Financial

  • The Rulings of Using Certain Alternative Financing Mechanisms

    Bay’ al-’Inah

    This is composed of two sale transactions. In the first transaction, a seller sells an item for a particular price to be paid in deferred installments. In the second transaction, after taking possession of the item, the buyer sells the item back to the seller for immediate payment of a lower price, to be paid before the installments of the first sale are due.
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  • In the name of Allah, Most Compassionate, Most Merciful,

    Firstly, one of the conditions for a valid sale is that the object of sale must be in the ownership of the seller. As such, a person can not sell an item which has not lawfully come into his ownership. (Sahih al-Bukhari & major fiqh references).

    Secondly, an item that was lost and found must be first advertised thoroughly until the owner is found. However, if after extensive search, the owner could not be found, then the item should be given in charity. If the person is poor himself, he can keep it for personal use. (Radd al-Muhtar, 6/433).

    Combining the above two rulings, it becomes clear that it is (normally) impermissible to sell an item that was found, for the seller is not considered a rightful owner of it. Similarly, to purchase such items would not be permissible, and it would be necessary to return it to their rightful owners or give it in charity on their behalf.

    Therefore, if one is fully aware that a particular item was lost and found, and it is being sold, then one should avoid purchasing the item.

    And Allah knows best

  • One cannot borrow from or financially transact with someone whose wealth is completely, or predominantly, haram.

    If it is predominantly halal, then financial transaction, borrowing, accepting gifts, etc. would be permissible.

    If one is unsure, then the default assumption is that most of their wealth is lawful, unless one is reasonably sure otherwise. One need not investigate into their wealth, but rather the basis is what is apparent.

    [Ibn Abidin, Radd al-Muhtar; Fatawa Hindiyya]

  • The scholars differentiate between two types of debts:

    • Long-term debt: Which is a debt repaid on fixed installments for more than a year. Mortgages from studying, buying a house, car and the like would be of this kind.
    • Short-term debt: Which is a debt immediately due within a year.

    This differentiation is important when it comes to zakat, since one can only subtract the entire amount if it is a short-term debt.

    Long-term debts are not dedcutable, except for the immediate installment.

    Consider the following example:

    Assume the zakatable-minimum (nisab) is $2000.

    One’s zakatable assets amount to &5000.

    One has an outstanding mortgage of $50.000 with fixed monthly installments of $500. This would be a long-term debt. As such one can only subtract the upcoming installment of $500, and has to pay zakat on $4500.

    A student-loan would be a long-term debt. Hence the entire debt is not deductable.

    However, if you have started repaying the debt, then it would be possible to dedcut the upcoming installment.

    Considering the above, the money you have donated has in fact been zakat.

  • Inheritance Law: Linguistics

    The word in Arabic most often used for this branch of jurisprudence is fara’id, sing. farida, which is derived from a root word that has three primary meanings:

    (1) “to decree,” (taqdir), since the shares that are designated for various relatives are decreed by Allah Most High and are therefore fixed;

    (2)”to be decisive,” (qat`), since the percentages are listed in the Qur’an itself and hence the proof for them is decisive and unequivocal;

    (3) “to expound or clarify” (bayan), since they are delineated in full clarity and as such need no interpretation or elucidation from the Prophetic practice. This is opposed to the ritual prayer (salat), for example, the command of which is general in the Qur’an but the details of which are then elucidated by the Prophetic sunna. [Mawsili, Ikhtiyar]

    Allah Most High Himself uses this term (farida) in the Qur’an to refer to inheritance rulings (4:11), and ends the verse with “Verily, Allah is All-Knowing, Ever-Wise.” These two divine attributes are essential to keep in mind when considering the fixed percentages of inheritance, since His decree of those percentages is undoubtedly based on His preeternal knowledge of human nature and society, and undoubtedly a reflection of His transcendent wisdom, which we are utterly incapable of comprehending. [Tafsir Jalalayn, Abu Suud, Nasafi]

    The Legal Ruling

    Based on the above discussion, one can appreciate that Islamic law does not allow for changes to these determined percentages. The one exception to this ruling would be if the deceased had made a bequest for an heir of a certain amount of money, which would be valid only if the rest of the heirs, that are adults, approved of it after his/her death. If some of them approved and not others, then it would be valid only with respect to the heirs that approved, based on their relative portions. Finally, a child’s approval would not be given any consideration. [Maydani, al-Lubab fi Sharh al-Kitab]

    And Allah alone gives success.

  • Scenario One

    1) If the first transaction were actually a sale (as opposed to a loan), (as indicated by the contract that you entered into with the pawnbroker) and

    2) If, at the time of the first sale, you did not agree (or promise) to repurchase the item at a higher price (but rather, for example, came back later, happened to find that the pawnbroker had not sold the item yet and decided to buy it back from him/her at that time) then the two sales (i.e. both the first and second) are valid (sahih), the transaction would not be usury (riba) and the transaction would be permitted (ja’iz).
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  • Investing in stocks is permitting if certain conditions are met, as outlined by Mufti Taqi Usmani and others. which are:

    1. The main business of the company being invested in is permitted by the shari`ah.
    2. The share holder must voice his disapproval of company policy if the company is involved in impermissible dealings such as interest based transactions (e.g. taking out interest-bearing loans or depositing money in interest-bearing accounts).
    3. The proportion of the income from interest included in the company income must be removed from the respective shareholders dividend and given in charity.
    4. The company must own some non-liquid assets.

  • Conditions for Investment in Shares

    In the light of the forgoing discussion, dealing in equity shares can be acceptable in Shariah subject to the following conditions:

    1. The main business of the company is not in violation of Shariah. Therefore, it is not permissible to acquire the shares of the companies providing financial services on interest, like conventional banks, insurance companies, or the companies involved in some other business not approved by the Shariah, such as the companies manufacturing, selling or offering liquors, pork, haram meat, or involved in gambling, night club activities, pornography etc.

    2. If the main business of the companies is halal, like automobiles, textile, etc. but they deposit there surplus amounts in a interest-bearing account or borrow money on interest, the share holder must express his disapproval against such dealings, preferably by raising his voice against such activities in the annual general meeting of the company.

    3. If some income from interest-bearing accounts is included in the income of the company, the proportion of such income in the dividend paid to the share-holder must be given charity, and must not be retained by him. For example, if 5% of the whole income of a company has come out of interest-bearing deposits, 5% of the dividend must be given in charity.

    4. The shares of a company are negotiable only if the company owns some non-liquid assets. If all the assets of a company are in liquid form, i.e. in the form of money that cannot be purchased or sold, except on par value, because in this case the share represents money only and the money cannot be traded in except at par.

    What should be the exact proportion of non-liquid assets of a company for the negotiability of its shares? The contemporary scholars have different views about this question. Some scholars are of the view that the ratio of non-liquid assets must be 51% at the least. They argue that if such assets are less than 50%, the most of the assets are in liquid form, therefore, all its assets should be treated as liquid on the basis of the juristic principle: The majority deserves to be treated as the whole of a thing. Some other scholars have opined that even if the non-liquid asset of a company or 33%, its shares can be treated as negotiable.

    The third view is based on the Hanafi jurisprudence. The principle of the Hanafi school is that whenever an asset is a mixture of a liquid and non-liquid assets, it can be negotiable irrespective of the proportion of its liquid part. However, this principle is subject to two conditions:

    First, the non-liquid part of the mixture must not be in a negligible quantity. It means that it should be in a considerable proportion. Second, the price of the mixture should be more than the price of the liquid amount contained therein. For example, if a share of 100 dollars represents 75 dollars, plus some fixed assets the price of the share must be more than 75 dollars. In this case, if the price of the share is fixed as 105, it will mean that 75 dollars are in exchange of 75 dollars owned by the share and the rest of 30 dollars are in exchange of the fixed asset. Conversely, if the price of that share fixed as 70 dollars, it will not be allowed, because the 75 dollars owned by the share are in this case against an amount which is less than 75. This kind of exchange falls within the definition of “riba” and is not allowed. Similarly, if the price of the share, in the above example, is fixed as 75 dollars, it will not be permissible, because if we presume that 75 dollars owned by the share, no part of the price can be attributed to the fixed assets owned by the share. Therefore, some part of the price (75 dollars) must be presumed to be in exchange of the fixed assets of the share. In this case, the remaining amount will not be adequate for the price of 75 dollars. For this reason the transaction will not be valid.

    However, in practical terms, this is merely a theoretical possibility, because it is difficult to imagine a situation where a price of the share goes lower than its liquid assets.

    Subject to these conditions, the purchase and sale of shares is permissible in Shariah. An Islamic Equity Fund can be established on this basis. The subscribers to the Fund will be treated in Shariah as partners “inter se.” All the subscription amounts will form a joint pool and will be invested in purchasing the shares of different companies. The profits can accrue either through dividends distributed by the relevant companies or through the appreciation in the prices of the shares. In the first case i.e. where the profits earned through dividends, a certain proportion of the dividend, which corresponds to the proportion of interest earned by the company, must be given in charity. The contemporary Islamic Funds have termed this process as “purification.”

    The Shariah scholars have different views about whether the “purification” is necessary where the profits are made through capital gains (i.e. by purchasing the shares at a lower price and selling them at a higher price). Some scholars are of the view that even in the case of capital gains the process of “purification” is necessary, because the market price of the share may reflect an element of interest included in the assets of the company. The other view is that no purification is required if the share is sold, even if it results in a capital gain. The reason is that no specific amount of price can be allocated for the interest received by the company. It is obvious if all the above requirements of the halal shares are observed, the most of the assets of the company are halal, and a very small proportion of its assets may have been created by the income of interest. This small proportion is not only unknown, but also a negligible as compared to the bulk of the assets of the company. Therefore, the price of the share, in fact, is against the bulk of the assets, and not against such a small proportion. The whole price of the share therefore, may be taken as the price of the halal assets only.

    Although this second view is not without force, yet the first view is more cautious and far from doubts. Particularly, it is more equitable in an open-ended equity fund because if the purification is not carried out on the appreciation and a person redeems his unit of the Fund at a time when no dividend is received by it, no amount of purification will be deducted from its price, even though the price of the unit may have increased due to the appreciation in the prices of the shares held by the fund. Conversely, when a person redeems his unit of the Fund at a time when no dividend is received by it, no amount of purification will be deducted from its price, even though the price of the unit may have increased due to the appreciation in the prices of the shares held by the fund. Conversely, when a person redeems his unit after some dividends have been received in the fund and the amount of purification has been deducted therefrom, reducing the net asset value per unit, he will get a lesser price compared to the first person.

    On the contrary, if purification is carried out both on dividend and capital gains, all the unit-holders will be treated at par with the regard to the deduction of the amounts of purification. Therefore, it is not only free from doubts but also more equitable for all the unit-holders to carry out purification in the capital gains. This purification may be carried out on the basis of an average percentage of the interest earned by the companies included in the portfolio.

    The management of the fund may be carried out in two alternative ways. The managers of the Fund may act as mudaribs for the subscriber. In this case a certain percentage of the annual profit accrued to the Fund may be determined as the reward of the management, meaning thereby that the management will get its share only if the fund has earned some profit. If there is no profit in the fund, the management will deserve nothing, but the share of the management will increase with the increase of profits.

    The second option of the management is to act as an agent for the subscribers. In this case, the management may be given a pre agreed fee for its services. This fee may be fixed in lump sum or as a monthly or annual remuneration. According to the contemporary Shariah scholars, the fee can also be based on a percentage of the net asset value of the fund. For example, it may be agreed that the management will get 2% or 3% of the net asset value of the fund at the end of every financial year.

    However, it is necessary in Shariah to determine any of the aforesaid methods before the launch of the fund. The practical way for this would be to disclose in the prospectus of the fund on what basis the fees of the management will be paid. It is generally presumed that whoever subscribes to the fund agrees with the terms mentioned in the prospectus. Therefore, the manner of paying the management will be taken as agreed upon on all the subscribers.

  • May Allah reward you for your pursuit of beneficial knowledge.

    Islamic banks and financing institutions structure their home-purchase contracts in a different way than conventional mortgages. While the end result (in terms of the amount you pay) might not be much different, the Islamic contract differs in important respects, involving issues such as details of ownership, liability, responsibility, and clear stipulation of a single, known price. The following, brief paper may be helpful to you for an overview of what has come to be called “Shari`ah-compliant financing.”

    Therefore, the short answer to your question is that it is definitely advisable if not required (wajib) for you to look into re-financing your existing, conventional mortgages through a Shari`ah-compliant alternative. However, the details of the contracts of each Muslim financing institution vary; some may be satisfactorily Shari`ah compliant, while others may have problematic or controversial details in their procedure. In general, it is advisable and an established sector-wide, international practice to look for an institution that has their products reviewed and approved by a Shari`ah Board, an expert body consisting of a minimum of three qualified and  trustworthy Muslim scholars (fuqaha’).

    And Allah knows best.

  • Discounted Debt Transfer

    This is the essence of the issue:

    Can a debt (mature or future) be sold. If so can it be sold at a price lower or higher than its face value?
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