprudence

CRUDE PALM OIL FUTURES CONTRACT

RESOLUTION

At its 11th meeting on 26 November 1997, the SAC resolved that the futures
contract on crude palm oil is permissible as it is in accordance with Shariah
principles.

INTRODUCTION

In general, there are two types of futures contracts: commodity futures
contract and financial futures contract. However, this resolution only takes
into consideration the views of Islamic jurisprudence regarding commodity
futures contract. This contract can be defined as an exchange-traded
agreement to buy and sell a commodity in an actual market (cash market) in
a standard quantity, at a future date and at a determined place of delivery. In
Malaysia, there is only one type of commodity futures contract – the crude
palm oil futures contract. It is a financial product innovation for those involved
in crude palm oil trading to manage risks more efficiently and effectively,
especially the risk of price fluctuation.

ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF CRUDE
PALM OIL FUTURES CONTRACT

The SAC, assisted by the Islamic Capital Market Department (ICMD)
conducted an in-depth study on this instrument and related Shariah issues.
Among the issues were:

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Resolutions of the Securities Commission Shariah Advisory Council

Gambling

There were doubts about this instrument based on the requirement imposed
on a market player to place a deposit as a margin of payment before he
begins trading. This action is regarded as a prohibited bet.

The SAC resolved that such a trading activity does not constitute gambling
because the fluctuation of the value occurs due to the change in demand in
the crude palm oil futures market. It is also a common phenomenon in the
trading world. It is not appropriate to judge a contract whose value fluctuates
due to the changing demands for crude palm oil futures market as a gambling
activity. This is because gambling activities depend solely on luck and are not
related to demand and offer.

Gharar

Gharar185 is defined as something that is not certain.186 This instrument relates
to the uncertainty in obtaining goods that have been bought and in receiving
potential profits. The SAC is of the opinion that profit and loss in business is
a common factor, although traders aspire to earn profits. This is stated by
Allah s.w.t. in several verses, such as Surah al-Fatir verse 29 which describes
the aspiration of traders of not incurring losses. Allah s.w.t. states:

Meaning: “For them, they secretly and openly hope for a commerce
that will never fail.”

(Surah Fatir: 29)

Similarly, in Surah al-Taubah verse 24 which describes the worry over a losing
concern. Allah s.w.t. states:

Meaning: “… the commerce in which you fear a decline.”
(Surah Al-Taubah: 24)

185 See SAC resolution on gharar for further details.
186 Afzalur Rahman, Economic Doctrines of Islam, Islamic Publications, Lahore, vol. 2, pp. 73–75. Taqi al-

Uthmani, “‘Uqud al-Mustaqbaliyyat fi al-Sil`ah fi Dhau’ al-Syari`ah al-Islamiyyah”, OIC, Majallah Majma’
al-Fiqh al-Islami, no. 7, vol. 1, pp. 353–355.

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This shows that profit and loss is a characteristic of trading and a trader
should take steps to minimise loss.

The main question in a crude palm oil futures contract is whether gharar
really exists. An important element in trading raised by Islamic jurists is the
element of ghalat.187 This must be clarified as there is a misunderstanding
that it is similar to the principle of gharar. The Islamic jurists see ghalat
from the view point of maslahah istiqrar ta`amul which means that market
players are given the freedom to trade, accept and trust each other in their
transactions to ensure that the market runs smoothly. Factors that can
disturb the market operations are cheating and manipulation. Ghalat that
involves a wrong assessment of an individual (ghalat `aqid) cannot be used
as a basis to terminate a contract. The factor that can terminate a contract is
ghalat wadhih, which is a mistake caused by apparent cheating.188

When a crude palm oil futures contract is offered, specifications such as
quantity, type, price and delivery date are made known to the market players.
Therefore there is no element of gharar in the contract. All specifications are
made clear in the contract, and surveillance and regulation are provided to
ensure there is no cheating.189

Buying Something That Does Not Exist (Bai` Ma`dum)

Ibn Qayyim had studied the issue of bai` ma`dum190 and clarified that the
prohibition of bai` ma`dum was actually due to presence of the element of
uncertainty to hand over the goods sold. Such transactions can take place
regardless of whether the goods exist or not. Nevertheless, bai` ma`dum that
involves something that exists and the seller can obtain it or in the form that
can be made tangible, is approved and valid. This often occurs in Shariah,
such as salam (forward sale) and istisna` (contract of manufacture). Therefore,
bai` ma`dum is prohibited because of the element of gharar rather than the
element of ma`dum.191

The above situation does not occur in the crude palm oil futures market. The
contract can be settled in cash before the due date or settlement by delivery

187 It means mistake. See SAC resolution on ghalat for further details.
188 Al-Zarqa’, Al-Madkhal al-Fiqhi, vol. 1, pp. 390–405.
189 See Futures Industry Act 1993, Business Rules (Exchange and Clearing House).
190 See SAC resolution on bai` ma`dum for further details.
191 Ibnu al-Qayyim, I`lam al-Muwaqqi`in, vol. 2, pp. 8–10.

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on the due date. In addition, the clearing house ensures the delivery and
settlement of a transaction. Therefore, the element of gharar does not exist
or is insignificant.

Speculation

Speculation is also one of the issues that cast doubts on the permissibility of
crude palm oil futures contracts according to the Shariah.192

Speculation193 refers to making profits out of the price movements of goods.
In fact, speculation exists in all forms of businesses and is not limited to
futures transactions. The concern is whether it is excessive or conducted
under normal circumstances.

No Exchange of Goods (`iwadh)

Present Islamic scholars194 put forward the issue that `iwadh does not occur
in crude palm oil futures transactions. ̀ Iwadh means the exchange in buying
and selling, but in this context no purchase of goods in the actual sense has
occurred. Therefore, there is no increase in the value of economic activities.
Crude palm oil futures contract trading, in actual fact, gives an increase in
value to market players. For example, when producers of crude palm oil
hedge,195 they endeavour to cut costs. This will indirectly improve company
profits and make their products more competitive.

Based on the studies, claims such as gharar, bai` ma`dum, non-existence of
`iwadh, etc. do not occur. The SAC thus resolved that crude palm oil futures
contracts are in accordance with the Shariah, for as long as they are free
from the element of riba and gambling. So, investors who are concerned
with Shariah practices can benefit from these facilities used as instruments
for risk management.

192 Al-Uthmani, “`Uqud al-Mustaqbaliyyat”, vol. 1, pp. 353–354.
193 See SAC resolution on speculation for further details.
194 Al-Uthmani, “`Uqud al-Mustaqbaliyyat” vol. 1, p. 354. E-Kotby Hussein, Financial Engineering for Islamic

Banks, The Institute of Middle Eastern Studies, IUJ, 1990, pp. 68–69.
195 Price risk management using a concept known as hedging.

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Capital Market Products According to Islamic Jurisprudence

COMPOSITE INDEX FUTURES CONTRACT

RESOLUTION

At its 13th meeting on 19 March 1998, the SAC resolved that the mechanism
for stock index futures contracts does not contradict Shariah principles.
Therefore, stock index trading is allowed as long as it is Shariah compliant,
and this is done by ensuring that the index component is made up of Shariah-
compliant securities.

INTRODUCTION

A composite index futures contract is one of the instruments categorised as
a financial futures contract. A crude palm oil contract is categorised as a
commodity futures contract. There are two types of financial futures contracts
in the futures industry in Malaysia. These are the Kuala Lumpur Composite
Index (KLCI) futures contracts and KLIBOR futures contracts which are traded
on Bursa Malaysia Derivative Bhd. The SAC decided that both of these
contracts are not permissible by Shariah. This is because the KLCI futures
contract is based on the underlying index where most of its components are
securities of companies that have not been approved by the SAC. On the
other hand, the KLIBOR futures contract is based on interest rates and hence,
contains the element of riba.

Nevertheless, it is important to discuss the extent to which the stock index
mechanism is permissible according to Shariah in the context of risk
management. Added to this was the launch of the Shariah Index by Bursa
Malaysia. It functions as a benchmark for the performance of Shariah-
compliant securities. The increase in the Shariah Index depicts an increase in
the share prices in this sector and vice-versa.

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A composite index futures contract is created when a total number of shares
which form the index components are made the underlying asset to the
instrument. The share index is a benchmark which indicates the performance
of the share/equity market. The contract is an agreement between a buyer
and seller to receive and hand over a certain number of shares comprising
the selected share components at an agreed price and at a determined future
date. However, the agreed price is not paid in full, merely a margin value
until a full settlement is made.

In the Malaysian context, the KLCI is a combination of 100 companies listed
on the Main Board that represent various sectors and are most frequently
traded on Bursa Malaysia. This index is calculated every minute during a
trading day. The Shariah Index is made up of all Shariah-compliant securities
approved by the SAC and are listed on the Bursa Malaysia Main Board.

As the composite index varies based on market performance, the price of a
composite index futures contract will also change according to the movement
of the share index value on the stock exchange. The underlying asset exists
in the physical form and is the total number of shares which are components
of a stock index. As the total is rather large, delivery in its physical form
cannot take place in an index futures contract. The buyer will receive only its
value in lieu of the physical delivery. That is why the contract is settled in
cash before or on the due date.

ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF
COMPOSITE INDEX FUTURES CONTRACTS

A composite index futures contract is a new instrument for managing risks
in securities trading. It is not fully compatible with the concepts of salam,
istisna`, musyarakah, etc. Therefore, it would be inaccurate to categorise it
as the same with existing named contracts, in accordance with Islamic
jurisprudence. The SAC, assisted by the ICMD carried out studies on this
new contract and resolved that it does not contradict the Shariah principles,
provided the index components comprise Shariah-compliant securities.

Features of a Contract Are Not Similar to Muqamarah,
Jahalah and Gharar

The issues of muqamarah (gambling), jahalah, gharar and bai` ma`dum are

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among the main issues emphasised by contemporary ulama` who do not
permit composite index futures contracts.

Buying and selling of index is not synonymous with gambling because there
is no similarity to losing a bet. In gambling, the player loses all his money if
his guess is wrong. This does not happen in index trading as the total index
point has its own inherent value. What happens is, the investor will experience
a decrease or increase in the value depending on the demand for the total
number of shares that comprise the index component. Index trading does
not involve any element of betting.196

This contract also does not contain elements of jahalah and gharar as it is
traded in clear quantities and pricing. There is no vagueness in price and
quantity. The price is determined by the market based on demand and supply.

The Issue of Bai` Ma`dum197

In an index futures contract, there is actually no physical delivery on the due
date. This is in contrast to crude palm oil futures trading where physical
delivery can occur. As a solution, physical delivery can be substituted for
cash value.

In general, Islamic jurisprudence can accept this. Al-Baghdadi in his book
Majma` al-Dhamanat discussed the relevant issues. Such settlements are
carried out when physical delivery cannot be done.

Solutions using cash value means pricing something according to current
market value without increasing or decreasing it.198 Other than the case of
trading, the ulama` also discussed at length the same problem on issues
concerning ghasb199 and its compensations.200 This shows that replacing
physical delivery with cash value is not something new in Islam.

196 See SAC resolution on gambling for further details.
197 See SAC resolution on bai` ma`dum for further details.
198 Ibnu `Abidin, Hasyiah Rad al-Mukhtar, vol. 4, pp. 573–576.
199 Ghasb refers to taking something by force. It is different from sariqah (theft) in the sense that a thief

takes something inconspicuously while in ghasb it is done blatantly.
200 Al-Maidani, al-Lubab Syarh al-Kitab, Dar al-Kitab al-’Arabi, Beirut, vol. 2, pp. 188–196.

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Ta’wil Based on Hikmat Tasyri`iyyah

Ta’wil (interpretation) based on hikmat tasyri`iyyah (secrets and reasons for a
ruling) is very important. Prof. Dr. Fathi al-Duraini stressed that ta’wil based
on hikmat tasyri`iyyah is stronger and more correct because a mujtahid uses
his understanding to apply the secrets and intentions to be achieved by a
nas in implementing a ruling. Therefore, it does not mean that we have
digressed from a certain dalil but that we understand the actual intentions
of the nas more comprehensively.201

In the context of a market, if viewed from the angle of hikmat tasyri`iyyah,
the stock index futures will create maslahah to the trader (investor) in particular
and to the economic system in general as it acts as a hedging instrument.

`Urf Iqtisadi Khas

`Urf are common practices recognised by the local people in their daily lives
be they in action or words. The composite index futures contract is an
instrument that can be used by fund managers, underwriters and market
players to transfer market price risks. In principle, it is a valid ̀ urf iqtisadi khas
(common practices specifically occurring in economic activities) that does
not contradict the Shariah principles. What needs to be corrected is that the
index component must consist of securities that are Shariah compliant. This
is overcome by the establishment of the Shariah Index.

The Mal Concept

The recognition of mal is important to determine whether something can be
traded. Imam Al-Suyuti outlined the mal concept as something that has a
value that can be bought and sold, and can be compensated for its damage.202

Based on this guideline, the status of a futures contract as mal is confirmed.
This is because it has a value within a specific period and is traded in its own
market. It also fulfils haq maliy in Islam. In the instance of ̀ urbun (deposit),203

for example, haq maliy is limited until the maturity date where, if it is not

201 Al-Duraini, Al-Manahij al-Usuliyyah, p. 208.
202 Al-Suyuti, Al-Asybah wa al-Naza’ir, Dar al-Fikr, Beirut, 1983, p. 409.
203 ‘Urbun refers to deposit. See Nazih Hammad, Mu`jam al-Mustalahat, p. 196.

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utilised before that date, the right no longer has value.204 Likewise in a
composite index futures contract, it is of value until the maturity date, after
which the contract cannot be traded. However, the holder of the contract
still benefits from the difference in the buying and selling price upon maturity.

204 Ibn Qudamah, Al-Mughni, vol. 4, pp. 312–313.

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ISLAMIC BENCHMARK BOND

RESOLUTION

The SAC discussed this in a series of meetings and, at its 8th meeting on
9 June 1997, agreed to the structuring of the Islamic benchmark bond, also
known as the Khazanah Bond. This bond is structured based on murabahah
principles.

INTRODUCTION

The main function of the Khazanah Bond is not to raise capital or to finance
a certain project but is created specifically as a benchmark for corporate
bonds to be issued.

The murabahah principle is used in structuring the Islamic benchmark bond.
This principle can be applied as it fulfils the features of a benchmark bond.
Several main features205 are essential for an Islamic benchmark bond to be
issued:

(a) The bond is liquid, that is, it can be traded actively in a secondary
market;

(b) The bond will be issued in series and frequently;

(c) The returns from the bond must be made known; and

205 It is not a Shariah criteria.

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(d) The returns from the bond are determined by the market.

In this context, the Khazanah Nasional Bhd (KNB) was found to be a suitable
corporate institution for issuing the bonds. It is a government corporation
that manages the assets of the Malaysian government.

Under this concept, KNB will sell its Shariah-compliant assets to investors for
cash, and buy them back at a higher price on a deferred basis.

What is interesting about the Islamic benchmark bond is that the asset buy-
back price through the murabahah way is predetermined by KNB but the
cash price or selling price (cost to the investor) will only be known through a
tender process by bidding using the bai` muzayadah principle (bidding or
bargaining). After the bidding is carried out, the cash selling price and buy-
back price through murabahah for trading the KNB assets are agreed upon
by both parties. This agreement is called ittifaq dhimni. The cash selling price
is lower than the buying-back price as the latter has already included profits
to the investor. For example, if the cash selling price for the investor is RM90
million and the buy-back price from the investor five years later is RM100
million, this means that the investor receives a profit of RM10 million. This
trading is then structured into securities to enable it to be a capital market
instrument.

ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF AN
ISLAMIC BENCHMARK BOND

An Islamic benchmark bond is regarded permissible based on the following
arguments:

Siyasah Iqtisodiyyah Principle

The SAC resolved that a benchmark used as a guide in price determination
does not contradict Shariah based on siyasah iqtisodiyyah which is an
economic ruling. It acts as a reference for determining the price level in a
more systematic way and consistent with prevailing market conditions. An
appropriate price level is an important feature of an Islamic market as
underlined by the principle of istiqrar ta`amul. In general, this principle
emphasises the importance of a market that operates smoothly based on
the mutual agreement of buyers and sellers, resulting from a system that is

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transparent, fair and efficient, and with market integrity. Hence, participating
individuals will not be ignorant of the market and will be able to facilitate
trading activities to fulfil their needs.206 To achieve this, Islam defined the
principle of ghalat207 and prevented the occurrence of gharar. With the
establishment of benchmark, the uncertainty of pricing is minimised and
the market is made more transparent and efficient.

The Murabahah Principle

The principle involves an `aqd for buying and selling assets whereby the
price which includes a profit margin is agreed upon by both parties (the
buyer and seller). This concept is appropriate in structuring an Islamic
benchmark bond as the profit in selling the asset has been predetermined.
The price of the issued bond and yield to be earned will be determined
based on the total assets transacted and the murabahah profit.

The Bai` Dayn Principle

After the buying and selling of assets have been concluded according to
murabahah, the Islamic debt securities can be structured and sold in a
secondary market according to the principle of bai` dayn. The SAC, at its 2nd
meeting on 21 August 1996, agreed to accept the principle of bai` dayn as
an instrument for the Islamic capital market.208

In the context of the Islamic benchmark bond, the KNB will sell its assets in
cash to a principle dealer (PD)209 and buys them back on murabahah. The
murabahah price which is paid in instalments is a right to the debt for the
PD. This right is haq maliy or the right on an asset that can be traded.210 The
right to the debt which is in the form of syahadah dayn (debt certificate) can
be used to obtain cash by redeeming it from the debtor upon maturity. This
syahadah dayn complies with mal according to a majority of Islamic jurists211

and can be traded.

206 Al-Zarqa’, Al-Madkhal al-Fiqhi, vol. 1, pp. 378–379.
207 Ghalat outlines the mistakes that should not happen to parties that have performed `aqd to build

confidence in the market.
208 See resolution on bai` dayn for further details.
209 Principal dealer is a financial institution authorised by the central bank to deal in debt securities, such as

government and private debt securities.
210 Al-Khafif, Ahkam al-Muamalat, p. 30.
211 Zaydan, Madkhal li Dirasah al-Syariah al-Islamiyyah, p. 183.

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According to the Syafi`i Mazhab, a debt that is to be sold to a third party
must comply with several basic regulations as follows:

(a) The debt must be the result of trading activities permissible in Islam
and the `aqd must be legal according to Shariah; and

(b) The debt to be sold must be a debt of quality, i.e. guaranteed to be
safe and has a low risk of default. This is in the interests of the
investor.212

In this context, the Islamic benchmark bond that is issued through the KNB,
fulfils both criteria above. This is because the KNB has a sound credit rating
supported and guaranteed by the Malaysian government.

The Bai` Muzayadah Principle

The Islamic benchmark bond is also intended to be a benchmark for the
current value of an asset and also the profit level. In this context, the principle
of bai` muzayadah can be applied. It refers to the action of the seller offering
his products in the market followed by the demand of several buyers
competing to offer a higher price, which results in the seller selling the product
to the highest bidder. The SAC resolved that bai` muzayadah is permissible
(please refer to the resolution regarding bai` muzayadah). This is based on a
practice of the Prophet s.a.w. himself. Imam Bukhari has dedicated a specific
topic that explains the permissibility of such trading.

This principle allows the market player to obtain the true market value of the
assets sold. As many financial institutions are willing to buy the assets in
cash, KNB will open tenders for the purchase of the assets. KNB will choose
the best price offered at the lowest cost and with high liquidity.

The Ittifaq Dhimniy Principle

Ittifaq dhimniy refers to a tacit understanding that exists before a contract is
sealed. The seller and buyer have made a prior agreement to sell the asset at
a certain price and to buy it back at a certain price. In this context, the PD
who has succeeded in securing the tender will buy the assets that have been

212 Al-Syirazi, Al-Muhazzab, vol. 1, pp. 262–263.

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bidden on. This refers to the tacit understanding in a sale and purchase
transaction, in accordance with muzayadah trading. It is likely that in the
context of forming an Islamic benchmark bond, there is more than one PD
successfully buying the assets. Therefore, several PDs will be partners in buying
the assets according to their allotment.

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Capital Market Products According to Islamic Jurisprudence

FINANCE LEASE AND OPERATING LEASE

RESOLUTION

The SAC, at its 14th meeting on 7 May 1998 resolved that rental payments
from finance leases and operating leases are Shariah-compliant products if
they are free of any element of penalty.

INTRODUCTION

Finance lease facilities are usually given by finance companies registered with
Bank Negara Malaysia. Most of these companies are subsidiaries of financial
institutions. There are also other non-finance lease companies which offer
leasing facilities commonly known as operating lease. Operating lease services
can be slightly different from that of finance lease services in that an operating
lease does not offer an option to customers to buy the leased assets at the
end of the period.

In calculating the lease rental, the approach adopted by the finance
leasing and operating leasing companies is similar, that is based on the
value of asset being financed, rate of charge or returns and the period of
financing.

In general, the penalty rate on late payment is high. This payment charge is
imposed to discourage late payment by customers as well as to prevent
leasing companies from being exposed to losses due to opportunity loss.

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Resolutions of the Securities Commission Shariah Advisory Council

THE IJARAH PRINCIPLE: COMPARISON OF FINANCE
LEASE TO OPERATING LEASE

From research carried out, the SAC resolved that finance lease and operating
leases are permissible. This is based on the following:

The Ijarah Principle

The mechanisms that are almost similar to finance leases and operating leases
in daily practices are ijarah and ijarah thumma bai`. Other terms used are
ijarah wa iqtina` and ijarah muntahiyah bi tamlik.

The concept for finance and operating leases without the late payment clause
is no different from ijarah and ijarah thumma bai`. In an operating lease, the
lessee has the right of utilising the assets within a specific period as agreed
to in the contract. As a consumer of the assets, he is required to pay for the
consumption within a certain period, whereas ownership of the assets is still
under the jurisdiction of the lessor.

The principle is similar to ijarah as the assets can benefit the lessee (musta’jir)
within a certain period for a certain sum agreed on. Meanwhile, the assets
still belong to the original owner (mua’jjir). The musta’jir only has the right
to benefit from the assets. However, the Islamic jurists still include ijarah in
the category of buying and selling (bai`). The item traded is a benefit which
is the right to use the asset.213 It is to be understood that Islamic jurisprudence
recognises the right as mal.

The basis of finance lease is similar to ijarah thumma bai`. This mechanism is
a development of the principle of ijarah which is in the nominee contract as
it is more of a financing feature. Unlike the first instrument, it gives a choice
to the musta’jir at the end of the ijarah period whether to buy the asset or to
dispose of it. If the musta’jir chooses to buy the asset, a new contract will be
drawn up.

The SAC then resolved that finance and operating lease activities without
the penalty clause do not contradict the Shariah as they are similar to our
daily practices of ijarah and ijarah thumma bai`.

213 Ibnu Rusyd, Bidayah al-Mujtahid, vol. 2, pp. 178–180.

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Penalty

Regarding the penalty on late payment for finance and operating leases, the
SAC at its 20th meeting on 14 July 1999 agreed to accept the resolution of
the SAC of Bank Negara Malaysia. The resolution allowed only one per cent
penalty rate to be imposed on late payment and the calculation of the penalty
is not based on compounded value. Based on the resolution, the SAC resolved
to take into account the difference between penalty rates imposed by a
company that provides finance and operating lease facilities with a permitted
penalty rate of one per cent.214

214 See SAC resolution on penalties for further details.

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PREFERENCE SHARES

RESOLUTION

At its 20th meeting on 14 July 1999, the SAC resolved that the basic
preference share (non-cumulative) is permissible based on tanazul.215

INTRODUCTION

A preference share is among hybrid instruments that combine equity and
debt in a capital market. It is in the form of hybrid equity which allows its
holders to receive a fixed dividend not enjoyed by ordinary shareholders.
Usually, this fixed dividend is described as a percentage of the nominal share
value.

The Companies Act 1965 defines preference share as a share that does not
give a right to the shareholders to vote at its general meeting or any right to
participate in any distribution of the company that is above the stated amount,
whether through dividends or redemption, dissolution or otherwise.216

There are many forms of preference share in the market, among which are:

(a) Redeemable preference shares;

(b) Participating preference shares;

(c) Cumulative preference shares;

215 Tanazul means to drop claims to right.
216 Companies Act 1965, section 4.

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(d) Convertible preference shares;

(e) Increasing rate preference shares; and

(f) Perpetual/irredeemable preference shares and non-cumulative
preference shares.

The SAC carried out studies on non-cumulative preference shares. It refers
to preference shares whose period of holding by the investor is permanent
and similar to ordinary shares except that dividends are fixed and non-
cumulative. It has features similar to those of an ordinary share – no maturity
date and non-cumulative dividend payment. Non-cumulative preference
shares is included in the classification of equity with fixed dividends.

ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF
PREFERENCE SHARES

The SAC ruled that non-cumulative preference shares are permissible based
on tanazul where the right to profit of the ordinary shareholder is willingly
given to a preference shareholder. Tanazul is agreed upon at an annual general
meeting of a company which decides to issue preference shares in an effort
to raise new capital. As it is agreed at the meeting to issue preference shares,
this means that ordinary shareholders have also agreed to give priority to
preference shareholders in dividing the profits, in accordance with tanazul.

In the context of preference shares, tanazul means surrendering the rights
to a share of the profits based on partnership, by giving priority to preference
shareholders. It is also known as isqat haq217 in Islamic jurisprudence.

217 Al-Mausu`ah al-Fiqhiyyah, vol. 4, pp. 226–256.

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CAPITAL MARKET ISSUES ACCORDING
TO ISLAMIC JURISPRUDENCE

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Resolutions of the Securities Commission Shariah Advisory Council

RIBA: PRINCIPLES AND DIVISION

RESOLUTION

The Shariah Advisory Council (SAC) resolved that riba is one of the main
criteria causing securities of listed companies to be excluded from the
SAC-compliant list. The Islamic Instrument Study Group (IISG), at its 5th
meeting on 23 August 1995 resolved that securities of a company whose
operations and main activity are based on riba are not halal. Examples are
merchant banks, commercial banks and finance companies.

INTRODUCTION

Islam forbids riba in economic and financial activities. This is based on
arguments in the Quran and the Sunnah. Many verses in the Quran clearly
oppose riba. Allah s.w.t. clearly states:

Meaning: “O you who believe! Fear Allah, and give up what remains
of your demand for riba, if you are indeed believers. If you do it not,
take notice of war from God and His Messenger. But if you turn back,
you shall have your capital sums: deal not unjustly, and you shall not
be dealt with unjustly.”

(Surah al-Baqarah: 278–279)

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The threat of war as stated by Allah s.w.t. in the above verse shows that riba
is an activity prohibited by Allah s.w.t. Muslims must purify themselves and
avoid these activities.

Riba in Arabic means something that has increased,218 but it does not mean
that everything that increases is riba, according to Islamic jurisprudence. As
narrated by al-Tabari, riba, was commonly practised during the jahiliyah
(pre-Islamic times) period, for example buying on credit. When the period of
credit expired and a buyer could not settle his debt, the seller would extend
the loan period and increase the amount of the debt.219

DIVISION OF RIBA

In general, riba is divided into two categories:

(a) Riba qurudh is riba that occurs through debt/loan; and

(b) Riba buyu` is riba that occurs through trade.

Riba Qurudh Concept

According to al-Jassas,220 riba as practised by the Arab Jahiliyah came in a
few forms. When the verse prohibiting riba was introduced, the practice of
riba was still being carried out. Riba qurudh involves lending money and
imposing interest. Among the forms of riba practised are as follows:

(a) The debtor borrows a certain sum for a certain period according to
the agreed terms; the debtor must pay back more than the capital
sum or loan;

(b) A creditor gives a periodic loan and earns monthly interest. The loan/
capital sum lasts until the period of expiry. Upon expiry, if the debtor
fails to pay back the capital sum, the period to pay back will be
extended. The creditor will continue collecting interest until the new
expiry date. In other words, this type of riba is more like money lending.
In other words, the money supplier lends his money to earn interest
every month, until the period expired; and

218 Fairuz Abadi, Al-Qamus al-Muhit, Dar al-Fikr, Beirut, 1995, p. 1158.
219 Ibnu Jarir al-Tabari, Jami` al-Bayan, Dar al-Fikr, Beirut, 1995, vol. 5, p. 140.
220 Al-Jassas, Ahkam al-Quran, Dar al-Ihya’ al-Turath al-’Arabi, Beirut, vol. 2, pp. 183–189.

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(c) A trader sells his product with payment deferred to a specific period.
If the buyer fails to pay within that period, the period will be extended
by increasing the interest on the product price.

Upon close examination, the type of riba qurudh prohibited by Allah s.w.t. is
similar to activities practised by commercial banks and conventional finance
companies. This is because banks or institutions give out loans and obtain
interest from the loan.

Riba Buyu` Concept

Riba buyu` occurs in the trading of ribawi products as stated by the Prophet
s.a.w. in his hadith:

Meaning: “Exchange gold for gold, silver for silver, grain for grain,
barley for barley, dates for dates, salt for salt in the same amount and
of the same type and must be handed over in an `aqd ceremony. If
what you have exchanged differs in type, you can trade according to
your wishes but it must be done on the spot.”221

It covers two types of riba; riba nasi’ah, trading in which the settlement is
deferred and not done on the spot and riba fadhl which means unlawful
excess gained in any exchange of ribawi products.222

In the above hadith, the Prophet s.a.w. explained a way to trade the goods
categorised as ribawi products, such as gold, silver, grain, barley, dates and
salt.

In general, all ribawi products mentioned in the above hadith can be classified
into two categories. Any product possessing similar features can be classified
according to the type of riba product. The two categories are, medium of
exchange and non-perishable staple food.223

221 Hadith narrated by Muslim.
222 Al-Sowi, Musykilah al-Istithmar, pp. 333–354.
223 Islamic jurists held different opinions on the categories of riba. What is mentioned here is based on the

dominant opinions of the Maliki Mazhab.

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(a) Medium of exchange – this refers to gold and silver which are used to
measure value because of their strength to back currency. For example,
gold has long been used to back the reserves of a country, as well as
the issuance of currency. Therefore, currency is classified as a ribawi
product because it acts as a measure of value. Money is commonly
used to measure something of value (property); and

(b) Non-perishable staple food – represented by grain, barley, dates and
salt, used as staple food in a certain area and can be kept for a long
time. In the Malaysian context, rice would be included as a ribawi
product.224

Riba buyu` can be avoided as explained by the Prophet s.a.w.:

Meaning: “The same amount and the same type of goods must be
surrendered at the `aqd ceremony. If what you exchange is different
in types, then you can exchange according to your wishes but it must
be on the spot.”

Based on the hadith above, Islamic jurists have set down specific conditions
for trading ribawi products with similar `illah and type as follows:

(a) Exchange must be of the same weight or measure; and

(b) Settled on the spot and handed over in an `aqd ceremony.

If the exchange involves ribawi products of a similar `illah but of different
type, such as the exchange of gold for silver, it must fulfil just one condition,
that it must be done on the spot and in an ̀ aqd ceremony but does not have
to be of the same weights and measures. Such conditions do not apply if the
exchange involves different ribawi products of different categories, such as
the exchange of a medium of exchange with staple food or with non-ribawi
products or similar non-ribawi products.225

224 Al-Sowi, Musykilah al-Istismar, pp. 343, 347. Rafiq al-Misri, Masraf al-Tanmiyah al-Islami, Muassasah
al-Risalah, Beirut, 1987, pp. 163–167.

225 Al-Sowi, Musykilah al-Istismar, pp. 343, 347. Rafiq al-Misri, Masraf al-Tanmiyah al-Islami, pp. 163–167.

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GHARAR

RESOLUTION

The SAC resolved that the existence of gharar in the main activities of a
company can cause the company’s securities listed on Bursa Malaysia to be
excluded from the list of securities approved by the SAC. The IISG at its 5th
meeting on 23 August 1995, resolved that securities with gharar features
are not halal. Company activities categorised as gharar include conventional
insurance activities.

INTRODUCTION

In Arabic, gharar 226 has the same meaning as khatar which means something
dangerous.227 It also carries the meaning of khida` or cheating.228 In terms
of terminology, gharar refers to elements of uncertainty that can expose
someone to danger. In the context of buying and selling, if it is said that an
`aqd has the element of gharar, it means that there is an element of uncertainty
in the `aqd. As an example, a sale and purchase contract which does not
state its price is said to possess an element of gharar as cheating in price can
occur.

Further examples of gharar include conventional insurance where the buyer
buys something and there is uncertainty as to whether the item bought can

226 According to Islamic jurisprudence, gharar differs from taghrir which is synonymous with ghurur or
tadlis. Gharar has no elements of cheating while taghrir has. Please refer to al-Dhariri, al-Gharar wa
Atharuhu fi al-`Uqud al-Fiqh al-Islammi, Dar al-Jil, Beirut, 1990, p. 35.

227 Majma` al-Lughah al-Arabiyyah, Al-Mu`jam al-Wasit, Dar al-Dakwah, Istanbul, 1980, vol. 2, p. 648.
228 Fairuz Abadi, Al-Qamus al-Muhit, p. 577.

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be obtained or not. The item bought (insurance) will only be claimed if an
accident or disaster strikes the buyer, but the accident or disaster may or
may not happen. Therefore, it is uncertain if the item bought by the buyer
will ever materialise.

CONCLUSION OF SAC ABOUT GHARAR

From studies done, the SAC concluded that gharar is a negative element in
trading. This is based on the following factors:

Hadith of the Prophet s.a.w.

The basis of prohibition of gharar is a hadith of the Prophet s.a.w.:

Meaning: “Verily, the Prophet s.a.w. forbids gharar trading.”229

Views of Past Islamic Jurists

The esteemed mazhab of past Islamic jurists gave several perspectives on
gharar. Their differing opinions had an impact on the resulting rulings. From
studies of their works, three main definitions of gharar were derived.230

First: Gharar which means jahalah about the products. Among ulama’ with
such a view were Al-Sarakhsi and Al-Zaila`i from the Hanafi Mazhab. Al-
Sarakhsi defined gharar as something with unknown consequences.231

Second: Gharar refers to syak (suspicion), according to Al-Kasani and Ibnu
Abidin from the Hanafi Mazhab and Al-Dusuqi from the Maliki Mazhab.
According to Al-Kasani, gharar is the potential risk faced by a person, with
the possibility that the goods may or may not eventually exist (syak). To Al-
Khasani, gharar is the suspicion that a good may not exist.232

229 Hadith narrated by Muslim.
230 Yasin Ahmad Ibrahim Daradikah, Nazariyyah al-Gharar fi al-Syari`ah al-Islamiyyah, Wizarah al-Auqaf,

Amman, vol. 1, p. 77.
231 Al-Sarakhsi, Al-Mabsut, Dar al-Ma`rifah, 1989, vol. 12, p. 194.
232 Al-Kasani, Bada’i` al-Sana’i`, vol. 5, p. 163.

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He outlined this while discussing the trading of goods that have yet to be
seen by the buyer. For the Hanafi Mazhab, such a trade is lawful because the
buyer has the right to make a choice after he has viewed the goods. This
view is based on the Prophet s.a.w. hadith:

Meaning: “Whosoever buys something that has not been viewed, he
has khiyar (choice to buy or reject) after viewing it.”233

The Hanafi Mazhab was of the opinion that the risk of the buyer being
exposed to uncertainty is minimum, as when the goods arrive, the buyer can
make a choice based on what he sees.

Third: Gharar refers to something with unknown consequence. This was the
opinion of a majority of Islamic jurists.

The Syafi`i Mazhab defined gharar as khatar (of high risks). Al-Syirazi, a jurist
in this mazhab, defines gharar as something whose condition and
consequence are unknown.234 Al-Ramli stated that, gharar is something
that has two assumptions, positive and negative, with the negative being
more dominant.235 Al-Sharqawi and Al-Qalyubi, also jurists from the Syafi`i
Mazhab, defined gharar as something whose consequence is unknown
and has two assumptions, positive and negative, the negative outweighing
the positive.236

Between the views of the Hanafi and Syafi`i schools of thought, the Syafi`i
Mazhab was of the opinion that jahalah about a product during the buying
and selling ̀ aqd is a significant gharar. This nullifies the ̀ aqd. That is why the
Syafi`i Mazhab stipulated that a buyer must know the specifications and
features of the product he is interested to buy, at the time of the `aqd.237

From the views of these two mazhab, it can be seen how the different
interpretations of gharar have a different impact on the relevant rulings. This
case puts forward buying and selling of a product that has not been seen by

233 Hadith narrated by al-Daraqutni.
234 Al-Syirazi, Al-Muhazzab, vol. 1, p. 262.
235 Shamsuddin Muhammad al-Ramli, Nihayah al-Muhtaj, Dar al-Fikr, Beirut, 1984, vol. 3, p. 405.
236 Al-Syarqawi, Hasyiah al-Syarqawi, Matba’ah al-Babi al-Halabi, Cairo, 1941, vol. 2, p. 9. Qalyubi wa

`Umairah, Hasyiata Qalyubi wa ’Umairah, Dar Ihya al-Kutub al-Arabiyyah, Cairo, vol. 2, p. 161.
237 Qalyubi wa ‘Umairah, vol. 2, p. 161.

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the buyer. However, the two mazhab reached an agreement on steps
taken to avoid the risks of cheating in the `aqd of buying and selling. In
this context, the Syafi`i Mazhab is seen to be stricter in guarding the maslahah
of the buyer.

Forms of Gharar

From the studies made, gharar may occur in two situations:238

(a) Sighah contract: such as two sales and purchases in one transaction
(bai`atain fi bai`ah); and

(b) Subject contract: such as ma`dum sales and purchase.

Gharar is divided into three,239 that is gharar fahisy (plenty),240 gharar yasir
(a little)241 and gharar mutawassit (moderate).242 Ulama’ unanimously say
that gharar fahisy can nullify the contract, especially ̀ uqud mu`awadhat and
gharar yasir do not give any effect on the contract. However, they have
differences of opinions on gharar mutawassit.

According to Muhammad Beltaji, it is impossible for the buyer and seller to
avoid gharar completely. Therefore, past ulama’ differentiated between
gharar which nullifies `aqd and gharar which can be excused based on the
maxims of Islamic jurisprudence, such as raf`u al-haraj243 and la dharar wa la
dhirar.244 As a result of his study, a majority of Islamic jurists placed three
conditions on which gharar can be excused:

(a) The gharar is minor and small;

(b) Such trading is needed by society; and

(c) The gharar cannot be avoided without masyaqqah (hardship) that is
recognised by Syara`.245

238 See the example al-Dharir, al-Gharar wa Atharuhu fi al-`Uqud, p. 76.
239 Daradikah, Nazariyyah al-Gharar fi al-Syari`ah al Islamiyyah, p. 97.
240 For example, selling fish which are still in the river.
241 For example, selling a house with the furniture therein which is not accounted in detail.
242 Gharar mutawassit is gharar which lies between gharar fahisy and gharar yasir.
243 The method in fiqh which bears the Shariah meaning of eradicating hardship.
244 The method in fiqh which bears the meaning of not hazardous and causing hazard (in Islam).
245 Muhammad Beltaji Hassan, Al-Milkiyyah al-Fardiyyah fi al-Nizam al-Iqtisadi al-Islami, Maktabah al-Syabab,

Cairo, 1988, pp. 202–203.

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GAMBLING

RESOLUTION

The SAC concluded that gambling is one of the main criteria causing a listed
company’s securities to be excluded from the list of Shariah-compliant
securities by the SAC. The IISG, at its 5th meeting on 23 August 1995, resolved
that the securities of a company carrying out gambling activities are not
permissible. The activities include casinos and gaming.

INTRODUCTION

Gambling or in Arabic, qimar or maisir means any activities which involve
betting, whereby the winner will take the entire bet and the loser will lose
his bet.246

DALIL ON THE PROHIBITION OF GAMBLING

The prohibition of gambling is clear in the Quran, where Allah s.w.t.
commands believers to eschew gambling by stating:

246 Nazih Hammad, Mu`jam al-Mustalahat, p. 226.

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Meaning: “O you who believe! Intoxicants and gambling (dedication
of) stones, and (divination by) arrows, are an abomination – of satan’s
handiwork: eschew such (abomination), that you may prosper.”

(Surah al-Maidah: 90)

As gambling is prohibited by Allah s.w.t. Muslims are forbidden to be involved
in contributing towards developing companies which carry out trade based
on gambling. Hence, the securities of a company whose main activity is
gambling will be excluded from the list of SAC-compliant securities.

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GHALAT

RESOLUTION

Ghalat is a negative element that can invalidate an ̀ aqd according to Islamic
jurisprudence. There is, however, a number of interpretations given by past
and modern Islamic jurists pertaining to ghalat that offer pros and cons
to its practice in the present day. Hence, the SAC, when discussing crude
palm oil futures contracts, outlined the scope of ghalat as a guidance in
assessing capital market issues.

INTRODUCTION

According to the theory of `aqd in Islamic jurisprudence, ghalat is a negative
element that can affect the validity of an `aqd. In Arabic, the word ghalat is
used to mean error in perception.247

Ghalat from the Perspective of Islamic Jurists

Although past Islamic jurists did not present the ghalat theory in a specific
topic, modern Islamic jurists248 have tried to present the ghalat theory as a
negative element in an `aqd based on principles outlined in the muamalat.
This is based on the studies on forms of errors in `aqd, whereby Islamic

247 Fairuz Abadi, Al-Qamus al-Muhit, p. 612, Majma` al-Lughah al-`Arabiyyah Al-Mu’jam- al-Wasit, p. 658.
248 As an example refer to Abd Razzak al-Sanhuri, Masadir al-Haq fi al-Fiqh al-Islami, Dar Ihya’ al-Turath al-

`Arabi, Beirut, vol. 2, pp. 104–146. Al-Zarqa’, Al-Madkhal al-Fiqhi, vol. 1, pp. 390–407. Muhammad
Yusuf Musa, Al-Amwal wa Nazariyyah al-Aqd, Dar al-Fikr al-Arabi, Cairo, 1996, pp. 366–369. Al-Zuhaili,
Al-Fiqh al-Islami, vol. 4, pp. 216–218.

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249 Khiyar wasf is the right to make a choice given to the buyer when he finds that the features of the
object purchased differ from what have been described by the seller. Please refer to Al-Mausu`ah al-
Fiqhiyyah, vol. 20, p. 157.

250 Khiyar `aib is the right to make a choice given to parties in a contract to cancel the `aqd when there
is an `aib or defect in the object and also payment. Please refer to Al-Zuhaili, Al-Fiqh al-Islami, vol. 4,
p. 261.

251 Khiyar ru’yah is the right to make a choice given to a buyer on whether to proceed with a contract or
cancel it when he finally sees the object for sale, which he did not at the time of the `aqd. Please refer
to Al-Zuhaili, Al-Fiqh al-Islami, vol. 4, p. 267.

252 Al-Zarqa’, Al-Madkhal al-Fiqhi, vol. 1, p. 390.
253 Musa, Al-Amwal, p. 366.
254 Al-Zarqa’, Al-Madkhal al-Fiqhi, vol. 1, pp. 391–392.

jurisprudence has given the right to a buyer to cancel the `aqd should there
be an error through khiyar wasf,249 khiyar `aib250 and khiyar ru’yah.251

Ghalat takes place when the assumption made by a buyer about what he
wants turns out to be otherwise, and this assumption is the reason why the
buyer carried out the sale and purchase `aqd.252

An example of ghalat in the capital market is the case of buying shares. For
example, someone buys ABC shares on the assumption that they can bring
good returns. However, after the purchase, the share price falls. This situation
is categorised as ghalat `aqid (an error on the part of the buyer). According
to Islamic jurisprudence, this error does not allow the party to withdraw
from the `aqd. This is because the consideration to buy the ABC shares was
based on a personal decision after taking into account the expected future
positive performance of the shares. The `aqd carried out does not contain
any gharar element and what has happened is merely ghalat `aqid which
does not nullify the `aqd because it is a normal situation. In Islamic
jurisprudence ghalat can affect an `aqd and causes it to be annulled if it
pertains to the type and feature of the traded object. For example, ghalat
pertaining to a type of object is when someone buys jewellery assumed to
be gold but which later turns out to be gold-plated copper. Ghalat pertaining
to feature is when someone buys a watch believing it to be of a famous
brand, only to discover later that it is a common brand in which he is not
interested.253

In discussing the issue of ghalat, Islamic jurists look at maslahah istiqrar
ta`amul.254 This methodology means that parties in an `aqd are given the
freedom to trade in a normal way, in an environment of willing buyer, willing
seller where mutual trust is present. The point to consider is whether fraud
and manipulation exist in the sale and purchase, because both elements can
affect the validity of an `aqd.

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Ghalat which involves an individual’s personal judgement in deciding on a
purchase is categorised as ghalat `aqid or the mistake of the buyer himself.

If ghalat `aqid is allowed to invalidate an `aqd, then the market will not run
smoothly. The seller will always have to think of the buyer’s expectations.
This worry will cause the absence of istiqrar ta`amul (stability of business
transactions) in the market, because the buyer will always take the
opportunity to cancel the `aqd resulting in a loss to the seller. Hence,
Islamic jurisprudence emphasises that the buyer is given the right to cancel
the `aqd only in cases of ghalat wadhih.255 Ghalat wadhih is a clear error
and it happens under two conditions, i.e. `aqid (party who participates in
the ̀ aqd) has explained clearly what he wants at the time of the ̀ aqd, or if he
has evidence to show what he wants, and qarinah, where the error is on the
part of the seller and not the buyer.256

255 Al-Zarqa’, Al-Madkhal al-Fiqhi, vol. 1, p. 390. Ghalat wadhih means clear error.
256 Al-Zarqa’, Al-Madkhal al-Fiqhi, vol. 1, p. 393.

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SPECULATION

RESOLUTION

The SAC, at its 10th meeting on 16–17 October 1997, and 11th meeting on
26 November 1997, discussed the issue of crude palm oil futures and resolved
that speculation is permissible under Islamic jurisprudence.

INTRODUCTION

According to Kamus Dewan, speculation can be defined as the act of buying
and selling something (shares and others) in anticipation of making a big
profit but at a great risk.257 Meanwhile, Kamus Ekonomi defines speculation
as the taking of risks by investors or businessmen in the hope of making
profits through financial or business trades. Speculators usually buy securities
for capital gains and not for dividends.258 For example, an investor buys shares
when prices are low and sells them when prices are high. The Dictionary of
Business Terms defines speculation as the “purchase of any property or
securities with the expectation of obtaining a quick profit as a result of price
change, possibly without adequate research. Compare with gambling, which
is based on random chance; contrast with investment”.259

257 Dewan Bahasa dan Pustaka, Kamus Dewan, Kuala Lumpur, 1989, p. 1224
258 Dewan Bahasa dan Pustaka, Kamus Ekonomi, Kuala Lumpur, 1993, pp. 245–246.
259 Jack P. Friedman, Dictionary of Business Terms, Barron’s, New York, 1987, p. 570.

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ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF
SPECULATION

Speculation was never debated by past Islamic jurists because it is a term
used in the modern world of finance. Nevertheless, through Shariah principles,
it can be studied to ascertain its status according to Islamic jurisprudence.

The Principle of Bai` Muzayadah

As a result of the studies undertaken, the SAC found that speculation is
present in whatever form of trade and is not confined to the share market.
The question is whether such an act is forbidden entirely in Islam. Generally,
making a profit from a price difference is not a hindrance in Islamic
jurisprudence. Should this activity be forbidden, then surely sale and
purchase principles like bai` muzayadah260 and murabahah will also be
forbidden because both involve making a profit from the difference in the
original price. Hence, this particular principle is allowed in Islam.

The Non-interference Practice of the Prophet s.a.w. in
Determining the Market Price

What is clearly forbidden in Islam are fraud and manipulation. These practices
have to be monitored and supervised to ensure fairness for market players,
and to minimise forbidden practices. A situation whereby a trader makes
bountiful gains as a result of a price increase following an increase in demand
is acceptable in Islam. It represents a blessing and an opportunity for the
trader. Rasulullah s.a.w. himself said:

Meaning: “Let the people seek their own livelihood provided by Allah
s.w.t. for them.”261

What needs to be done is monitoring to ensure that fraud and manipulation
do not occur in the market. The aim is to create a healthy market in line with
the principles outlined in the Shariah.

260 Please refer to the SAC resolution on bai` muzayadah for further details.
261 Hadith narrated by Muslim.

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The Prophet s.a.w. himself was loath to interfere in the fixing of prices in the
market after finding that the prices were being determined by market forces,
and not by any act of manipulation. This view was supported by a prophetic
tradition which told of how the Prophet s.a.w. responded to a request made
of him to arrest the prevalent rise in prices by fixing the prices in the market.
He said:

Meaning: “Verily, Allah s.w.t. determines the climate of economic
affluence and gloom. I do not want to take any action to fix the prices
because I do not want, later in the hereafter, any among you to demand
for the return of your property and blood from me because of my
tyranny (in fixing the prices).”262

The Prophet s.a.w. described the act of fixing prices as tyranny towards the
seller if price fluctuations in the market were due to normal market forces.
An increase in price due to increasing demand should be seen as an
opportunity for the seller to make more profits from the prevalent market
climate. Fixing the price means forcing the seller to sell at the fixed price and
stopping him from enjoying the bounties provided by Allah s.w.t. Thus, it
will not be against the Syara` if market players take advantage of the rise
and fall in prices following the forces of supply and demand of the goods
offered.

Difference Between Speculation and Gambling

At a glance, speculation and gambling appear to be similar in practice. As
such, we do hear, for example, the exhortation not to treat the share market
as a casino. This perception arises because speculators enter the market
depending solely on luck, similar to gambling.

The share market is not a place for gambling. On the other hand, the share
market is a place which allows shareholders to dispose ownership of shares
to other investors in order to gain liquidity. Whether it is gambling or not
depends on the conduct of the investors who enter and leave the market, as
well as their motives. There are those who are well informed when they

262 Hadith narrated by Tirmizi.

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enter the market. This is good because they enter with careful consideration.
There are, however, those who enter the market depending solely on luck.
This not only exposes them to risk, but is also not in line with what is required
in Islam.

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QABADH

RESOLUTION

The IISG, at its 8th meeting on 25 January 1996, resolved that the local `urf
be made the basis and guideline to determine the qabadh status in any
transaction. Subsequently, whatever is accepted by the `urf as qabadh can
be used as a guideline for transactions conducted in the Malaysian capital
market.

INTRODUCTION

Qabadh, according to Islamic jurists, means the control and ownership of
something that usually refers to an uqud mu`awadat (exchange contract). It
can be explicitly done as claiming the goods after the sale transaction, or
implicitly, as recognising that as a result of a certain action, qabadh has
successfully taken place. Generally, qabadh depends on the perception of
`urf or the common practices of the local community in recognising that
the control and possession of a good has taken place.263 Islamic jurists also
use a number of other terms which have the same meaning, among which
are: naqd, munajazah, hiyazah, yadd, yadd bi yadd, ha’ wa ha’, qadha` wa
iqtidha`.264

Qabadh is closely related to the theory of `aqd in Islamic jurisprudence, and
this relationship can be seen from two dimensions:265

263 Nazih Hammad, Mu`jam al-Mustalahat, pp. 221–222.
264 OIC, Majallah Majma` al-Fiqh, no. 6, vol. 1, pp. 560–561, 712–716.
265 OIC, Majallah Majma` al-Fiqh, no. 6, vol. 1, p. 499.

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(a) Outcome and obligation of an ̀aqd. An ̀aqd carries certain obligations
binding to the parties involved. For example, in a sale and purchase
`aqd, the seller is obliged to deliver the goods to the buyer. Similarly,
the buyer is obliged to pay the seller. This transaction involving the
collection of goods by the buyer and the payment for the goods to
the seller is called qabadh; and

(b) Completion of an `aqd. Some `aqd require qabadh to complete the
`aqd. An example is the acceptance of payment in `aqd salam, which
is qabadh used as a condition to complete the `aqd. For the sale and
purchase of ribawi goods,266  taqabudh (exchange transaction between
seller and  buyer) is a requirement for the ̀ aqd. If the ̀ aqd partnership
dissolves before the qabadh is effected, the ̀ aqd is considered invalid.

In general, Islamic jurisprudence has outlined two forms of qabadh:

One: Qabadh Haqiqi or Qabadh Hissi267

This qabadh is explicit and as an example, a qabadh transaction occurs when
the buyer is seen taking the goods sold to him. Qabadh in this form usually
takes place when it involves two types of assets:

(a) `Aqar – fixed property such as land and buildings. Qabadh for fixed
property like land is considered to have taken place when the original
owner gives permission to the buyer to take control of the land and
carry out whatever activity he wishes without hindrance. In the context
of administering the real estate, official transfer of ownership by
changing the name on the ownership certificate and the like is enough
to complete the qabadh;268 and

(b) Manqul – movable property such as trading goods, food, vehicles,
etc. Qabadh hakiki is considered to have taken place when it
involves the collection of goods. For example, in the purchase of
books, qabadh hakiki occurs when the buyer collects the books and
pays the price.

266 Ribawi goods comprise various types of goods which have elements of riba. Exchange of such goods
must follow certain set ways to avoid the incident of riba. Please refer to the SAC resolution on riba for
further details.

267 OIC, Majallah Majma` al-Fiqh, no. 6, vol. 1, pp. 717–723.
268 Al-Zarqa’, Al-Madkhal Al-Fiqhi, vol. 2, p. 648.

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Two: Qabadh Hukmi or Qabadh Ma`nawi269

Qabadh hukmi is the opposite of qabadh hakiki, in that the transaction that
takes place is implicit. However, Islamic jurisprudence still equates its status
with that of qabadh hakiki. The following conditions are considered as qabadh
hukmi:

(a) Takhliah – that is, the seller gives permission to the buyer to take the
goods sold, unhindered. For example, the seller delivers the sold goods
to an agent appointed by the buyer to receive the goods on his behalf.
Another example is, the seller opens up his warehouse to show the
wheat to the buyer, as an indication of handing over the wheat to be
sold;270

(b) Muqassah – meaning a contra debt. In a contra debt, an implicit
settlement takes place between the two parties, i.e. debtor and
creditor. As a result of the contra transaction, there is no more debt
between the two parties. For example, Ahmad owes Ali RM2,000.
Then, Ali owes Ahmad the same amount. This means the two parties
are no longer in debt with each other. In this context qabadh hukmi
to the amount of the debt has taken place in the form of contra;271

(c) Earlier action – Qabadh hukmi can also take place due to an earlier
action which shows that qabadh has taken place earlier, although the
earlier qabadh differs in form from the new qabadh. For example, in
the case of a qabadh rental that is followed by a purchase. During
rental, the tenant occupied the rented premises. This represents a
form of early qabadh. Then, the premises is sold to the tenant, and
qabadh hukmi takes place although the qabadh hakiki is after the
sale and purchase `aqd;272 and

(d) Itlaf – qabadh hukmi also takes place when there is itlaf. Itlaf means
damage. If the goods are damaged by the buyer before the sale and
purchase ̀ aqd – when the goods are in the hands of the buyer, qabadh
is still considered to have taken place. The buyer has to pay for the

269 OIC, Majallah Majma` al-Fiqh, no. 6, vol. 1, pp. 560–561, 712–716. Ibnu `Abidin, Hasyiah Rad al-
Mukhtar, vol. 4, p. 562.

270 OIC, Majallah Majma` al-Fiqh, no. 6, vol. 4, p. 562. Haidar, Durar al-Hukkam, vol. 1, p. 251 (section
263, Majallah al-Ahkam al-’Adliyyah).

271 OIC, Majallah Majma` al-Fiqh, no. 6, vol. 4, pp. 726–727.
272 OIC, Majallah Majma` al-Fiqh, no. 6, vol. 4, p. 729.

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goods, if he causes damage while examining them, e.g. dropped the
goods etc. because qabadh for the goods is considered to have taken
place.273

In the present context of the capital market, the concept of qabadh often
touches on issues like bai` dayn, crude palm oil futures contract and contra
trading in the capital market. Hence, understanding this concept is very
important in determining whether the trading status of the instrument is in
line with Shariah principles.

VIEWS OF PAST ISLAMIC JURISTS

Because the Prophet s.a.w. himself mentioned the matter of qabadh in a
number of sale and purchase situations, Islamic jurists discussed whether it
was a valid condition in transactions or otherwise.

The majority of Islamic jurists were of the view that qabadh represented a
valid condition in the transaction of ribawi goods if the said goods have
similar `illah riba, such as similarity in type (sale and purchase of gold with
gold) or difference in type (sale and purchase of gold with silver). The
transaction should meet the conditions of the ̀ aqd ceremony whereby goods
are handed over and payment is made on the spot.

Such a condition does not apply when the transaction of ribawi goods involves
ribawi goods of different `illah, such as buying gold and paying for it with
rice. Gold is categorised as a medium of exchange whereas rice is a staple
food. (See chapter on riba).

TRANSACTION BEFORE QABADH HAKIKI

In general, there are two viewpoints of Islamic jurists regarding this issue:

First viewpoint: Some Islamic jurists were of the view that qabadh is not a
valid rule for a business transaction. Hence, a person should sell his goods
(without exception) before qabadh can take place. Among those of this
view were `Ata’,274 `Uthman al-Batti275 and Syi`ah Imamiyah.276

273 OIC, Majallah Majma` al-Fiqh, no. 6, vol. 4, pp. 731–732.
274 Ibnu Hazm, Al-Muhalla, Dar al-Turath, Cairo, vol. 8, p. 520.
275 Ibnu Rusyd, Bidayah al-Mujtahid, vol. 2, p. 237.
276 OIC, Majallah Majma` al-Fiqh, no. 6, vol. 1, p. 478.

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Second viewpoint: The majority of Islamic jurists were of the view that
qabadh hakiki is valid for the transaction of some types of goods.277 This was
based on validated prophetic traditions which forbade the sale of some
types of goods before qabadh hakiki.

Nevertheless, they were of differing views in deciding on the `illah and
guidelines for the types of goods that should be included under this
restriction. This is because the prophetic traditions which discussed qabadh
were very generally stated and related to food. The Islamic jurists tried to
find an answer as to whether the restriction was only specific for food or
whether it applied to other things. Among the hadith used to support qabadh
hakiki were:

Meaning: “From Ibnu `Abbas, it was narrated that the Prophet s.a.w.
had forbidden a man from selling food he had not yet procured. Ibnu
`Abbas was asked as to its form. He answered; dirham with dirham,
and food after it has been procured.”278

Meaning: “From Abdullah bin Dinar that he had heard Ibnu ’Umar
said, the Prophet s.a.w. said: Whoever buys food, he should not resell
it before he procures it (qabadh hakiki).”279

Based on the above hadith and a few other narrations with the same
understanding, the Prophet s.a.w. had forbidden the resale of food before
qabadh hakiki. Such evidence shows the importance of qabadh hakiki in
sale and purchase transactions involving specifically food which is perishable.

277 Al-Zuhaili, Al-Fiqh al-Islami, vol. 4, p. 382.
278 Hadith narrated by Bukhari, Muslim and Tirmizi.
279 Hadith narrated by Bukhari and Malik.

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In general, the Hanafi, Shafi`i and Hanbali Mazhab were of the view that the
`illah forbidding the sale of an object before qabadh hakiki was due to the
presence of gharar. This was because of the concern that the goods might
not be delivered due to damage or other factors.

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DHA` WA TA`AJJAL

RESOLUTION

The SAC discussed the issue of dha` wa ta`ajjal in a series of meetings. At
its 10th meeting on 16–17 October 1997, the SAC agreed to accept the use
of the dha` wa ta`ajjal principle in developing Islamic capital market
instruments.

INTRODUCTION

Dha` wa ta`ajjal is the action of a creditor writing off part of the debt when
the debtor settles the balance of his debt earlier.280

Generally, the dha` wa ta`ajjal principle is important in developing Islamic
corporate bonds in a secondary market. Islamic bonds issued are based on
the concepts of ijarah, istisna`, murabahah, musyarakah, and mudharabah.
To enable the trading of these bonds in the secondary market, securities
holders will sell them at a lower price based on the concept of dha` wa
ta`ajjal.

DHA` WA TA`AJJAL PRINCIPLE

Based on the results of a study undertaken, the SAC is of the view that the
principle of dha` wa ta`ajjal is permissible. This is based on the following
dalil:

280 Ali al-Salus, Al-Iqtisad al-Islami, Dar al-Thaqafah, Doha, 1996, vol. 2, p. 568. Al-Zuhaili, Al-Fiqh al-
Islami, vol. 4, p. 693.

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Hadith of the Prophet s.a.w.

Meaning: Narrated from Ibnu `Abbas that the Prophet s.a.w. ordered
the Bani Nadhir to leave Medinah and was then duly informed that
there were still many in the city who owed them money. Said the
Prophet s.a.w: “Give a discount on the debt and hasten the
payment.”281

Meaning: Ka`ab narrated that he had a debt owing him by Ibnu
Abi Hadrad; whereby they were discussing the debt in a mosque and
their voices were raised reaching the ears of the Prophet s.a.w. who
was at his house. He called out to Ka`ab and Ka`ab answered: “Yes,
Messenger of Allah.” The Prophet s.a.w. said: “Lessen your debt
(indicating to lessen a part of it).” Answered Ka`ab: “I have done so,
oh Messenger of Allah”, and the Prophet s.a.w. immediately said (to
Ibnu Abi Hadrad): “Arise and settle your debt.”282

Opinion of Ibnu `Abbas

Ibnu `Abbas is of the opinion that dha` wa ta`ajjal is permitted with the
following argument:

281 Hadith narrated by al-Baihaqi.
282 Hadith narrated by al-Bukhari.

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Meaning: “It (dha` wa ta`ajjal) is permitted because it concerns claiming
part of one’s right and relinquishing another.”283

Views of Past Islamic Jurists

The past Islamic jurists differed in their views on dha` wa ta`ajjal. Generally,
there were two main views regarding this issue:

The first view permited dha` wa ta`ajjal. Among those advocating this view
were Ibnu `Abbas, al-Nakha`i, Zufar, Abu Thaur, Ibnu al-Qayyim and Ibnu
Taimiyyah. Their argument was based on the prophetic sayings explained
earlier.284

The second view did not permit it. This was the view of the majority of
Islamic jurists. Their argument was that there is a similarity between the
concept of dha` wa ta`ajjal and riba, in the prohibition of the increase in
payments. The similarity lies in using time/duration to determine the price.
This is made clear when an extension in time results in an increase in price,
and vice versa when a reduction in time results in a reduction in price.285

Ibnu Qayyim reinforced the view of the group permitting dha` wa ta`ajjal
with the following conclusion:

“Riba is not present in this issue whether in reality, language or `urf. As a
matter of fact, riba is something that increases whereas this does not happen
in dha` wa ta`ajjal. Those who have forbidden it have compared it to riba,
whereas there is a clear difference between the two in the words used:

(a) Either you increase the payment (due to late payment), or settle the
debt (in time) – this is riba; and

(b) Quickly settle your debt with me and as an incentive I will discount
part of it – this is dha` wa ta`ajjal.”

283 Ibnu Qudamah, al-Mughni, vol. 4, p. 189.
284 Ibnu Rusyd, Bidayah al-Mujtahid, vol. 2, pp. 236–237. Al-Salus, Al-Iqtisad al-Islami, vol. 2, p. 569. Ibnu

Qayyim, I`lam al-Muwaqqi`in, vol. 3, p. 371.
285 Ibnu Rusyd, Bidayah al-Mujtahid, vol. 2, pp. 236–237. Al-Salus, Al-Iqtisad al-Islami, vol. 2, p. 569. Ibnu

Qayyim, I`lam al-Muwaqqi`in, vol. 3, p. 371.

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Where is the similarity between the two? In addition, there are no nas, ijmak,
and validated qiyas that forbid this concept.286 Based on these views, the
SAC adopted the principle of reduced debt to be applied in the capital market.

286 Ibnu Qayyim, I`lam al-Muwaqqi`in, vol. 3, p. 371.

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`UMUM BALWA

RESOLUTION

The SAC, at its 2nd meeting on 21 August 1996, when discussing the issue
of a benchmark for haram elements in a mixed company (see definition in
chapter on mixed company), resolved that the situation categorised as ̀umum
balwa needs to be considered in determining the status of a mixed company.

INTRODUCTION

`Umum balwa, according to Islamic juristic terminology, is an unfavourable
widespread situation287 affecting most people and is difficult to avoid.288

EXCUSE GIVEN BY ISLAMIC JURISPRUDENCE IN `UMUM
BALWA SITUATIONS

There is a number of maxims of Islamic jurisprudence that excuse Muslims
caught in `umum balwa situations. The purpose of such an excuse is to
facilitate the carrying out of daily activities. Without such an allowance, the
maslahah of the public will be affected especially in an economic field that
involves the control of mal and trade as well as social stability.

Among the maxims of Islamic jurisprudence touching on `umum balwa
situations are as follows:

287 Situations categorised as ̀ umum balwa in a very small ratio are excused by Islamic jurisprudence. Please
refer to Mu`jam al-Mustalahat, p. 203.

288 Nazih Hammad, Mu`jam al-Mustalahat, p. 203.

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Meaning: “Adversity allows for measures to bring about ease.”

Meaning: “If a situation faces a problem, Syara’ allows for a way out.”

Meaning: “Something forbidden which occurs widely (and which is
difficult to avoid), Syara’ brings relief to those affected.”

Imam al-Suyuti, when explaining the maxims of Islamic jurisprudence
( ), included `umum balwa among factors permitting the
taisir principle, which is the application of relief measures. This means that if
something is categorised as `umum balwa, Syara` allows for relief so as not
to burden the Muslim community.289

289 Al-Suyuti, Al-Asybah wa al-Naza’ir, pp. 77–78.

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TA`WIDH

RESOLUTION

The SAC, at its 12th meeting on 14 July 1999, agreed to allow the imposition
of ta`widh (compensation) on the late repayment of Islamic financing.

Subsequently, the SAC at its 30th meeting on 8 November 2000, resolved
that ta`widh payment for (i) arrears and (ii) failure to pay after the due date,
is permissible for Islamic financing formulated based on `uqud mu`awadhat
(exchange contracts) including Islamic debt securities. Ta`widh can be imposed
after it is found that mumathil (deliberate delay in payment) is utilised on the
part of the issuer to settle the payment of the principal or profit. The rate of
ta`widh on late payment of profit is one per cent per annum of the arrears
and it cannot be compounded. While the ta`widh rate on failure to settle the
payment of the principal is based on the current market rate in the Islamic
interbank money market, it too cannot be compounded.

INTRODUCTION

The imposition of ta`widh or syart jaza’i according to Arab terminology is a
penalty agreed upon by the `aqd parties as compensation that can rightfully
be claimed by the creditor290 when the debtor291 fails or is late in meeting his
obligation to pay back the loan.292

290 The creditor is the financier.
291 The debtor is the issuer.
292 Uthman Syabir, Buhuth Fiqhiyyah fi Qadaya Iqtisadiyyah Mu`asirah, Dar al-Nafais, Jordan, 1998, vol. 2.

p. 855.

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Ta`widh can be imposed as follows:

(a) For the late payment of profit, the rate of ta`widh which can be imposed
is one per cent per year on payment in arrears of profit. However, the
sum of ta`widh cannot be compounded;

(b) For not settling the payments of the principal sum, the ta`widh which
can be imposed is at the current rate of Islamic interbank money
market;

(c) The maximum amount of ta`widh that can be imposed on any unsettled
payment of financing cannot exceed the total amount of the remainder
of the financing balance; and

(d) Ta`widh obtained from financing for which payment has not been
settled, may be consumed by the financiers involved and distributed
according to the bank’s prevailing rate of profit distribution ratio.

ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF
TA`WIDH

The permissibility of imposing ta`widh is based on the following arguments:

Hadith

The Prophet s.a.w. rebuked those who delay the payment of a debt:

Meaning: “The rich who delay the payment of a debt are committing
tyranny.”

Qiyas

The delay in paying off a debt can be compared with ghasb (usurpation) of
valuable property. This is because of the similarity of `illah between the two,
that is obstructing the use of property and exploiting it in a tyrannical way.
According to the Syafi`i and Hanbali Mazhab, in the case of ghasb, the usurper
has the benefit of using the property that he has seized and therefore must

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pay compensation to the owner. In the case of a delayed payment of debt,
the creditor stands to lose because he is deprived of the opportunity of using
the funds for other trading purposes, which he could if the debt is settled
within the stipulated time frame. Therefore, this loss should be compensated
by the debtor based on qiyas.

Maxims of Islamic Jurisprudence

There is a maxim of Islamic jurisprudence which can be used in dealing with
this matter, that is:

Meaning: “Nothing is a loss or results in a loss (in Islam).”

Based on this principle, the debtor’s act of delaying payment is a loss to the
creditor. This situation has to be avoided so that businesses are conducted
according to the istiqrar ta`amul principle, that is the smooth running of the
market. It is supported by another maxim of Islamic jurisprudence:

Meaning: “Whatever loss should be removed.”293

In the context of this discussion, losses that are borne by a creditor must be
removed by the provision of a suitable approach. Imposing ta`widh on a
delayed payment of debt is a suitable approach for covering the loss borne
by the creditor and it encourages the debtor to settle the debt within the
stipulated time frame.

Qadhi Syuraih’s Resolution

There is a basis in Islamic jurisprudence to show that ta`widh can be imposed
in a trade. An example is the resolution made by Qadhi Syuraih in a case
narrated by Bukhari from Ibnu Sirin:

A potential customer said to the owner of some animals for hire:
“Prepare for me one of your animals. Should I not hire it on such a

293 Al-Suyuti, Al-Asybah wa al-Naza’ir, pp. 83–84.

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date, I will pay you of 100 dirham.” Apparently, the customer did not
proceed with the deal, and so, according to Qadhi Syuraih: “Whoever
imposes a condition upon himself voluntarily, then that condition is
binding.”294

Qadhi Syuraih resolved that the condition stated by the potential customer
is binding. Based on this resolution, it can be used as an Islamic jurisprudence
principle to permit the imposition of a condition in the form of ta`widh in a
business transaction. The payment is for opportunity loss borne by the creditor.
Al-Zarqa’ sums it up by saying:

Meaning: “Compensation is for loss (borne by parties involved in a
business transaction) as a result of waiting and the disruption of a
transaction.”295

294 Al-’Asqalani, Fath al-Bari, vol. 5, p. 707.
295 Al-Zarqa’, Al-Madkhal al-Fiqhi, vol. 1, p. 496.

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296 Hibah ruqba is “a conditional gift determined by the hibah giver whereby the hibah property will be
owned by the hibah recipient in case the hibah giver dies. But if the hibah recipient dies before the
hibah giver, the hibah shall be returned to the hibah giver”. Please refer to Al-Syawkani, Nail al-Awtar,
Dar al-Fikr, Beirut, 1994, vol. 6, pp. 112–113. Ibn Qudamah, al-Mughni, Dar al-Fikr, Beirut, 1994, vol. 5,
p. 335. Wahbah al-Zuhaili, al-Fiqh al-Islami Wa Adillatuhu, Dar al-Fikr, Damascus, 1989, vol. 5, p. 10.
Wizarah al-Awqaf wa al-Syu’un al-Islamiah, al-Mawsu`ah al-Fiqhiyyah, Kuwait, 1992, vol. 23, pp. 5–6.

297 Hibah ‘umra is “A temporary gift referring to the life of either the giver or the recipient of the hibah. If
the recipient of the hibah dies, the hibah property shall be returned to the hibah giver. Conversely, if the
hibah giver dies, hibah property shall be returned to the next-of-kin of the hibah giver”. Please refer to
Wizarah al-Awqaf wa al-Syu’un al-Islamiah, al-Mawsu`ah al-Fiqhiyyah, vol. 30, p. 311.

HIBAH RUQBA

RESOLUTION

The SAC at its 44th meeting on 15 January 2003, passed a resolution to
accept the use of hibah ruqba296 principle as the Shariah basis in implementing
the hibah declaration forms for transactions involving joint unit trust fund
accounts, especially for Muslim account holders.

INTRODUCTION

Studies on hibah `umra297 and ruqba were conducted with the intention of
finding a solution to the possible emergence of dispute when one of the
account holders of the joint account dies. According to the normal practice
of unit trust funds, when one of the account holders dies, the other living
person is entitled to the whole amount in the said fund. This practice is
based on the “survivorship” method.

Guided by the existing trust deed, it is the condition that if either one of the
joint unit trust holders dies, the other surviving joint unit trust holders have
the right to all the units of the said account.

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The joint holder of the unit trusts means that anyone who holds unit trusts
or part thereof based on the provision under the trust deed, jointly with
another person will also be known as a joint holder.

Under normal circumstances, joint holding in a unit trust is established for
the interest of family members, such as children or individuals who have not
attained the mature age of 18 years. If an individual has not attained the
permitted age, he is given the choice either to maintain the joint account or
use his own individual account.

While holding unit trusts on a joint basis, unit holders can choose whether
one of them or both are allowed to sign when making withdrawals or selling
the units. This situation is allowed provided all of them have attained the
age of 18 and above. This means that in a joint account there is an element
of hibah or gift whereby both parties benefit from the said property while
still alive. It differs from an account which has a nominee.

ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF
HIBAH RUQBA

Opinions of Past Islamic Jurists

Al-Zaila`i said that Islamic jurists have unanimously agreed not to allow hibah
which imposes a condition that ownership will only be implemented at a
certain period of time in the future.298

The majority of Islamic jurists are of the opinion that hibah which is temporary
in nature such as hibah ruqba and hibah `umra are permissible but that the
conditions be nullified.299 They argued that should the conditions be applied
it will mean that it is in conflict with muqtadha al-`aqd and also the
requirement of the Shariah rules. They were also guided by the sayings of
the Prophet s.a.w.:300

298 Al-Zaila`i, Tabyin al-Haqai’q Syarh Kanz al-Daqa’iq, Dar al-Kitab al-Islami, Cairo, vol. 5, p. 104.
299 Al-Kasani, Badai’i` al-Sana’i`, vol. 6, p. 116. Al-Zaila`i, Tabyin al-Haqai’q, vol. 5, p. 104. Ibn ‘Abidin, Hasyiah

Rad al-Muhtar, Dar al-Fikr, Beirut, 1992, vol. 5, p. 707. Ibn Qudamah, al-Mughni, Dar al-Fikr, Beirut,
1994, vol. 6, pp. 339–340.

300 Al-Kasani, Bada’i` al-Sana’i`, vol. 6, p. 116.

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Meaning: “Look after your property and do not hibah it by way of
`umra because whoever hibah something by way of `umra, then it
becomes the possession of the person to whom it has been hibah.”

Some Islamic jurists from the Hanbali, Imam Malik, Imam al-Zuhri, Abu Thur
Mazhab and others, as well as the early views (qadim) of Imam Syafi`i
are of the opinion that hibah `umra is permissible and its condition valid
provided it is not mentioned by the giver of the hibah that the asset which is
put on hibah will be owned by the hibah receiver’s next of kin after the
death of the hibah receiver.301 This means that hibah item will be returned to
the giver of hibah after the death of the hibah receiver. There are other
opinions whose approach is that hibah being temporary in nature, in reality
it is not hibah but `ariyah (lending).302

Imam Abu Hanifah and Imam Malik allowed hibah `umra but disallowed
hibah ruqba.303 Their views are guided by the sayings of the Prophet s.a.w.
who allowed hibah ̀ umra and annulled hibah ruqba. However these sayings
were criticised by Imam Ahmad because its validity is not known.304 In their
opinion hibah ruqba is hibah ta`liq on something which is uncertain from
the aspect of the period of implementation.305

Based on the above discussion, it can be summarised that among the
important issues which have brought about the differing of opinions among
Islamic jurists on hibah `umra and hibah ruqba are the focus on the element
of hibah which is temporary in nature and hibah that is ta`liq with a person’s
life span. Both issues have drawn different reactions among the Islamic jurists.

The mazhab that says hibah ruqba and hibah `umra are not permissible are
being guided by the sayings of the Prophet s.a.w.:306

Meaning: “Do not give (hibah) either by way of `umra or ruqba.”

301 Ibn Qudamah, al-Mughni, vol. 6, pp. 338–339.
302 Al-Ramli, Nihayah al-Muhtaj ila Syarh al-Minhaj, Dar al-Fikr, Beirut,1984, vol. 5, p. 410. Al-Nawawi,

al-Majmu’ Syarh al-Muhazzab, Dar al-Fikr, Beirut, vol. 15,  p. 395. Al-Zarqa’, al-Madkhal al-Fiqhi, vol. 1,
p. 273.

303 Al-Hattab, Mawahib al-Jalil, Dar al-Fikr, Beirut,1992, vol. 6, p. 61. Al-Nawawi, al-Majmu’ Syarh al-
Muhazzab, vol. 15, pp. 395–396. Al-Zuhaili, al-Fiqh al-Islami, vol. 5, pp. 9–10.

304 Al-Nawawi, al-Majmu` Syarh al-Muhazzab, vol. 15, p. 396.
305 Abd al-Rahman al-Jaziri, Kitab al-Fiqh ‘Ala al-Mazahib al Arba`ah al-Maktabah al-Taufiqiyyah, Cairo,

vol. 3, p. 258.
306 Ibn Qudamah, al-Mughni, vol. 6, p. 335.

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The mazhab that allows hibah ruqba and hibah `umra made the following
sayings of the Prophet s.a.w.307 as their argument:

Meaning: “(hibah) `umra and ruqba are allowed for them.”

Al-Ruju` Fi Al-Hibah (Annulment of Hibah)

Studies regarding al-ruju` fi al-hibah was made because the features of al-
ruju` fi al-hibah are similiar to the hibah ruqba concept from the aspect of
the rights of a hibah giver to get back the goods which have been hibah.
Despite the method of getting back the goods by the hibah giver in the
context of al-ruju` fi al-hibah is different from the hibah ruqba method, the
effect is the same, that is goods which have been hibah can be returned to
the hibah giver.

Islamic jurists of the Hanafi Mazhab are of the opinion that annulment of
hibah is permissible but makruh (forbidden but not haram) even if delivery
has taken place. This is because the right to return hibah property is the
prerogative of the giver.308

Their argument was based on the saying of Saidina Umar al-Khattab which
means: “Whoever gives hibah to their relatives or (the gift concerned) on
the basis of alms, they are prohibited from asking the hibah item to be
returned, and whoever gives the hibah with the hope of receiving reward in
return, then he can ask for the return of hibah item, if he so decides”.309

Generally, the Syafi`i and Hanbali Mazhab, and some of the jurists of the
Maliki Mazhab are of the opinion that annulment of hibah is permissible as
long as there is no qabd (surrender). If qabd happens then hibah contract
becomes customary (binding) and at that point of time it is not permissible
to annul hibah except hibah from parents to their children.310

307 Ibn Qudamah, al-Mughni, vol. 6, p. 335.
308 Ibn ‘Abidin, Haysyiah Rad al-Muhtar, vol. 5, p. 698.
309 Ibn Rusyd, Bidayah al-Mutjahid, vol. 2, p. 428.
310 Abd al-Rahman al-Jaziri, Kitab al-Fiqh`ala al-Mazahib al-Arba`ah, vol. 3, pp. 267–272.

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Imam Ahmad and Islamic jurists of the Zahiri Mazhab do not allow the
annulment of hibah.311 Their arguments were based on a unanimously
accepted general saying which states: “Whoever takes back the hibah item
(given by him) is just like a dog that swallows its own vomit”.312

Generally, Islamic jurists agree with regard to the permissibility of annulment
of hibah provided it is done voluntarily with one another or as resolved by a
judge.313

311 Ibn Rusyd, Bidayah al-Mujtahid, vol. 2, p. 428.
312 Ibn Rusyd, Bidayah al-Mujtahid, vol. 2, pp.428–429.
313 Al-Zaila`i, Tabyin al-Haqa’iq, vol. 5, p. 101. Ibn ‘Abidin, Hasyiah Rad al-Muhtar, vol. 5, p. 704. Al-Sanhuri,

Nazariat al-`Aqd, Dar al-Fikr, Beirut, p. 724.

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CONDITIONAL HIBAH

RESOLUTION

The SAC, at its 44th meeting on 15 January 2003, resolved that hibah bi syat
`iwadh (hibah with return condition) is in line with the principle of Shariah
and is applicable in structuring Islamic bonds.

INTRODUCTION

This principle can be used as a supporting principle in structuring Islamic
bonds. For example, in the structuring of Islamic bonds based on assets, the
original asset holder (originator) is allowed to sell his rights in the form of
financial rights in order to receive payment which has not been received
together with the hibah (gift) on his rights over a particular property to a
special purpose vehicle (SPV). The hibah contract is the supporting contract
attached to the main contract, that is the sales and purchase of financial
rights of the original owner of the asset to the SPV.

It is one of the solutions to avoid the occurrence of bai` dayn bi dayn on the
part of the SPV when issuing Islamic bonds. This is because if the financial
right that was bought by the SPV from the original owner is being made
the underlying asset to the Islamic bond which is based on bai` bithaman
ajil (BBA), it will lead to bai` dayn bi dayn which is disputable. As such, the
property which is being hibah to the SPV will be used as the underlying asset
in issuing Islamic bonds based on BBA.

However, the type of hibah that is given by the original asset owner to the
SPV is conditional hibah. The original owner imposes a condition on the

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314 Al-Zarqa’, Al-Madkhal al-fiqhi, vol. 1, pp. 482–491. Al-Buhuti, Kasysyaf al-Qina`, vol. 3, pp. 188–192.
315 Al-Zarqa’, Al-Madkha al-Fiqhi, vol. 1, p. 491.
316 Al-Zuhaili, Al-Fiqh al-Islami, vol. 5, pp. 29–30.

SPV that the property which is being hibah will be returned after it has been
used by the SPV in issuing Islamic bonds.

ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF
CONDITIONAL HIBAH

To include conditions in any contract is a muamalat issue called nazariyyah
muqtadha`aqd (theory of contract objective). The Hanbali Mazhab is
considered the most open minded with regard to this issue whereby they
permit additional conditions in the contract in order to safeguard the interests
of those who are bound by the contract as long as the conditions do not
contradict the Shariah principles.314

For example, it is permissible for a seller to put a condition on a buyer to
forbid him from selling the merchandise to another person other than the
original seller.315

The majority of the Islamic jurists collectively allow hibah bi syart `iwadh.
However, they have differences in opinions in deciding on the type of contract.

The Hanafi Mazhab is of the opinion that this contract is classified as hibah
at the beginning of the contract that is before qabdh, and will end with bai`
when `iwadh occurs. Whereas, the Maliki Mazhab is of the view that this
contract is similar to bai`.

The Syafi`i and Hambali Mazhab are of the opinion that this contract is a bai`
contract and should meet the sales and purchase conditions.316

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WHEN ISSUE PROCESS

RESOLUTION

The SAC, at its 38th meeting on 2 April 2002, agreed that the process of
when issue (securities futures trading) in the Islamic bond market is in line
with the Shariah requirement. It is a process that has been practised in
conformity with the “al-wa`d“ principle that is the use of a promise. This
activity is permissible because it has been ascertained to be free of riba or
gharar elements.

INTRODUCTION

The process of securities futures trading was created with the objective of
obtaining a suitable bid price by a principle dealer when making a buying
offer before the issuance of the bond. At the same time the principle dealer
will be able to identify the demand level of a particular bond which is to be
launched. By identifying the demand level of the bond, the principle dealer
will be able to estimate the risk control which has to be taken during the
purchase of the bond.

The process of securities futures trading between the investor and the principle
dealer does not involve any contract but it is a promise to buy and sell. All
promises to buy and sell are recorded in the system and the parties involved
are responsible to fulfil their promises. If the party that promises to sell fails
in the bid, then the said party will buy from the market in order to deliver
to the party that has been given the promise.

The possibility of a party reneging on his promise in this process is very unlikely
because the party that made the promise will endeavour to fulfil the promise

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for the sake of reputation, as well as maintaining the smooth flow of the
market.

At this moment, there is no specific provision regarding compensation or
penalty imposed on those who renege on their promises. However, under
the current method, the party that promises will normally fulfil the promise
by acquiring goods from the market. As such, unfulfilled promises in the
process of securities futures trading have never occurred ever since the bond
market was introduced in this country.317

ARGUMENTS THAT SUPPORT THE PERMISSIBILITY
OF AL-WA`D

According to the resolutions of SAC, regarding the process of issuing
Mudarabah Khazanah Bonds, two Shariah principles were approved, namely:

(a) Principle of Bai` Muzayadah – bidding process; and

(b) Principle of Ittifaq Dhimni – it is a documented agreement between
parties involved prior to sealing any official contract.

Based on the resolution of the SAC above, it is clear that the two Shariah
principles play the same role in the process of securities futures trading, as in
the process of Khazanah bonds. The only additional issue involving Shariah
basis in the process of securities futures trading is the promise or wa`d .

Al-Wa`d Principle

The use of a promise or commitment between the investor and principal
dealer is unavoidable in the process of securities futures trading because it is
an important element to successfully process bond issuances at an efficient
cost. Without the element of promises, securities futures trading will not
likely exist and vice versa. The promises that take place are promises to buy
and promises to sell.

According to al-Zarqa’, a promise is initially not a burden to the person who
makes it and also, it does not give any rights to the other party who has

317 Based on a statement from representative of Bank Negara Malaysia/Treasury.

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been promised. However, in the context of divine sins and rewards, it is a
requirement that one must fulfil any promises made. If it is not fulfilled, then
one has committed a sinful act. So, according to the original understanding
of a promise, the person who promises cannot be forced into compliance or
be penalised.

Ruling on Promises to Buy and Promises to Sell

The majority of past Islamic jurists allowed the practice of promises to buy
and sell. The Maliki Mazhab is of the opinion that if a promise is used to fix
the rate of profit then it is not permissible.

Current Islamic jurists have opinions that do not allow promises to buy and
sell. Their rejection of this principle is based on their understanding that it is
similar to what happens in bai` `inah. It is not allowed because there are
elements of tawatu’ (collusion) between buyers and sellers.318

The decree by the Mufti of Saudi Arabia, Sheikh Abdul Aziz bin Baz resolved
that  promises to sell are permissible provided that the goods that have been
pledged are owned by those who made the promises.319

Permissibility of Promises to Buy and Sell Currencies

Imam Syafi`i allowed the promises to buy and sell currencies.320 The Maliki
Mazhab prohibited promises in currency transactions except by spot.321

Ibn Hazm allowed promises to buy and sell currencies at the agreed price of
the day, followed by the actual buying and selling which is sealed by both
parties. However, parties that make the promise are allowed to abort by not
executing the contract for buying and selling. Promises can be aborted since
they are not binding.322

318 Ibn Qayyim, I`Iam Al-Muwaqqi`in, vol. 3, p. 323.
319 Mohamamd Sulaiman Al-Asyqar, “Bai` al-Murabahah Kama Tajrihi al-Bunuk al-Islamiyyah”. Working

paper presented at the 2nd Islamic Finance Convention held at Kuwait on 21–23 March 1983.
320 Imam al-Syafi`i, Al-Umm, vol. 3, p. 27.
321 Ibn Rusyd, Muqaddimat, vol. 3, p. 58.
322 Ibn Hazm, Al-Muhalla, vol. 9, p. 583.

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PRICE FIXING BASED ON FORWARD PRICING

RESOLUTION

The SAC, at its 30th meeting on 8 November 2000, resolved that the use of
forward pricing is permissible for creating and cancelling units of unit trust
funds which take place between the management company and unit trust
holders.

INTRODUCTION

The Securities Commission provided a rule stating that the price of creating
and cancelling units is equal to the net asset value per unit at the next
valuation.  This means that each unit price created and cancelled will only be
known at the end of the transaction day (based on forward pricing).323

Price Fixing Based on Future Price

The objective of creating and cancelling the units based on forward
pricing is to safeguard the interest of existing unit trust holders in unit trust
schemes. If the said price is fixed at yesterday’s price (historic pricing), the
management company can manipulate the unit price to the advantage of
the management company and at the same time, mistreat existing unit trust
holders.

For example, if units are created based on yesterday’s price, and that the
management company is aware that the share market is on an uptrend, it is

323 Securities Commission, Guidelines on Unit Trust Funds.

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able to maximise its profit by instructing the trustee to create units today
(based on yesterday’s price) and instruct the trustee the next day to cancel
the said units. In this situation, there is a high possibility that the cancelled
price was higher (because the market was on the uptrend) than the price
when the units were created, and the difference has to be absorbed by the
existing unit trust holders.

Apart from that, the management company can also adopt an opposite
strategy if the share market is on a downtrend. The management company
will instruct the trustee to cancel the units for today (based on yesterday’s
price) and instruct the trustee the next day to create the said units. The price
to create the units in this case is possibly lower (because the market is on a
downtrend) than the price of cancellation, and the difference has to be
absorbed by the unit trust holders.

ARGUMENTS SUPPORTING THE PERMISSIBILITY OF
FORWARD PRICING

In Islam, price is a very important element in a sales and purchase contract.
If a sales and purchase contract is done without determining the price, the
said contract is deemed invalid. However, there are various methods in
determining the price which is part of the sales and purchase process.

Adaptability of Forward Pricing With Shariah Basis

Generally, a majority of Islamic jurists stressed that any sales and purchase
contract done without determining the price is invalid. This is the general
guideline that needs to be complied with.324

Shariah stipulates the need to know the price to avoid niza` (dispute) and
gharar. If both parties to the contract agree on the basis that must be used in
determining price according to the certain mechanism, then the issue of
niza’ and gharar can be solved.325

324 Al-Dharir, al-Gharar Wa Atharuhu fi al-‘Uqud fi al-Fiqh al-Islami, p. 255. Al-Zarqa’, Al-Madkhal al-Fiqhi,
vol. 2, pp. 691–692.

325 Al-Jaziriy, Kitab al-fiqh ‘Ala al-Mazahib al-Arba`ah, vol. 2, p. 165. Al-Dharir, al-Gharar Wa Atharuhu fi
al-‘Uqud fi  al- Fiqh al-Islami, p. 271.

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Ibn Qayyim is of the opinion that buying and selling, without knowing the
price in advance when contracting, is valid so long as the method to determine
the price has been agreed by both parties, buyer and seller. This method
was adopted from the views of Imam Ahmad and was further strengthened
by the arguments of `urf and qiyas.326

According to him, ̀ urf was used to allow buying and selling since it does not
cause niza`. This was proven during his time, where people had already
practised such buying and selling in the trading of bread and meat. What is
important here is the agreement of both parties as to how a price is to be
determined for buying and selling without necessarily knowing the price in
advance.

He also provided an analogy for such buying and selling with mahr mithl327

in marriage contracts. Although the amount of mahr is not known when a
marriage is being carried out, such marriage is valid because the method of
determining the mahr has been agreed upon, that is based on mahr mithl.
The same issue was also being recognised by Islamic jurists in determining
ijarah based on the value of mithl.

Some modern Islamic jurists of the Hanafi Mazhab recognise buying and
selling which they called bai`al-istijrar.328 This form of buying and selling is
similar to al-bai` bima yanqati` bihi al-si`r which is permissible in the
Hanbali Mazhab. With this, there is a point of convergence between modern
Islamic jurists from the Hanafi and Hanbali Mazhab.329

Based on studies, using yesterday’s price as a reference will encourage greater
manipulation and therafter, will result in dharar (adversity) to the market. In
Islam, the elimination of dharar is a requisite. This is based on the fiqh method:

Meaning: “Adversity needs to be abolished.”

326 Ibnu Qayyim, I`lam al-Muwaqqi`in, vol. 4, pp. 5–6.
327 Marriage dowry based on the value of marriage dowry of close female relatives who are married.
328 Which means: to buy essential goods from a seller by paying at a later date. Please refer to Ibn `Abidin,

Hashiah, Rad al-Muhtar, vol. 4, p. 12.
329 Al-Mausu`ah al-Fiqhiyyah, vol. 9, pp. 43–47.

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and the fiqh method:

Meaning: “Adversity needs to be abolished as much as possible.”

330 Muhammad al-Zarqa`, Syarh al-Qawa`id al-Fiqhiyyah, pp. 179, 207.

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SHARIAH CRITERIA FOR
LISTED SECURITIES

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INTRODUCTION

At the end of 1995, the Islamic Capital Market Department (ICMD) of the
Securities Commission (Commission) with the co-operation of the Islamic
Instrument Study Group (IISG) took the initiative to begin a study of securities
listed on Bursa Malaysia (formerly known as Kuala Lumpur Stock Exchange).
As a result of the study, a set of criteria were formulated to be used as
basic guidelines for the study of listed securities. This study was continued
by the ICMD with the establishment of the Shariah Advisory Council (SAC)
that replaced the IISG. The role of the SAC was to ensure that the studies
carried out were conducted according to Shariah principles. In June 1997,
the Commission published a list of Shariah-compliant securities based
on Shariah principles. At that time, the number of Shariah-compliant
securities was only 371 or approximately 57% of the total listed securities.
By 28 October 2005, a total of 857 securities or 85% of the listed securities
were found to comply with the Shariah principles, enabling Muslim
investors to invest the Islamic way.

The IISG and SAC carried out their study from various angles, including
considering the views from within and outside the country before publishing
the initial list of Shariah-compliant securities. However, the criteria used as a
basis to review the securities are constantly updated based on the research
and case studies of all the listed securities on Bursa Malaysia. This is to
ensure that Shariah-compliant securities go through the appropriate review
process, in line with the requirements for the development and progress
of the Islamic capital market in this country.

SHARIAH CRITERIA FOR LISTED SECURITIES

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SHARIAH CRITERIA

In formulating the criteria, focus is placed on the primary activities of a
company with regard to the goods and services offered. This is because
these primary activities bring returns for the company that are subsequently
distributed to its shareholders in the form of profits and dividends. Such
activities need to be identified to see whether they are contrary to Shariah
principles. If they are, then that particular company’s securities are excluded
from the list of Shariah-compliant securities.

PRIMARY ACTIVITIES CRITERIA

After a lengthy study and discussion with various parties within and outside
the country, the SAC established that the following criteria can be used to
analyse whether securities of a particular company can be deemed Shariah
compliant or not. By applying these criteria, the Shariah-compliant securities
can be separated from all listed securities. The IISG, at its 5th meeting on
23 August 1995, decided on four basic primary criteria to analyse listed
securities.

In general, these criteria were established after referring to the Quran, hadith
and general Shariah principles, and were formulated according to the activities
of a particular company. The criteria are as follows:

First Criterion

The primary activity of the company is based on riba as practised by
conventional financial institutions, including commercial banks, merchant
banks, finance companies, etc.

Arguments to support the first criterion

(a) Quranic evidence based on verses 275–276 in Surah al-Baqarah:

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Meaning: “Those who devour riba will not stand except as one whom
the evil one by his touch hath driven to madness. That is because they
say: ‘Trade is like riba,’ but God hath permitted trade and forbidden
riba. Those who after receiving direction from their Lord, desist, shall
be pardoned for the past; their case is for God to judge; but those
who repeat (the offence) are Companions of Fire: they will abide therein
(forever). God will deprive riba of all blessing, but will give increase
for deeds of charity: for He loveth not creatures ungrateful and
wicked.”

(b) Evidence of ijmak

Islamic jurists from all the mazhab unanimously view that riba is
forbidden. Because of this consensus of opinion, the prohibition on
riba has become ijmak.331

Second Criterion

A company whose primary activity is gambling, such as companies running
casinos, gaming and others.

Arguments to support the second criterion

The prohibition on gambling is clear in the Quran, where Allah s.w.t. ordered
the faithful to stay away from it, as decreed in verse 90, Surah al-Maidah:

331 Ibnu Qudamah, Al-Mughni, vol. 4, p. 134. Al-Syirazi, Al-Muhazzab, vol. 1, p. 170. Ibnu Rusyd, Bidayah
al-Mujtahid, vol. 2, p. 217. Al-Zuhaili, Al-Fiqh al-Islami, vol. 4, p. 670.

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Meaning: “O you who believe! Intoxicants, and gambling, (dedication
of) stones, and (divination by) arrows, are an abomination of Satan’s
handiwork: eschew such (abomination) that ye may prosper.”

Third Criterion

The primary activity of a company is the production and sale of goods and
services that are prohibited in Islam, including:

(a) Processing, producing and marketing alcoholic drinks;

(b) Supplying non-halal meat like pork, etc.; and

(c) Providing immoral services like prostitution, pubs, discos, etc.

Arguments to support the third criterion

(a) Evidence from the Quran regarding food

Islam urges the whole of mankind to eat food which is halal and
good. This exhortation is based on the decree of Allah s.w.t. in the
Quran, verse 168, Surah al-Baqarah:

Meaning: “O ye people! Eat of that which is on earth, lawful and
good; and do not follow the footsteps of the evil one for, he is to you
an avowed enemy.”

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Meaning: "Forbidden to you (food) are dead meat, blood, the flesh of
swine, and that on which has been invoked other than Allah’s name,
that which has been killed by strangling, or by a violent blow, or by a
headlong fall, or by being gored to death, that which has been eaten
by a wild animal, unless you are able to slaughter it (in due form), and
that which is sacrificed on stone altars."

(Surah al-Maidah: 3)

(b) Evidence for prohibition of alcoholic drinks

Allah s.w.t. decrees:

Meaning: "O you who believe! Intoxicants and gambling, and
(dedication of) stones, and (divination by) arrows, are an abomination
of Satan’s handiwork. So avoid such abomination that you may
prosper."

(Surah al-Maidah: 90)

It was narrated of a hadith:

Meaning: “Verily Allah s.w.t. curses intoxicants, those who squeeze
grapes to produce, those who buy the grape juice for making the
drinkers, suppliers of intoxicants, bearers of intoxicants, those who
pour intoxicants into cups for drinkers, sellers of intoxicants, those
who buy them and those who spend the money earned from the sale
of intoxicants.”332

(c) Prohibition on immoral activities

In the matter of adultery, Islam prohibits its followers from committing
the abominable act, so much so that the perpetrator deserves

332 Hadith narrated by al-Hakim and Ibnu Hibban.

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the heaviest penalty should he or she be found guilty. Allah s.w.t.
decrees:

Meaning: “Nor come high to adultery: for it is a shameful (deed) and
an evil, opening the road (to other evils).”

(Surah al-Isra’: 32)

Similarly, with a company which carries out immoral activities like selling
alcoholic drinks, running pubs and discos, prostitution, etc. because such
activities encourage vice.

Fourth Criterion

The primary activity of the company is gharar333 (uncertainty) such as
conventional insurance trading.

The basis of the prohibition on gharar is a hadith of the Prophet s.a.w.:

Meaning: “Verily, the Prophet s.a.w. prohibits gharar transactions.”334

333 For further details please refer to the SAC resolution on gharar.
334 Hadith narrated by Muslim.

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RESOLUTION

The SAC, at its 2nd meeting on 21 August 1996, discussed the status of
companies running a mix of permissible and prohibited activies. The SAC
resolved that such companies, with a certain degree of prohibited elements
which do not exceed the benchmark set by the SAC, can be included in the
List of Shariah-compliant Securities by the Shariah Advisory Council of the
Securities Commission. The SAC also resolved that the subject of ’umum
balwa and gharar yasir need to be taken into account when justifying a
company with a mix of permissible and prohibited elements, whereby its
core activity is permissible. At its 9th meeting on 27 August 1997, the SAC
decided on a benchmark in relation to the image factor of a company.

INTRODUCTION

A mixed company is one where its core activities are permitted by Shariah,
although there are some other activities that may contain a small extent of
prohibited elements. For mixed companies, the SAC carries out an analysis
with additional considerations before including these companies in the list
of Shariah-compliant securities. These considerations are–

(a) the core activities of the company must be activities which are not
against the Shariah principles as outlined in the four primary criteria
(that were explained earlier). Furthermore the haram element must
be very small compared to the main activities;

(b) public perception of the image of the company must be good; and

MIXED COMPANIES

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(c) the core activities of the company have importance and maslahah
(benefit in general) to the Muslim ummah and the country, and the
haram element is very small and involves matters such as ̀ umum balwa
(common plight), `urf (custom) and the rights of the non-Muslim
community which are accepted by Islam.

THE STATUS OF MIXED COMPANIES ACCORDING TO
SHARIAH

The Involvement of Muslims in the Purchase of Equity

The existing structure of a company enables its majority shareholders to control
it. This means that Muslims can control a company by being the largest
shareholders of the company. This is a strategic and important matter that
needs to be understood by the Islamic community. At the same time, a
question that will possibly arise is that the transfer of the company’s control
to Muslims may not necessarily solve the problem of prohibited activities.
Sometimes, even though the ownership of the company has changed hands,
the prohibited activities still carry on. This depends on the extent of the
Muslim community’s observance of the religion’s commandments and
prohibitions, and the presence of fasad al-zaman.335

The question of having prohibited activities in a company is not something
new. In fact, it has been discussed by contemporary Muslim scholars like
Al-Khayyat. He gives the example for riba, where certain companies are
involved in contracts with riba for business transactions conducted by the
company’s management. He separates the practice of riba by the company’s
management from the company’s main activities. The sins are therefore borne
by the company’s management as they are not part of the company’s main
activities.336 Nevertheless, the prohibited status of the company is clear if the
core activity is prohibited, like riba-based financial services, gambling,
production of liquor, etc.

335 Fasad al-zaman means the lack of good deeds and practices at a particular time.
336 Abdul ’Aziz Khayyat, Al-Syarikat fi Dhau’ al-Islam, Al-Idarah al-Maliyyah, Al-Majma’ al-Malaki, Amman,

1989, vol. 1, p. 196.

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Situation of Mixed Companies

A question arises when a company’s core activity is permissible but at the
same time it has other prohibited activities. For example, a big company
whose core activity is the production of industrial goods, but has a subsidiary
company whose activity involves riba. This activity occurs within the company’s
group, and provides loans to the subsidiaries and the holding company as a
source of financing for their business activities.

An example of another mixed company is a large company whose core activity
is real estate but which has a subsidiary company that operates a hotel or
resort where liquor is sold within its premises. What is the status of this
company according to Shariah? Is the core activity which is more significant
not taken into consideration to permit Muslims to invest in the company?
Whereas the permissible activity benefits the public much more compared
to the prohibited activity which has minimal benefits.

The form of prohibited activity in the first case is more for financing the
company’s purchase of machinery, equipment and others. The form of
prohibited activity in the second company is to provide a service to non-
Muslims.

Opinions of Past Islamic Jurists

There are some discussions by Islamic jurists in classical works on Islamic
jurisprudence which are related to the issue of mixed companies. The
discussion looked at the status of companies jointly owned by Muslims and
non-Muslims. They touched on a situation where the non-Muslim partners
carry out riba-based activities and trading of liquor, which are prohibited for
Muslims. Nevertheless, Islam recognises the rights of the non-Muslims. Islam
classifies this matter as mal for them.337 Islam has also ruled that its followers
cannot damage or violate the assets of the non-Muslim community even
when the said assets are prohibited for Muslims. Due to the existence of
such a situation, there are different views among past Islamic jurists with
regards to permitting the establishment of such a company in Islam.

The next issue also addressed by the Islamic jurists concerns companies owned
by Muslim partners but where one partner carries out a prohibited activity,
for example, riba. The situation comes about because this partner

337 Zaydan, Al-Madkhal, pp. 186–187.

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is not that observant about religious and moral practices. A matter such as
this also gives rise to a difference of opinion among the past Islamic jurists
because it was related to the principle about a person’s sins not being
transferable to another and also the principle of muamalat transactions being
generally permissible. It means that we are allowed to practise muamalat
among fellow Muslims who may be faithful or fajir338 or between Muslims
and non-Muslims or vice-versa.

The past Islamic jurists did not make religion a condition for incorporating a
company except when it concerns a mufawadhah company.339

Group of Islamic Jurists That Permit Mixed Companies

Some Islamic jurists believe that it is permissible for Muslims to partner non-
Muslims in business, although it is not encouraged. The Islamic jurists were
from the Syafi`i Mazhab, and some from the Hanafi, Maliki and Hanbali
Mazhab.340

Their arguments were based on qiyas where both partners qualify to
become official representatives. Thus they should run the mufawadhah
company complying with how the mufawadhah company was formed
between the Muslim and non-Muslim. Subsequently, both parties (Muslim
and non-Muslim) qualify to carry out the work of the company on their
own, even though they both differ on what is permissible and prohibited in
carrying out an activity. According to the Islamic jurists, Muslims cannot carry
out prohibited activities, such as those connected with riba and liquor trading,
while there are no restrictions on the non-Muslims. The same religion need
not be present in a mufawadhah company. Islam allows a mufwadhah
company to be formed between Majusians and the kitabis (Jews and
Christians) although the religions of both parties differ. Majusians worshipped
fire and their altar was considered mal, whereas the kitabis did not have
the same practice.341

338 Muslim fajir means a Muslim who does not follow the commandments of Allah s.w.t. and does not
protect himself from doing what is prohibited.

339 A mufawadhah company is a company with partners who share the capital, action, debts and profits,
starting from the beginning of the company’s operations right up to the end. See Al-Khafif, Ahkam al-
Muamalat, p. 458. Nazih Hammad, Mu`jam al-Mustalahat, p. 169.

340 Al-Hattab, Mawahib al-Jalil, vol. 5, pp. 118–119. Al-Buhuti, Kasysyaf al-Qina’, 1982, vol. 3, p. 496.
Al-Ramli, Nihayah al-Muhtaj, Dar al-Fikr, Beirut, vol. 5, p. 6. Al-Rafi`i, Fath al-’Aziz (Al-Majmu` Syarh al-
Muhazzab), Dar al-Fikr, Beirut, vol. 10, p. 405.

341 Al-Hattab, Mawahib al-Jalil, vol. 5, pp. 118–119. Al-Buhuti, Kasysyaf al-Qina’, vol. 3, p. 496. Al-Ramli,
Nihayah al-Muhtaj, vol. 5, p. 6. Al-Rafi`i, Fath al-`Aziz, vol. 10, p. 405.

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Group of Islamic Jurists That Prohibit Mixed Companies

Imam Hanafi and Muhammad were from among the early generation of the
Hanafi Mazhab who did not believe it was permissible for Muslims to
collaborate with non-Muslims through mufawadhah. This was because Islamic
and non-Islamic activities differ. What was permissible for non-Muslims was
considered mal such as liquor and pork, which were prohibited for Muslims.

Rationale Permitting the Inclusion of Mixed Companies in the
List of Shariah-compliant Securities

Views of Many Islamic Jurists Permitting

Based on the views of many Islamic jurists,342  the approach towards permitting
Muslims to invest in the shares of companies with a mix of permissible and
prohibited activities is justified. This is because the esteemed Islamic jurists
did not prohibit such companies when evaluating the status of companies
jointly owned by both good Muslims and fajir Muslims, even though the
companies were later found to carry out prohibited activities, such as riba
and the sale of liquor.

Past Islamic jurists also discussed the issue of funding from both permissible
and prohibited sources. The majority of the Islamic jurists allowed such
transactions involving permissible and prohibited funding, provided the ratio
of permissible funds is more.

Izz al-Din bin Abd Al-Salam said:

Meaning: “If the permissible money is more, that is, one dirham of
prohibited money is mixed with one thousand of permissible money,
then the transaction is allowed.”343

342 A majority of Islamic jurists from the Hanafi, Maliki, Syafi`i and Hanbali Mazhab found mixed companies
to be permissible. Regardless of the Islamic jurists, who came before the Hanafi Mazhab, not permitting
such companies; the later Islamic jurists permitted them based on a differing interpretation towards the
social situation which could influence a fatwa. The change in judgement from not permitting to permitting
was seen as meeting the needs of Muslims to be involved in controlling a company in a plural society.

343 Izz al-Din bin Abd al-Salam, Qawa`id al-Ahkam, vol. 1, pp. 72–73.

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344 Al-Kasani, Badai’i` al-Sanai’i`, vol. 6, p. 144.
345 Ibnu Taimiyyah, Majmu` Fatawa, vol. 29, p. 273.
346 Gharar means uncertainty and cheating. Please see Al-Mu`jam al-Wasit, vol. 2, p. 648. Fairuz Abadi,

Al-Qamus al-Muhit, p. 577.
347 Ghabn means the act of taking profits by charging above the market price. Please see Nazih Hammad,

Mu`jam al-Mustalahat, p. 210.

Al-Kasani also said:

Meaning: “Everything will be tainted by what is prohibited, but if the
larger part is halal, then trade is allowed.”344

Ibnu Taimiyyah also gave the same view with regards to funds where
permissible and prohibited assets are mixed:

Meaning: “Should the permissible be more, then a business transaction
will not be judged as prohibited… and should one’s wealth be found
to have a mixture of the permissible and prohibited, then the
permissible element will not be prohibited; on the contrary, the owner
is allowed to take according to the permitted ratio.”345

Islamic Jurisprudence Accepts the Reality of Gharar Yasir and
Ghabn Yasir

Gharar346 and ghabn347 are two negative elements that can ruin a contract.
However, should it occur in a small amount, Islamic jurisprudence
considers it normal and will not adversely affect the contract’s goodwill. In
other words, the miniscule presence of these two negative elements in a
contract is excusable. The same situation can happen in a mixed company
where the permitted activity is more than the prohibited activity. Therefore,
the nature of such a company is within the permissible bounds of the Islamic
jurisprudence and is excusable.

...

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The Principle of `Umum Balwa

Most of the small prohibited matters in today’s business transactions can be
categorised as `umum balwa.348 Such matters, as earlier explained, are
included among those matters excusable under Islamic jurisprudence.

The Principle of al-Dharuriyat al-Khamsah

With reference to the masalih dharuriah,349 Syara` has listed hifz al-mal350 as
a masalih dharuriah that must be regarded very seriously. The question of
the Muslims’ economic strength and integrity is an important factor in the
continuity and progress of Muslims. Large companies whose core activity is
permissible, should not be cast aside by Muslims just because there is a small
number of activities that do not comply with the Shariah requirements. If
Muslims are involved in these companies, they can concentrate their capital
in permissible activities that outweigh those which are prohibited. Besides,
this will benefit Muslims as they can participate in the economy, especially in
companies that are important and strategic to them.

Change in Hukm (Ruling) Due to Change in Human Behaviour

Changes in environment and location greatly affect the consistency of rulings
through the ages. This is because Islam is a religion that is suitable for meeting
human needs at any time and any place. To meet these demands, changes
in rulings always take place. Every ruling that is endorsed has a specific aim
in meeting the call for justice, obtaining maslahah, and averting damage
and destruction. Apart from the factors of time, place and environment, the
change in ruling is also related to the changing morality of Muslims. Based
on the history of Islamic jurisprudence, there were many rulings that were
amended due to changes in time, place and environment. The Islamic
jurisprudence states a maxim of Islamic jurisprudence as follows:351

348 Please refer to the SAC resolution on `umum balwa for further details.
349 Al-Syatibi, Al-Muwafaqat, vol. 2, pp. 8–10. Al-Masalih al-Dharuriyyah refers to the five primary concerns

of mankind – preservation of religion, self, mind, genealogy and property.
350 Hifz al-mal means preservation of property.
351 Al-Zarqa’, Al-Madkhal al-Fiqhi, vol. 2, p. 923.

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Meaning: “It cannot be denied that a change in ruling is caused by a
change in time.”

Even then, changes are confined to rulings that are ijtihadi in nature.

A ruling can change as a result of a lack of abstinence and weak adherence
to religious commandments as a whole at a place or what is known as fasad
al-zaman. Besides that, a ruling can also change due to changes in the
economic system or what is known as asalib iqtisadiyah because if rulings do
not change with the times, it ceases to be practical. As a result, the lack of
changes will make the Shariah appear static and obsolete because it cannot
cope with the prevailing needs, whereas according to Imam Al-Syatibi, nothing
is purposeless in Shariah.352

An example of a change in ruling as a result of a change in environment for
Muslims is provided by the ruling concerning the payment for teaching the
Quran. The early generation of past Islamic jurists ruled that no payment
should be given for teaching the Quran and religion. However, with changing
times, such duties were required to be appropriately paid. Without such
payment, religious education would be neglected because no one would be
interested to teach. As a result, nobody would have a deep knowledge of
the Quran and the religion, because specialist knowledge would not be
available. Because of this, the Islamic jurists later took the approach of
permitting the acceptance of payment, which was originally not permitted,
in line with the changing times and environment.353

The reason for deciding on a ruling that differs completely from its original
ruling, that is from not permitting to permitting, is so that the religious
maslahah will continue to be preserved. If the ruling is not updated in line
with the changing times and environment, religious study and its propagation
would almost certainly be completely neglected. This contradicts the
requirement of the Shariah which wants such noble efforts to continue.
Thus, maintaining an old ruling which has no maslahah is contradictory to
Shariah principles.

352 Al-Syatibi, Al-Muwafaqat, vol. 1, p. 137.
353 Al-Zarqa’, Al-Madkhal al-Fiqhi, vol. 2, p. 930.

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Response to Views Disputing the Permissibility of Mixed
Companies

There are parties opposed to the inclusion of a mixed company in the list of
Shariah-compliant securities due to its non-compliance with the maxim
( )  which means that if the permissible is
mixed with the forbidden, then it should be ruled as forbidden. They are of
the view that such a mixed company should not be at all included in list of
Shariah-compliant securities.

It must be understood, however, that there are strong arguments to rebut
the above viewpoint, as follows:

(a) Weakness of the maxim ( ).

The authenticity of the above maxim is also disputed. It cannot be
denied that this maxim is suitable for certain cases, such as the mixing
of slaughtered animals carried out by Muslims and the Majusi but it is
not suitable in the case of mixed companies.

Al-Sayuti mentions that this maxim is based on a hadith of the Prophet
s.a.w.:

Meaning: “Where there is a mix of the permissible and the forbidden,
then it becomes forbidden.”

However, Islamic scholars debated on the status of this hadith.
According to al-Hafiz Abu Al-Fadhl al-`Iraqi, this hadith is of unknown
origin. Meanwhile, al-Subki quoted al-Baihaqi that the hadith was
conveyed by Jabir Al-Ja`fiy, someone of weak status who had conveyed
it from al-Sya`biy who, in turn, conveyed it from Ibn Mas`ud in the
form of a munqati` (hadith of a broken reporting sequence).354

(b) Existence of an opposing maxim

There is an opposing maxim mentioned in Al-Asybah355 at the end of
the discussion of the maxim . The

354 Al-Suyuti, Al-Asybah, pp. 139–144.
355 Al-Suyuti, Al-Asybah, p. 151.

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maxim concerned is  which means: “That which is
forbidden does not render forbidden that which is permissible.” This
maxim was formulated based on the hadith warid found in Sunan Ibn
Majah and Al-Darqutniy conveyed from Ibn Omar.

(c) Maslahah

Apart from the weakness of the maxim stated above, maslahah is
also a strong argument for permitting mixed companies. It is further
strengthened by arguments pertaining to the existence of the ̀ umum
balwa, fasad al-zaman, `urf, asalib iqtisodiyyah situations and the
recognised rights of non-Muslims.

Because of that, the maxim as presented by Izz al-Din `Abd al-Salam356

regarding the mix of good and bad should be applied:

Meaning: “Where there is good and bad together, then it needs to be
reviewed…”

If such an action is taken, and hopes of achieving good are more positive,
and the disadvantage can be overcome and averted, then such an action
should continue. This takes into consideration the command of Allah s.w.t.:

Meaning: “So fear Allah s.w.t. as much as you can…”
(Surah al-Taghabun: 16)

On the contrary, if the bad cannot be overcome and the good cannot be
obtained because the bad outweighs the good, then the decision not to
proceed with the planned action is wiser to avoid the bad.

BASIS FOR ESTABLISHING THE BENCHMARK

To determine the status of a mixed company as a Shariah-compliant company/
securities, it is necessary to draw up specific benchmarks to ensure that

356 Izz al-Din Abd al-Salam, Qawa`id al-Ahkam, vol. 1, p. 83.

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prohibited elements are minimal and related to those excused by Syara`. In
other words, the presence of prohibited elements do not affect the permissible
part which is larger and more important.

The esteemed past Islamic jurists did not draw up a benchmark for
determining the status of a mixed company. This, therefore, gives modern
Islamic jurists the opportunity to think about such a benchmark.

The SAC considered a number of benchmarks as a basis that can be considered
as ihtiyat (precautionary measure) that gives caution in classifying a mixed
company under the permissible category as stated by Ibnu Subki in al-Asybah
wa al-Naza’ir, that is, “to rule as prohibited something that is a mix of the
permissible and the prohibited is ihtiyat and it is not necessarily prohibited.”357

The SAC took into account additional elements like maslahah, ̀ umum balwa,
`urf khas min asalib iqtisodiyah,358 fasad al-zaman and huquq ghair
muslimin.359  The SAC also looked at numerous fatwa (religious edict from
a qualified scholar) which have become exceptions to the maxim

which means, if there is a mix of the
permissible and the prohibited, then it is ruled as prohibited.

For example, the mixing of slaughtered animals by Muslims and the Majusi
is ruled to be totally prohibited.360 This fatwa is in line with the maxim

 because such a mixed item is prohibited in
essence. Whereas if the essence of such an item is not prohibited, but is
prohibited for other reasons, then it needs to be scrutinised differently.

Ibnu Qayyim in his Bada’i` al-Fawa’id361 divided the nature of prohibited assets
into two groups:

(a) Prohibited because of its zat (nature), for example liquor, pork, etc.
This relates to the case of mixing slaughtered animals mentioned earlier;
and

(b) Prohibited due to other reasons, for example, the means by which
money is earned is prohibited. Money, in essence is not prohibited,
but if money is obtained as a result of theft, robbery, cheating, etc.;

357 Al-Suyuti, Al-Asybah, p. 151.
358 ‘Urf khas min asalib iqtisodiyah is something that is widely used, especially in economic activities.
359 Huquq ghair muslimin is the rights of non-Muslims.
360 Al-Suyuti, Al-Asybah, p. 140.
361 Ibnu Qayyim, Bada’i` al-Fawa’id, vol. 3, p. 257.

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then this money is prohibited. This is similar to the securities of a
mixed company, because securities in essence is not prohibited. It
becomes prohibited because the activities of such companies produce
profits which can be distributed through dividends.

An exceptions to the maxim  is, for example,
the fatwa concerning silk mixed with common thread. Silk cloth is prohibited
to be worn by men as in the hadith of the Prophet s.a.w.:

Meaning: “The Prophet s.a.w. took a piece of silk and placed it on his
right. He took some gold and placed it on his left. Then he said: Both
these things are prohibited unto men among my followers, but
permissible for the women.”362

However, it can be worn by men if the ratio of silk thread mixed with the
common thread does not exceed 50%. The benchmark concerning such a
mixture is 50%. In other words, if the mixture of silk does not exceed 50%,
the cloth may be worn by men. The question is whether such a benchmark
is suitable for application in the context of mixed securities. However, from
the viewpoint of asset characteristic, both cases are essentially similar, as
they appear to be assets that are not prohibited in essence.

Benchmark of One-third

The Prophet s.a.w.’s condition of 1/3 (33.33%) is a very generous limit which
can also be considered for use as the benchmark for mixed companies. This
statement can be supported by the legacy of Sa`ad Ibn Abi Waqas who
wanted to leave his assets as alms as in the following hadith:

362 Hadith narrated by Ahmad, Abu Daud, Nasa’i and Ibn Majah.

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Meaning: “One day, the Prophet s.a.w. visited Sa`ad bin Abi Waqas
who was ill. Sa`ad expressed to the Prophet s.a.w. his feelings that his
illness was entering the last phase and that death was near. He asked
for the Prophet s.a.w.’s opinion on giving his assets away as alms for
he had only one daughter to inherit his wealth. Therefore, he wished
to give as alms 2/3 of his property. However, the Prophet s.a.w. stated
his objections. Then Sa`ad asked whether he could give away 1/2 of
his property. The Prophet s.a.w. still said no. The Prophet s.a.w. then
said: 1/3 (of Sa`ad’s property to give away as alms) is enough, that too
is still too much. Verily, to leave your heir wealthy is far better than to
leave you heir impoverished and dependant on other people’s
charity.”363

Based on the Prophet s.a.w.’s words, 1/3 or 33.33% “is enough” and can be
used as a guideline for the basis of formulating a benchmark. The question
is whether this benchmark is suitable to be used for mixed companies,
because it relates to the bequest of property and giving of alms. Even so,
it cannot be denied that it can be used as a benchmark to set the upper
limit of a mixture because an amount exceeding the percentage set will
be considered excessive.

Benchmark Based on Ghabn Fahisy

The practice of ghabn fahisy364 in trading is not allowed in Islam. However, if
the ghabn is small then it is excused. The meaning of ghabn is making profits
which exceeds market price. The theory of ghabn fahisy describes gains which
exceed the market price achieved through cheating. If ghabn happens without
any act of cheating, then it is permitted.

363 Hadith narrated by al-Bukhari and Muslim.
364 Ghabn refers to profits arising in an exchange contract which can be divided into ghabn fahisy, i.e.

excessive, and ghabn yasir, i.e. minimal. Please refer to Nazih Hammad, Mu`jam al-Mustalahat, p. 210.

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The activity of tanajusy,365 that is manipulation, if accompanied by the element
of ghabn fahisy can give buyers the right to cancel the sale and purchase
contract, according to the majority of Islamic jurists from the Maliki, Syafi’i
and Hanbali Mazhab.366 This shows that if ghabn fahisy is accompanied by
the element of tanajusy, then it is not permissible. However, if it occurs below
the benchmark, it is excused. The Hanafi Mazhab ruled that the upper limits
for ghabn fahisy are as follows:

(a) 5 per cent for ordinary goods;

(b) 10 per cent for animals, including those used for riding; and

(c) 20 per cent for fixed assets.

365 Tanajusy refers to a collusion between the seller and the buyer outside the actual market in order to
stimulate interest among buyers to buy at a higher price, when the said buyer has no wish to buy. The
motive of the collusion is to influence the market and subsequently take the opportunity to make
profits. It is a form of cheating and is prohibited in Islam. Please refer to Nazih Hammad, Mu`jam al-
Mustalahat, p. 274.

366 Al-Zarqa’, Al-Madkhal al-Fiqhi, vol. 1, p. 378.

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RESOLUTION

The SAC, at its 40th meeting on 22 July 2002, resolved that image is part of
Shariah criteria which forms the basis of analysis on companies listed on
Bursa Malaysia. Image is used as one of the criteria because it refers to the
following three bases:

(a) Image based on maslahah rajihah (tangible deeds)

Image involving public interest and a mix of activities which do not
comply are small and forgivable. For example, hotel activities. Such
an image has a benchmark of 25 per cent;

(b) Image based on sadd zari`ah

Image involving activities where the benefits are disputed, and may
lead to harm and aspersion to the public. For example, manufacturing
of condoms. Such an image has a benchmark of 5 per cent; and

(c) Image based on factors between maslahah and sadd zari`ah

Image involving activities that largely benefit the Muslim society but
at the same time has its negative element which portrays a bad image
of the Muslim society. For example, sale of liquor in public transport.
Such image does not have a particular benchmark and its resolution
is based on the discretion of the SAC.

IMAGE AS CRITERIA FOR LISTED SECURITIES

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INTRODUCTION

The SAC used two approaches in its resolution of analysing listed companies:

(a) The first method is by way of quantitative approach. By this method,
the SAC’s decision is based on the percentage (%) contribution of
activities which do not comply with the group income and profit
before tax set by the Commission. The SAC will compare the
percentage with the benchmark which has been fixed, such as
5 per cent, 10 per cent and 25 per cent; and

(b) The second method is by way of qualitative approach (non-
quantitative). By this method, the SAC’s decision is based on several
external factors of the company, such as image, maslahah and others.
This method does not refer to the benchmark for activities which do
not comply with the Shariah in deciding the status of the listed
company.

The SAC’s resolution on the status of listed securities related to image depends
on the following categories:

Image with Benchmark

Determining the status of companies based on image is done using the
quantitative method because the SAC has formulated the benchmark for
image criteria. It is divided into two activities as seen in the following cases:

(a) Hotel activities (inclusive of resort and chalets) – 25 per cent

The SAC resolved that hotel activities do not comply with Shariah
because of image. This is due to the existence of night clubs provided
by the hotel management, for which their contribution are not
accounted for because they are considered as complimentary for the
hotel guests. In addition, hotel activities give a negative image to the
public. As such, the SAC placed a benchmark of 25 per cent on the
image factor for hotel activities; and

(b) Manufacturing/marketing of condoms – 5 per cent

The SAC resolved that the manufacturing and marketing of condom
do not comply with Shariah because of the image. As such, the SAC

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placed a benchmark of 5 per cent. This resolution is based on studies
which show that the use of condom is for immoral activities.

Image Without Benchmark

In deciding the status of companies based on image, it is normally done on
a case by case basis and it does not involve benchmarks. It is based on
qualitative decisions made by the SAC. This can be seen in the following
cases:

(a) Serving of alcoholic drinks in public transport;

(b) Pork-based business;

(c) Sale of alcoholic drinks in restaurants;

(d) Take-over of casino companies;

(e) Advertisements of alcoholic drinks; and

(f) Equity holding of listed companies that do not comply with the Shariah.

ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF
THE USE OF IMAGE AS CRITERIA

Studies on image from the perspective of the Shariah are carried out to
identify the actual meaning of image according to the views of the Shariah.
At the same time, it is also to avoid any misunderstanding in the use of the
image terminology which all this while has been used as the basis to assess
a listed company.

Definition of image

According to Dewan Dictionary, image has two meanings,367 as follows:

367 Dewan Bahasa dan Pustaka, Kamus Dewan New Edition, Kuala Lumpur, 1989.

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(a) Illustration or reflection of shadow; and

(b) Personality or character of a person as portrayed and seen from another
person or perception of others.

This means that image is a mental picture or perception of others on a
certain matter. In Arabic, image is “surah zihniyyah” which means mental
picture.368

The understanding of image in the context of fiqh is vague. However, it can
be defined as the Shariah’s view on a certain matter because one’s
perception or mental picture towards something is meaningless from the
aspect of law if it is not based on Shariah law. As such, it is important to
differentiate between views based solely on perception and views based on
the Shariah.

According to Yusuf al-Qaradhawi, the focus of man-made laws is to fulfil
the needs of mankind solely based on their culture and way of life. It does
not matter whether the culture and way of life deviate from the human
code of ethics or one that may jeopardise mankind.

On the other hand, the focus of Shariah in formulating certain rules or
laws is to place importance on the welfare of the people by avoiding
all negative elements of the society, such as a culture that leads to
destruction, freedom based on sexual desire, self-interest which may harm
others, etc.369

Fundamentals of Shariah Assessment on Image Analysis

Studies on image have a close relationship with those on mixed companies.
This is because most of the resolutions on the image of activities are
categorised under activities of mixed companies. This means that the
Shariah principles used in assessing mixed companies are also used as that
for image analysis. Perhaps there are several additional principles which are
more relevant to the studies of image. Among the Shariah principles that are
used in the studies of image are as follows:

368 The Concise Oxford English-Arabic Dictionary, Edited by N.S. Doniach, Oxford University Press, 1982.
369 Yusuf al-Qaradhawi, Madkhal li Dirasah al-Syari`ah al-Islamiyyah, p. 104.

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Principle of maslahah rajihah

Maslahah rajihah is the main factor of consideration by the SAC in their
analyses of mixed companies. The measurement of maslahah, which has
been the guiding principles for Islamic jurists in ascertaining that Shariah law
is implemented in all fairness, is guided by maqasid Shariah. Among the
principles which form the core of maslahah as stipulated by Islamic jurists
is hifz mal (preservation of assets). The question of hifz mal is one of the
masalih dharuriah370 which must be given top priority. The question of
economic integrity and robustness is one of the “survival” factors for the
Muslims. At the same time, there is a need to be wary of tahrib mal al-
muslim efforts  by those who are envious of the economic
solidity of the Muslim community.

The importance of safeguarding the economy is one issue that is demanded
by the Shariah. The strength of the community is closely related to the stability
and the strength of economic power of the community itself. As such, Islamic
jurists are of the view that if the Muslim community is poor and weak, the
demand for other dharuriyat will be affected or mortgaged due to the Muslim
community’s weakness to uphold the sovereignty of their economy.371

Principle of sadd zari`ah

Sadd zari`ah is among the methods acceptable and used by some Islamic
jurists. In fact it was made as one of the important principles by Maliki
Mazhab in determining certain laws.

The meaning of zari`ah is “an issue of which on the exterior is permissible
but there is great possibility it is involved in issues prohibited by Shariah”.372

The tazarra` method as debated by Islamic jurists is divided into two sections.
The first section refers to paths or ways that are expected, whether
compulsory, optional or permissible. In this context, it is called “fath zari`ah”
or paths which are open and permissible. The second section refers to
paths which will lead to adversity and things that are prohibited. This
second path becomes the basis for Islamic jurists of the Maliki Mazhab in
determining the law.

370 Al-Syatibi, al-Muwafaqat, vol. 2, pp. 8–10.
371 Mas`ud al-Yubi, Maqasid al-Syari’ah al Islamiyyah, pp. 283–284.
372 Mahmud Uthman, Qa`idah Sad al-Zarai’i`, p. 62.
373 Al-San`ani, Subul al-Salam, vol. 3, p. 831.

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An example of sadd zari`ah is someone who sells grapes to a person who
processes them to make wine. According to the Maliki Mazhab, such sale is
prohibited because every act of buying and selling that results in prohibited
issues is prohibited by law.373

Principle of al-Ta`arudh Bayna al-Masalih Wa al-Mafasid
(Meeting Point of the Good and Adverse)

In certain cases, with regards to studies made on a company, elements of
maslahah to mankind are present but at the same time, adversity may arise
if certain action is approved. In such a situation, Islamic jurists are of the
opinion that a decision has to take into account what is more aslah (best)
between abolishing the adversities and reaping the benefits.

Izz al-Din urged when there is a meeting point of the good and adverse, the
solution is to weigh intelligently how far the good is implemented and
adversity is avoided.374

Relationship of Image and Principle of Shariah

The Shariah principle for mixed companies as clarified earlier is also used
to assess the image status. In order to make the relationship between the
Shariah principle and image even clearer and more complete, the following
principles were used for the image criteria. The three main principles are:

Maslahah Rajihah

A company’s activity which is related to maslahah rajihah is an activity that
benefits mankind, but incorporates mixed elements, which can be forgiven.
For example, activities which involve the rights of non-Muslims or have
syubhah elements can make it difficult to compute the ratio of contribution
of such activities towards the income of the company.

Company activities which are closely related to this method are hotel
activities, including resorts and chalets. Although hotel activities or rest
houses were initially permissible according to the Shariah, but due to other

374 Izz al-Din ‘Abd al-Salam, Qawa`id al-Ahkam, vol. 1, p. 83.

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supporting services which are prohibited by the Shariah, such as the sale of
alcohol, massage parlours, night clubs and others; hotel activities are
bound by the image criteria. However, in order to honour the rights of non-
Muslims, it is forgiven.

Sadd Zari`ah

Company activities classified under this method are activities whose benefits
are disputed by the Islamic jurists and may give rise to detrimental acts or
aspersion if they are not controlled. One such activity is the manufacturing
and marketing of condoms.

The condom itself initially does not give rise to any problem if used in a
permissible way. But studies showed that condoms are used for immoral
activities and can give rise to aspersions, such as promiscuity which is
prohibited.

Hence, such activities have to be controlled by adopting the sadd zari`ah
method.

Meeting Point of Maslahah and Sadd Zari`ah

The meeting point of maslahah and sadd zari`ah can happen when an activity
is seen as one that brings enormous benefit to mankind. However, at the
same time, there are mixed activities which give a bad perception to the
Islamic image and also in the eyes of Muslims.

An example of such an activity is a food and drink processing company
which brings benefits to society. However, its subsidiary is involved in the
rearing of pigs or processing of pork, although the contribution from this
prohibited activity is below the benchmark of 0.05 per cent.

The maslahah is that most of the processed foods and drinks are halal and
give benefits to society. Due to the prohibited element which also concerns
food, the image implicating the unhealthy mixture of activities becomes a
concern to the SAC in assessing which is more aslah to society.

171

Glossary

Arabic terms commonly used throughout the book.

Ahli Kitab the kitabis, people of the Book i.e Christians and
Jews

`aqd contract

`aqd tauthiqiy security contract

athar deeds and precedents of the Companions of the
Prophet s.a.w.

bai` sale

bai` dayn sale of debt

bai` kali’ bi kali’ sale of one debt for another

bai` ma`dum buying and selling something that does not exist

bai` maujud buying and selling something that exists

bai` muzayadah sale by auction

bai` salam sale where payment is made on the spot but
delivery of goods is done on a deferred basis at a
preagreed date

bai` wafa sale with a right in the seller to repurchase the
property by refunding the purchase price

GLOSSARY

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dalil evidence, indicative legal text

dayn debt

dharurah necessity

fatwa decree, religious edict from a qualified scholar

fiqh muamalat Islamic commercial law

fuqaha Islamic jurists

ghalat error in perception

gharar elements of uncertainty and cheating

ghasb usurpation, the invasion of property rights in an
open and flagrant manner

hadith prophetic tradition

halal lawful

haq right

haq dayn debt right

haq maliy rights on assets with financial values

haq tamalluk ownership right

hawalah debt assignment contract

hibah gift

hukm Shariah ruling

i`arah asset borrowing

ihtiyat precautionary measure

ijmak consensus of Islamic scholars and jurists

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Glossary

ijarah leasing contract

ijtihad reasoning by qualified scholars to obtain legal rulings
from the sources of the Syariah

`illah cause

`inan form of partnership in which each partner
contributes both capital and work

initizar waiting

istihsan juristic preference, disregarding a hukm backed
by a dalil and supported by another hukm that is
sounder

istiqrar ta`amul stability of business transactions

jahalah ignorance or lack of knowledge

jahiliyah Pre-Islamic times

juz’ie branch

khiyar option

mal asset/property

manhaj methodology

maslahah consideration of public interests

mazhab school of thought

muamalah (singular)/ transaction(s)
muamalat (plural)

mudabbar slave

mujtahid (singular) / person who formulates independent tradition-
mujtahidun @ based opinions in legal or theological matters
mujtahidin (plural)

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muqamarah gambling

murabahah cost plus profit sale

musya` jointly-owned property

musyarakah partnership

nas explicit legal text

qabadh possession

qadhi judge

qardh loan

qiyas analogy

rahn pledge or collateral

riba usury

sadd zari`ah blocking the means to something (evil)

sahih valid, authentic

salam forward sale. The purchase of item known by
specification or description for delivery at a later
specified time, with payment of price in full at
time of contract

sukuk financial notes

ta`attul delay

tabarru`at ownership contract on voluntary basis

tabi`in the successors. A successor is a person who can
meet any companion of the Prophet s.a.w. (named
as sahabi or sahabat) after the death(wafat) of
the Prophet s.a.w.

tanazul cessation of right to claim

175

Glossary

ta`widh compensation

ta’wil interpretation

taqabudh taking possession

taqlid imitation, following the views and opinions of
others

thamanul mithl market price

ulama’ Islamic scholars

ummah Muslim community at large

`urbun earnest money, down payment

`urf customary practices

`uqud contracts

`uqud mu`awadat exchange contracts

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