fatawa on islamic banking

FATAWA ON ISLAMIC BANKING & FINANCE(Source: Al-Baraka Seminars)

Stocks & Bonds

Commercial Bank Notes

Salam (Sale by Advance Payment)

Sales

Leasing

Insurance

Real Estate Financing

Letters of Guarantee

Zakah

Sarf and Mutual Promising

Contracts

Penalties for late Payment of Debts

Interest Based Profits

Mudarabah Capital Trust

Al Murabaha

Agency

Use of Credit Cards

Stocks & Bonds

1. Buying a share in capital assets and sharing profit without interfering in the administration

Question:

Is it permissible to sell a share in capital assets conferring upon the purchaser a right in sharing accruing cash profit or other accruing profit as a result of a rise in the value of the capital asset, on condition that he will not interfere nor dispose of the capital assets except by selling the deed for the share that he might own?

Fatwa:

In principle, such an agreement is permissible, for possession in the Islamic law is of various kinds. It is permissible for a seller to restrict the buyer by excepting certain advantages or rights of disposal, in the opinion of the Committee2, the terms and conditions of this kind of sale be recast to conform to the requirements of the Islamic law

in order to safeguard the rights of the contracting parties in accordance with the rules laid down in Islamic law.(First Albaraka Seminar, Fatwa No. 11)

2. Selling of shares of companies while retaining the right of administration.

Question:

A company is registered in the name of a group of people and has its own business name and possesses an independent legal entity. The owners of the company propose to sell shares of the capital (some shares) on the condition that the administration of the company shall remain in the hands of those owning the business name and legal registration, so that these owners may continue to exercise the actual right of disposal in the assets of the Mudaraba3 (co-partnership) as working agents. Is such an agreement permissible?

Fatwa:

It is permissible to make an agreement on selling shares in a company with real assets-not debts or cash and with the seller stipulating the retention of the name and administration of the company. The legal relationship of the management vis-a-vis the shareholders is similar to that of the Mudarib vis-a-vis the capital owner.

(Second Albaraka Seminar, Fatwa No. 5)

3. Giving consent for purchasing shares of portions

Question:

Is it permissible for an Islamic bank owning a major portion of capital assets of a company to give a general consent for the purchase of shares or portions thereof, while fixing the price at which these shares or portions may be bought within a fixed period of time?

Fatwa:

It is permissible for an Islamic bank to give a general consent for the purchase of these shares or portions as long as doing so does not lead to something which is specifically forbidden by Shari'a.


4. Participation of other organizations in contractual agreement for purchasing shares or portions:

Question:

Is it permissible for an Islamic bank that undertakes a contractual agreement for purchase of shares or portions that are on sale (as mentioned in the previous Fatwa) to bring in other banks and Islamic organizations in the purchase of these shares and resume their sale to those willing (to buy them)?

Fatwa:

It is permissible for an Islamic bank which is giving a general consent to bring in other Islamic banks and organizations to participate in purchasing shares or portions on similar

conditions, provided that the names of the banks and organizations participating in the general consent are made public whenever there is any change in the names of the participating parties.


5. Buying shares of joint stock companies purchasing legitimate objectives, but which occasionally have business transactions with banks that work on principle of interest lending or borrowing from them

Question:

Is it permissible to buy shares of joint stock companies which have legitimate goals but have transactions with banks operating on interest, lending or borrowing from them?

Fatwa:

The participants discussed the subject of buying shares of the aforementioned companies and noted the difference in the following situations:

a. Buying shares of the companies operating in the Islamic countries with the intention of islamizing their transactions because this may help the Muslims to conform more and more to the laws of the Shari'a.

b. Buying shares of the companies operating in non-Islamic countries is permissible for the investors if they find not other sound and flawless alternative. (Adopted by majority).

c. Buying the shares offered by Islamic financial organizations is permissible, if it is restricted to investing the surplus liquidity or establishing investment funds specializing in helping individuals to enter this field. (Adopted by majority).

(Sixth Albaraka Seminar, Fatwa No. 5)

6. Preferred Shares

Question:

What is the position of Islamic law regarding preferred shares where some shares are given priority preference in gaining profit, and if profit is not gained any year the right is transferred to the next year?

Fatwa:

In Islamic law preferential treatment is not permissible, because in some cases this can cause dissolution of partnership.


7. Permissibility of accepting certificates of deposits as a security

Question:

Is it permissible to accept certificates of deposits as a security for the obligations of the agent?

Fatwa:

It is permissible to accept certificates of deposits as a security for the obligations of the agent, or others respecting the same bank, and the deposits will continue to be invested under the same existing terms and conditions.

(Fifth Albaraka Seminar, Fatwa No. 5)

Commercial Bank Notes

1. Buying and Selling of Commercial Bank Notes

Question:

What is your opinion regarding what is known as selling and buying commercial bank notes, which is deferred payment note whose owner, and the one holding it, that is, its beneficiary, is willing to accept the value for the bond before its maturity, on the understanding that a certain percentage of its price will be deducted for the remaining period.

Fatwa:

The position that has been presented here implies a deferred credit sale by making less amount for immediate cash payment. It is a usurious kind of sale which involves unlawful interest, and in this respect it resembles the discount on the bills of exchange.

(1st Albaraka Seminar, Fatwa No. 12)

2. New Form of Commercial Bank Notes

Question:

What is the Islamic law regarding the new development of commercial bank notes that serve as a means of paying real Murabaha transaction (mark-up sale) in which the first to benefit is the bank by selling them through its agent (the bank with the right to accept), the buyer being responsible for making payment for them, and the bank keeping them in its custody until they mature, without deducting its discount.

Fatwa:

The participants were of the opinion that this is a lawful form of business in the sight of Islamic Shari'a under the rules mentioned above.


Salam

1.Restricting the Price of a Commodity in a Salam Sale as per Prevalent Rates in a Particular Market

Question:

Is an agreement permissible on restricting the price of a commodity in a Salam sale according to rates of a particular market (or for instance, at a market price less 10%), the market rate being the one prevalent on the day of delivery? Or is it imperative to absolutely fix the price right in the beginning?

Fatwa:

The basic principle in all Salam sales is that the price between the contracting parties must be agreed upon and fixed when they enter an agreement.

It is likewise lawful to agree on fixing the price according to rates of a particular market in a Salam sale at the time of agreement.

Likewise it is lawful to agree on fixing the price according to rates prevalent in a particular market, whether higher or lower by a fixed amount.

It is not lawful to conclude an agreement on fixing the price in accordance with future rates of a market.


2. Sale of a commodity (in a Salam sale) before taking possession of it

Question:

Is sale of goods permissible before their actual possession? If this is not permissible then can the purchaser sell against advance payment (in a Salam sale) relying on what he will receive in future, and without linking the agreement for what he sells (against advance payment) to what he is to receive in future?

Is it permissible for the purchaser to utilize this process for business?

Fatwa:

The sale of goods without actual possession is not lawful.

In a Salam sale the purchaser may, however, sell a portion of the merchandise sold to him without linking it to what is sold in one agreement to what he undertakes under another agreement.

It is not lawful to use this (permissibility referred to above in the second para) for business, because the Salam sale is allowed as an exceptional case in the original regulations to meet the needful of the producers that justify a Salam sale in individual cases, but not using it for business purposes. If economic situation is such in some Islamic countries and greater good (of the people) demand that in some special situations it should be used for business purposes in order to remove some real injustice, then it would be lawful to do so in the interests of greater good, to be appraised by the bodies entrusted with Islamic legal judgment and supervision.(Second Albaraka Seminar, Fatwa No. 2)

3. Selling a portion of the commodity bought in a Salam transaction before taking possession of it

Question:

If a person buys for instance, a hundred tons of grains in the month of January 1985 at a known price, to be delivered to him in May 1985, and in March another person offers to join him as a partner for half of what he had agreed upon, then is it permissible for him to

take on this other person as a partner in that he had agreed upon regardless of whether his payment was greater or less than the price of the goods?

Fatwa:

This case falls under the non-permissibility of selling goods purchased in a Salam transaction before actually taking their possession, as described before actually taking their possession, as described in the first paragraph (A) of the previous Fatwa.


Sales

1. Sale of a Merchandise which is not in possession (of the seller)

Question:

What is the legal verdict regarding the practice of some companies and banks, that are requested to sell a merchandise which they do not own, so they buy the merchandise from the market and sell it to those demanding it?

Fatwa:

This is permissible if the commodity involved is not food and is well defined and paid for, because the prohibition of selling a commodity not in possession applies to food only.(Sixth Albaraka Seminar, Fatwa No. 14)

2. Deferred Sales with Immediate Payment

Question:

Is it permissible to buy a commodity which is to be delivered later but which is fully defined and fully paid for on the spot?

Fatwa:

If the time of delivery is fixed and payment is made in full on the spot, then such a Salam sale is lawful.(Sixth Albaraka Seminar, Fatwa No. 21)

3. Deferred sales when the delivery of goods and payment of price is made simultaneously

Question:

What is the position with regard to sales of goods imported from their producers when the time of delivery of goods and payment of price is fixed at a future date?

Fatwa:

In essence this is an agreement on entering into a sale and purchase contract within a specified time with a promise of purchase. According to those who hold that the promise is binding, the sales is completed by exchange, that is, of delivery of goods and payment.(Sixth Albaraka Seminar, Fatwa No. 22)

4. Explanation of the phrase "two sales in one sale"

Question:

What is meant by the phrase "two sales in one sale?"

Explanation:

This means that a gift and a sale cannot be combined. For example if someone says to another, "Sell these goods to me and I will pay you its price and also a gift therefor". Or if some one says, "I will sell these goods to you for a hundred dollars cash, but will charge you one hundred and fifty dollars in case of deferred payment". And then the two (the buyer and the seller go their ways without defining as to what the customer wants, then such a deal is not permissible.There are contracts which cannot be joined together, for instance, a sale cannot be combined with irrigation agreement or partnership or gift or marriage or loan.


5. Booking Out

Question:

What is the position in Islamic law of the practice of booking out involving sales in which sales and purchase of different quantities of a specified commodity is accomplished without actual ownership or possession, and then the deals are closed by balancing out and the parties pay or collect the difference in price.

Fatwa:

The participants discussed this issue at great length and concluded that this kind of sale is on paper only and is based on chance and risk, and is not lawful.


6. Options

Question:

Is the practice of options lawful?

Fatwa:

The participants exchanged views about the practice of options and buying right to choose and were of the opinion that it is not lawful. Because it is one of those businesses that involve risk, and in which no real sale is intended. Similarly dealing in the right of options in selling and buying is inadmissible, because this right is not something you can buy or sell.(Sixth Albaraka Seminar, Fatwa No. 26)

7. Hedging

Question:

What is your opinion about the practice of hedging or covering (against risk of loss) which means an agreement on entering into a contract in future for protection of the buyer and seller as a safeguard against fluctuations of the market rates?

Fatwa:

The participants were of the opinion that it is lawful in the sense that it is an agreement on entering into a contract in future provided the subject of the contract is lawful.(Sixth Albaraka Seminar, Fatwa No. 27)

8. Government Bids Contracts

Question:

What is the legal position regarding the Government Bid contracts and other similar to them in the sense that the bidder offers his bid, and if he is successful to win the bid, the contract takes effect, and the bidder thereafter buys from the market what he had bidden for. Does such a contract fall under the prohibition of selling what one does not actually possess?

Fatwa:

This is one of those contracts which are of recent origin. They are accepted by custom and mutual consent and are based on well defined voluntary agreement which remove (chances of) ignorance and conflict. This does not include any element of deception or damage and legally it cannot be deemed unlawful. It is therefore, Islamically one of the valid forms of contract.(Sixth Albaraka Seminar, Fatwa No. 10)

9. Buying and Selling by the Agent to Himself

Question:

Is it permissible to appoint an agent to sell a specific commodity for a specific price on the account of the client giving the agent the authority to sell to himself or to a third party known to specialize in such merchandise?

Fatwa:

Appointing someone as an agent for the sale of a specific commodity for a specific price, with the agent handling its sale after the purchase, is perfectly legitimate when the sale transaction is made to a third party. As for the agent selling to himself, it is permissible provided the price is fixed by the client.

(First Albaraka Seminar, Fatwa No. 15)

Ijara

1. Buying Equipment and Leasing it to the Seller

Question:

Is it permissible to buy equipment or real estate and lease it to the seller?

Fatwa:

If the agreement of sale is first completed and thereafter an agreement of lease is concluded then there is nothing wrong with it in the sight of the Islamic law.


2. Leasing out a thing for a fixed price and then renting it out to someone else at a higher rent

Question:

Is it permissible to lease out something for a fixed rent and then rent it to someone else at a higher rate? And if permissible, then is it legitimate to bring in a third person as a party to the first agreement so that he becomes a partner in the difference of lease by selling him a share of benefit of ownership guaranteed to the first lease holder, irrespective of whether this sale price is similar to or less, or greater than the rent paid?

Fatwa:

It is permissible to lease out a thing for a fixed amount and then to rent it out to someone else at a similar, higher, or lower price, unless prohibited by the first lessor or the customary law ('urf).

Likewise, this partnership may be for a similar, higher or lesser amount than the amount paid by the first lease holder. But subsequently when he loses his right of benefit (that he enjoyed) in lieu of his right of disposal by renting it out, then it is no longer lawful for him to exercise his right of disposal in what he no longer has any right of ownership, and which is a credit due to him from another person.


3. A lease agreement for a daily increasing rate

Question

Is it permissible to have a lease agreement for a daily increasing rate, rising with each day, by mutual agreement of the lessor and the lessee?

Fatwa:

Legally such an agreement is permissible, because the increase here results from the original agreement and not from delay in making due payment. An agreement to give the creditor more than is owed to him in case of delay in payment is legally forbidden, because it is interest paid against a period of payment.


4. Responsibility for maintenance expenses of rented equipment

Question:

Who is responsible for maintenance of leased equipment?

Fatwa:

Submitted to the committee were many researches that dealt with the responsibilities of the lessor and the lessee concerning maintenance of leased equipment and appliances, the question as to what is permissible for a lessor to stipulate of the works of maintenance as binding upon the lessee, and the justification of stipulating that the lessee will take out an Islamic insurance to cover the rented equipment at his own expense. The committee, however, was of the opinion that the matter be deferred for further studies, and advised that it be presented in the next seminar. (First Albaraka Seminar, Fatwa No. 3)

Insurance

1. Insurance against danger of the delaying payment

Question:

Is it permissible for the Islamic bank to safeguard its loans against the risk of delay in payment whether such insurance is from an Islamic insurance company or through establishing a cooperative insurance fund to serve the Islamic bank?

Fatwa:

It is permissible for an Islamic bank to safeguard its loans against the risks of delay in payment of the loans by others. The Islamic banks can remedy this situation by establishing a cooperative insurance fund to serve them. The committee agreed on this solution and preferred it to others.

The insurance of loans by an Islamic insurance company is also permissible (adopted by majority). For both of these a system should be established and presented before the committee of scholars to secure their approval before implementing it.


2. Transactions with the Islamic Insurance Companies

Question:

Is it permissible to deal with the non-Islamic insurance companies at a time when the Islamic insurance and re-insurance companies are emerging? (The emergence of Islamic insurance and re-insurance companies was a plain fact in the opinion of the committee. This removes the need for which transactions with the non-Islamic insurance companies are allowed).

Advice:

The committee advise the Muslim, banks, and Islamic organization that they should deal with Islamic insurance companies, wherever they are available, in order to keep their business transactions lawful.

(Fourth Albarka Seminar, Fatwa No. 3)

3. The "no Liability Clause" in the Islamic insurance policies

Question:

What is your opinion about inserting a "no liability clause" in the Islamic insurance policies?

Fatwa:

Inserting a "no liability clause" in the policies of the Islamic insurance is permissible legally. Nevertheless in the opinion of the committee it is better to include, in cases of great losses a full compensation clause, beyond the minimum agreed upon, without deducting it. The Islamic insurance companies should not in such a situation deduct a portion of the loss, but should avoid it as much as possible. And this avoidance on their part would show the difference between them and others (non-Islamic insurance

companies) and would provide an added incentive for others to deal with them on the basis of fairness and equity.

(Fourth Albarka Seminar, Fatwa No. 3)

Real Estate Financing

1. Real Estate financing formula of Albaraka in London

Question:

The contractual relationship between the applicant (the partner) and the bank is based on taking possession of the real estate for sale to the mutual benefit of both parties according to percentage of participation by each party in the purchase price. This percentage is called shares, and the price of each share is agreed upon at the beginning of the contract, and its amount is only one pound sterling (per share). This price remains constant throughout the period of the contract just as the real estate remains subject to sale, so the bank is able to sell its share in the property periodically (every month, for instance) to the purchaser. Likewise, in consequence thereof, the bank is able to buy its shares on periodic basis. Thus the ownership is transferred gradually to the purchaser over and agreed upon period of time. As it is the purchaser who benefits from the property, he pays a rent to the bank against this benefit, which is called profit and is determined by the percentage of the bank's share in the ownership. Its value is calculated annually according to a fixed procedure that does not change taking the percentages for financing real estate properties?

Fatwa:

The participating scholars discussed the method of financing houses and real estate properties followed by Albaraka Bank, London, under the laws regulating such dealings to meet the needs of the Muslims for suitable housing. The scholars offered a number of suggestions on this subject which are given below:

Registration of the house in the name of the partner (the person willing to purchase) in the very beginning of the process.

The partner pays the fees and other expenses related to registration.

Installments of insurance to be paid by the house.

Rent will be calculated on annual basis.

Dissolution and covering the distinction of rights of the bank in cases where sale price is not enough.

After thorough discussion the following points were agreed upon:

1.Registration of the house in the name of the partner from the very beginning is legally permissible, and such registration does not contradict the contractual agreement, especially as the right of the partner to dispose of the house is subject to his becoming its full owner. The registration in this context is a confirmation backed up by a tangible collateral against this ownership according to the terms agreed upon with the partner. 2. Bearing cost of fees of registration, property survey and stamps etc., relating to joint

ownership will initially be paid by the partner alone without the bank bearing any of these is permissible by mutual agreement of the two partners on this point, especially the fact that the partner would in the end be the sole owner. 3. As to the insurance in principle, the two partners should jointly bear its cost, because it arises from the joint ownership. The bank may, however, while fixing rent for its share may allocate a reasonable amount to cover its insurance costs. 4. The ownership partnership is based on the principle of equality in profit and loss in relation to percentage of ownership because the profit is linked to liability. As the legal system requires that the bank bear no loss in case of dissolution of the ownership partnership there is need to adjust the formula so that the process may proceed on the following guidelines:

1. The bank and the partner participate in the purchase of the house according to an agreed percentage.

2. The bank sells its share to the partner on the principle that it shall sell to him the property while renting its right to profit from it until the partner fully pays its remaining price.

3. The bank will collect an annual rent from the profit in proportion to the amount of sale price actually paid.

4. In case the partner defaults in paying his installments to the bank, the bank may either continue with the sale and recover its share of the remaining sale price through enforced implementation of the collateral, or terminate the sale and preserve its ownership if the partner agrees, provided the amount paid by that partner is returned to him. In such a case the sale will be deemed as null and void from the first day of the agreement.

(this article 4 was adopted by a majority vote).


2. Housing Deeds

Question

If you buy a piece of land to build residence apartments and some people buy a share in it, a meter or so for instance, with a view of acquiring an apartment, thereon after its completion, and purchasing the rest of the meter or shares (for their respective apartments). Is this permissible in Islamic law?

Fatwa:

The participants hold that in this operation with these conditions there is nothing forbidden, and there is no legal restriction against implementing it; it is a legitimate operation.


Letters of Guarantee

1. Accepting payment for issuing letter of guarantee

Question:

Is it permissible for an Islamic bank to accept remuneration for its work as in issuance of bank letters of guarantee for payment, either considering this operation a suspended authorization for payment of a fixed amount, or on the basis of the credit that a bank has because of its cash flow?

Fatwa:

After the discussion it appeared that the subject (letters of guarantee by a bank) needs further research and study of the actual practice of the banks in this regard.


2. Formulation of a letter of guarantee and how much may be charged

Question:

What is your opinion on the following: Bank letter of guarantee and how much charges may legitimately be collected for this service? Is a letter of guarantee an assurance in the legal sense (combining an obligation to another obligation in responsibility) or is it an authorization for payment of a specified amount in cash within a fixed period of time? If a letter of guarantee is a righteous deed, then can these righteous deeds be transformed into acts that are performed for payment, as described by some jurisconsults in their formal legal opinions concerning for instance, teaching the Quran and leading prayers?

If the bank letter of guarantee is an agency, then is it permissible for an agent to accept payment in proportion to the amount of value as is presently the case with brokers and attorneys-at-law?

Fatwa:

The permissibility of letters of guarantee by banks is subject to the legitimacy of the object for which a letter of guarantee is required. A letter of guarantee unaccompanied by a full cash coverage is a surety and is subject to laws pertaining to it, but if it is fully covered by cash payment to the bank, then it is an agency for the person covered by it. However, in relation to (claimant) the letter of guarantee will be a surety.

Under all situations it is permissible for a bank to take payment for a letter of guarantee in proportion to the effort and work involved in the issuance process without linking the payment to the amount covered by a letter of guarantee. As to the practice of taking payment for issuing a letter of guarantee not covered by a portion of the amount guaranteed, as is usually the practice of the banks, the committee (majority of it) is of the view that it needs further study, investigation, and information about the various models used in various situations, and asks the specialists in banking to submit these different models for its consideration, especially the subject of letters of guarantee by banks that is scheduled for discussion by the next Islamic Figh Academy due to be held at Jeddah.

(Third Albaraka Seminar, Fatwa No. 1)

Zakah

1. Zakah on Agricultural Produce

Question:

Albaraka is working on a number of agricultural investment projects, and is spending large amounts of money on reclamation of soil for cultivation and betterment of its produce. On what basis then, are these expenses to be decided? And is Zakah to be paid on these projects in the light of the original principle of the ('ushr') or half-tithe (one twentieth) depending on the condition of irrigation?

Fatwa:

After thorough discussion it appeared that in this regard there are three opinions.First, deduct all expenses and then take out tithe or half-tithe (i.e., one tenth or even twentieth) from the remainder. Second, not to deduct expenses and pay a tithe as Zakah on rainfall cultivation and a half-tithe on irrigation cultivation. Third, take out one third of produce and then pay Zakah on the remaining produce according to the condition of irrigation.

The participants concluded in favor of deducting expenses before taking out Zakah provided that such deduction should not exceed one third, and then calculate Zakah by taking out 'ushr' for a land irrigated by rain, and half 'ushar' for that irrigated artificially.


2. Zakah on the cattle

Question:

How can the Zakah be calculated on the cattle bearing in mind various reasons for which people keep them?

Fatwa:

The participants considered the question of Zakah on livestock according to the purpose for keeping them, while taking account of the view of the majority of Muslim jurists, that is, there is no Zakah on the stall-fed livestock. The livestock can be divided into two categories:

1. Those which are for sale. On these, the participants agreed, Zakah is to be paid as on any other merchandise.

2. Those which are kept for milk and its products. About this category there were three opinions:

Valuation of the raw materials used in the production and all other expenses, including packaging/ bottling expenses, and then paying one fortieth (ruba'ushr) as Zakah. There is no Zakah on fixed assets.

Valuation of raw materials purchased with a view to manufacturing and selling the products and calculating the Zakah on them as raw material disregarding materials for the medium which do not show in the product,

and any increase resulting from manufacturing, because there is no Zakah or earning on vocation.

Taking out a tithe from the value of the manufactured products after deducting the expenses or paying one twentieth without deducting the expenses as Zakah, by analogy to Zakah on the agricultural product.


3. Zakah on projects in progress

Question:

How can the Zakah on projects in progress be calculated?

Fatwa:

The participants exchanged views on this issue and reached the conclusion, that there is no Zakah on a project before its completion when it is meant to bring income. After it is completed and income accrues therefrom, then this income should be added to all other wealth of the person concerned and Zakah be paid for the whole. As to the project meant for sale, there is no Zakah on it before its completion, provided that Zakah is given on the parts there of which are completed and are ready for sale after calculating their value. Under all circumstances, however, Zakah must be given on all cash amount earmarked for the projects, and such as could not be spent thereon. In case a project is stopped and is put up for sale as it is, then it should be valued and Zakah given on it as in the case of commercial merchandise.(Sixth Albaraka Seminar, Fatwa No. 12)

4. Zakah on rent-to-own articles

The participants exchanged views about the leased products that are promised to be sold at the end of the lease period. They concluded that the Zakah is due on the income from the rent taken together with all the other wealth of the person concerned. There is no Zakah in the capital assets because of lack of intention of selling them until the end of the rental period, and because during the rental period these cannot be regarded as commercial merchandise.


Sarf and Mutual Promising

1. Promising to buy different currencies at the rate prevalent on the day of agreement

Question:

What is the (legal) position on promising to buy different currencies at the rate of the day of agreement (the day of mutual promise) on the condition that the delivery of the exchange will occur later so that the exchange in future will be from hand to hand, when such a mutual promise is binding, and when it is not binding?

Fatwa:

If such a mutual promise is binding on both the parties then it falls under the general prohibition of selling credit for credit, and it is not permissible. However, if it is not binding upon the two parties then it is permissible.

(Fifth Albaraka Seminar, Fatwa No. 13)

2. Mutual promising concerning exchange of currencies

Question:

What is the position on mutual promising concerning exchange of currencies?

Fatwa:

This verdict confirms what is stated in the resolutions adopted by the second conference of Islamic banks held in March 1983 in Kuwait, that the arrangement for sale of currencies with deferred payment is permissible provided the promise is non-binding (this was the opinion of the majority). If the arrangement is binding then it is not permissible.


3. Bank preparing deals for future purchase of currencies for its clients

Question:

Is it permissible for an Islamic bank to engage in future purchase transactions of currencies for its clients?

Fatwa:

In principle it is not permissible for the bank to engage in this kind of transactions nor is it permissible for it to act as an intermediary for its clients in this regard because it is prohibited in Islamic law.


Contracts

1. What is the guiding principle in contracts: permissibility or prohibition

Question:

Is it necessary that the contemporary contract be put under the familiar nomenclature of the Islamic law of contract. Or it is enough to compare them with the general rules, and if they are not in conflict with any text or consensus they would be lawful no matter what name is given to them?

Fatwa:

The preferred course in Islamic law is based on the authority of what is found in the Book of Allah and Sunnah of His Prophet, (PBUH) the guiding principle in contract and terms and conditions is permissibility, except what is forbidden by the lawgiver. This is the position adopted by Shaikhal Islam. Ibn Taimiyyah, and his pupil, Ibn Al-Qayyim, relying on some sayings of the great imams. Based on that any contract found in the contemporary life but not known in Islamic law will be legally valid if it is not in conflict

with the Quran or sunnah or consensus of analogy (qiyas), and is based on considerations of the common good of people, and also is free of any great evil. The Islamic law has during its various phases witnessed many new forms of contracts which it described designated by various names, while explaining rules and laws concerning them, like for instance, ground rent hikr, dual lease contracts and sales of settlement contract (bay' al-wafa).

(First Albaraka Seminar, Fatawa No. 1)

Penalties for late Payment of Debts

1. A debtor who fails to settle his debts within the agreed term

Question:

Is it permissible for an Islamic bank to stipulate a penalty clause against the borrower who is supposed to pay a specified amount, but fails to do so within the assigned term, while the amount thus collected under this penalty clause is expended by the bank on charitable works and welfare?

Fatwa:

This is not permissible. (This is a debtor no matter what is his status. For a debtor prolonging payment without any genuine excuse, see the following fatwa.

(Second Albaraka Seminar, Fatawa No. 13)

2. A dilatory debtor who delays payment of a loan

Question:

Is the principle of holding a dilatory debtor liable to pay damages to the creditor legitimate from the point of view of the Islamic law?

Fatwa:

In Islamic law it is permissible to hold responsible a financially capable debtor, who delays payment of debt without any genuine reason, and to compensate the lender for any loss resulting from late payment. Such a debtor is unjust as the Prophet (PBUH) said, "A rich debtor who delays payment of debt is unjust". The case of such a person is similar to that of a usurper decreed that besides returning the capital he should also be made to return any profit made by him on the usurped property. This was the majority opinion. Some are of the view that the obligation to pay this amount is a sort of penalty clause based on the principle of public welfare provided any income thus obtained is spent on legitimate charitable works.

The amount of this compensation will be decided according to the loss incurred by the lender in the normal profit that he could have earned if he had invested this amount in a project during the period of the delayed payment. The compensation court will, with the help of experts in Islamically approved methods of investment and with the help of a financial institution. If such an interest-free institution is found in the city of the lender (an Islamic bank, for instance), determine the amount of this compensation, taking an average of the profit actually earned by such institutions for their investors for a similar amount of money over a period similar to the period of the delayed payment.

It is not permissible for the lender and the borrower to agree in advance on the amount of such a compensation (for late payment) so that it does not become a means of charging interest on the amount lent out.

(Third Albaraka Seminar, Fatawa No. 2)

3. Ruling on compensation for the damages caused by delay in paying installments of Murabaha partnership

Question:

Is it permissible to charge compensation for any damages because of late payment of installments of Murabaha partnership?

Fatwa:

The committee took note of the Fatwa adopted by majority vote at the third Albaraka Seminar held in Turkey concerning permissibility of compensation, and noticed the questions arising about it, and also heard the explanation offered by some managers of banks. Some members of the committee favored the affirmation of this Fatwa, while others were of the opinion that it be revised. The committee referred the issue to the forthcoming seminar for further research.

(Fifth Albaraka Seminar, Fatawa No. 4)

4. Penalties for those delaying payment of debt

Question:

Is it permissible to stipulate a penalty clause in the case of those who delay paying their debts while they are able to pay.

Fatwa:

It is permissible to stipulate a penalty clause as a deterrent against those who are well off and still delay paying their debts provided the money received from these penalties is spent on works of charity and general welfare. In case there is any taxes to be paid on the amount of penalty then the bank is entitled to deduct these expenses from the penalty for late payment.

(Sixth Albaraka Seminar, Fatawa No. 8)

5. Qard Hasan benevolent loan agreement and penalty for delaying the late payment

Question:

Is it permissible to apply the penalty for delaying the payment of a 'qard hasan' benevolent loan?

Fatwa:

It is not permissible to apply a penalty for delaying the payment of a qard hasan loan. In case of a qard hasan loan between banks, it may be settled by exchange of deposits without any specified profit.


Interest Based Profits

1.Two manners of transactions - interest based and interest free

Question:

Is it permissible for a bank to conduct business simultaneously on the principles both of interest and non interest when the authorities in this country stipulate it as a necessary condition (for any banking operation) until they are convinced that interest free banking is workable, and are ready to appreciate its scope and suitability. This is achieved by the bank by opening accounts for those who wish to transact their business without interest, and on the understanding that the bank will pay interest at the current rates to those (account holders) who might ask for it, despite the fact that the bank invests these amounts in lawful Islamic methods and bears all expenses therefore - whenever there is need for it paying the difference between what it has to pay to the investor and the actual profit earned by the accounts from investing them through the Islamic methods of investment.

Fatwa:

The interest based transactions are not permissible in Islamic law. The jurist scholars of the seminar suggest that the Islamic banks cooperate with each other in establishing one or more Islamic banks in non Islamic countries, and to cooperate and deal with any existing Islamic bank or one that may be established in future. (The jurist scholars of the seminar support the efforts of Sheikh Saleh Abdullah Kamel concerning establishment of an Islamic bank in Europe and avoiding dealings based on interest).


2. Paying taxes out of bank interest

Question:

Is it permissible for a person gaining some interest based profit in a non Islamic country to pay taxes out of this amount for his income in that country?

Fatwa:

The second conference on the Islamic banking held at Kuwait on 6-8 Jamadi Al Akhirah 1403A.H., (21-23 March 1983) offered the following advice:

The conference advises the rich Muslim to direct their wealth, first to the Islamic banks, Islamic organizations, and the Islamic companies within the Arab and Muslim countries, and then in foreign countries. Until the time this is achieved the interest they gain is an evil gain and they should collect it and expend it on the general welfare of the Muslims. To continue to deposit it in the banks and institutions functioning on the principle of interest, while they can avoid it if they wish, is an unlawful act.

In the light of this principle any taxes due on this evil gain may be paid out of it, but it is not permissible to pay taxes due on any other activity out of it.


3. Working in the country where local laws require the banks to provide security for the capital sum of the depositors.

Question:

What is your opinion concerning establishment of an Islamic bank in non Islamic countries and working under their laws, which among other things demand that a bank must provide security for the capital amount deposited with it? (as in case of Al Baraka London)

Fatwa:

It is permissible for the Muslims to abide by the laws of the foreign countries so long as they do not

conflict with the laws of the Shari'a. As the Albaraka bank in London is allowed to function according to its memorandum of association and articles of association, and to conduct its banking activities in accordance with the laws of Islamic Shari'a, the functioning of Albaraka bank in London, within the framework of law and prevalent system of the land is permissible. In this regard the scholars also considered the great benefit of the presence of Albaraka bank in London and the services it renders to the Muslim living outside the Islamic countries, the impact of its continued functioning in spreading Islamic banking thought, and elucidation of features of Islamic economics, and concluded that in the interests of common good the bank should continue to function.

As to the responsibility of the bank to provide security for the capital deposited with it in accordance with the local law, the learned scholars offered the following suggestions:

The deposits placed with the bank to be paid on demand (in a form of checking account), by its very nature, implies a surety (for the depositor), provided the bank does not share the profit, nor is there a Mudaraba in the capital sum. All such deposits are a kind of loan to the bank with permission to utilize them on the proviso that these will be returned (to their depositors) on demand.

The deposits with the bank as the investment deposits, however, fall under the various categories as regard guaranteeing their capital sums. These are: 1. Use of an insurance umbrella for the deposits; 2. Exploring possibility of applying the idea of guarantee for a joint Mudaraba, by analogy to a shared employee; 3. Investing money on the basis of limited Mudaraba in areas of fixed return or yield; 4. To get the guarantee approaching a third party other than the one working with the money. For instance, Albaraka of Jeddah. The participating scholars agreed that further detailed study is needed on this subject, and that there is no harm in the continuance of Albaraka bank in the form forced upon it by the law until such time when an Islamically acceptable solution is found.


4. Using the world 'interest' in place of the word 'profit' or 'return' when the interest gained by the clients is exempted from tax.

Question:

Is it permissible to use the word 'interest' in place of the world 'profit' without intending its essence in order to gain certain financial advantages granted by the governments concerned in the West for interest on deposits and financing?

Fatwa:

The participating scholars noted some of the legal advantages offered by the British Inland Revenue department to those working in the banks for interest paid or collected by those dealing with the banks.

Considering the principle that in financial dealings it is the meaning behind the contracts regarding their objectives and purpose that are of prime importance rather than their wording and structure, there was consensus that there is no harm in using the word 'interest' as a substitute for the word 'profit' or 'return' for (in essence) it does not mean the same as the forbidden interest. After discussion it was agreed that: 1. Notwithstanding the fact that in the world of banking the word 'interest' is technically used for what is forbidden in the Islamic law, whether it be paid or collected, and whether it be on productive loans or consumer loans; 2. There is nothing wrong, however, in using the term 'interest' in circumstances where those dealing with Albaraka Bank in London require it (in place of the word 'profit') to obtain financial advantages granted for interest on deposits and financing; 3. In this regard it was noted that the use of the word 'interest' in the aforementioned sense will be in statement forms not used by the bank, like the tax statement for the depositors or separate certificates for various situations involving financing. However, if the purpose be to change the nature of the transaction whereby it is transformed into a loan or borrowing on interest, then it is not permissible at all.


5. Replacement concept (formula) for nightly deposits

Question:

Is it permissible to deposit and withdraw surplus cash on daily basis and to issue necessary transaction rules so as to calculate profit on the average monthly balance?

Fatwa:

The participants exchanged views on the above suggestion concerning depositing and withdrawing surplus cash on daily basis and issuing necessary rules so that the profits are calculated on the average monthly balance, and (the majority) was of the opinion that it was permissible being similar to calculating profits by figures.


6. Investing with Interest Based financial institutions

Question:

Is it Islamically correct to finance in partnership with the interest based institutions by financing a partnership when the venture in itself is quite legitimate according to Shari'a?

Fatwa:

The participants exchanged views on financing in partnership with the non Islamic, or interest based institutions when the venture in itself is Islamically lawful, and concluded that there was nothing wrong in doing so from the Islamic standpoint if necessary guarantees to conform to the Islamic Shari'a in accomplishing the venture are first secured (from the other party).

As to the partnership with such institutions in guaranteeing fully or partially, even without financing a venture, when the venture itself is un-Islamic, it is not permissible, because guaranteeing or insuring an unlawful activity is not permissible in Shari'a.


7. Setting up partnerships with a partner who deals with interest

Question:

Is it right to enter into a partnership to purchase real estate property on a fifty-fifty basis with a partner dealing in interest, when each partner is independent in disposing of his own share?

Fatwa:

The participants of the seminar were of the opinion that there is no harm in joining a partnership to purchase real estate property on a fifty-fifty basis along with a partner dealing with interest, when each partner is independent in disposing of his share, and when the share of Albaraka is free of any element of interest.


Mudarabah Capital Trust

1. Paying a percentage out of the capital sum of the Mudaraba capital trust

Question:

Is it permissible for an investor to demand from the entrepreneur, al Mudarib, to pay him a fixed percentage of the value of the contract, besides the capital sum, irrespective of the amount of investment involved? Or whether the project is profitable or in loss?

Fatwa:

Such a contract is unlawful because of the following reasons: Firstly, because it involves a guarantee from an entrepreneur respecting the capital sum, whereas a Mudarib (entrepreneur) is a trustee and cannot be held responsible for the capital sum except in cases of transgression or negligence. Secondly, because it involves a condition in the contract that the Mudarib will pay a fixed amount to the investor which renders the contract void, because it can lead to non-participation in the profit.


2. Contracts of Mudaraba and partnership when the Mudarib is required to pay on account to the bank a fixed percentage of the capital sum

Question:

Islamically is there any legal prohibition against making it necessary for the Mudarib to pay on account of the profits a fixed percentage of the capital to the bank so that the settlement and balancing out is achieved later on?

Fatwa:

Legally there is nothing wrong in requiring the Mudarib to pay to the bank a fixed percentage of he capital of the Mudaraba on account of the profits, so that the balancing out and settlement is achieved later on, provided the bank bears the loss, if and when incurred.


3. The owner of the capital imposing a condition on the Mudarib to deal only in a commodity proven to yield a fixed return.

Question:

It is permissible for an owner of the capital to impose a condition on the Mudarib stipulating that he would trade only in a commodity which in the market terms yield a fixed return?

Fatwa:

In Mudaraba such a condition is permissible, and must be adhered to and fulfilled, because the owner of the capital is entitled to stipulate such a condition for the Mudarib within the framework of the Mudaraba.


4. Agreement that any profit exceeding a certain limit would go to the Mudarib

Question:

Is it permissible for an owner of the capital to have an agreement with the Mudarib to the effect that if the profit exceeded, for instance 15% a year, on the capital, then the excess will be the Mudarib's share?

Fatwa:

Such a stipulation is permissible as long as the division of profit is based on calculations in accordance with the proclaimed and agreed percentage, and provided that the owner of the capital bears any losses when they occur.


5. Stipulating the condition that a Mudarib will sell for cash only failing to do that will be held liable

Question:

Is it permissible to stipulate that a Mudarib will sell for cash only, and if he sells on credit terms then he will have to guaranty the customers in order to prevent him from negligence in selling to those who are financially not sound (unable to pay)?

Fatwa:

The owner of the capital may quite legitimately stipulate that a Mudarib will sell for cash only, and if he sells on credit he will be held liable.


6. Determining profit shares of both parties in a Mudaraba capital trustcapital trust

Question:

How to calculate the profit share of both parties in a Mudaraba capital trust?

Fatwa:

It is legally binding that the profit of both the bank and the investor be clearly spelled out and known to both parties, and be fixed for the period of the Mudaraba partnership. This must be clearly specified and incorporated in the agreement of Mudaraba partnership at the beginning of it or at the time of its renewal. In the case of any change in the percentage of profit in future, such a change and its period must be brought to the attention of the partner. This change will be valid provided that the investor has no objection to it.

(Fourth Albaraka Seminar, Fatawa No. 2)

7. Guarantee of the Mudarib for the capital sum of Mudaraba capital trust

Question:

Is it valid for the Mudarib to guarantee the capital sum of the Mudaraba?

Fatwa:

After considering the research presented before the seminar and after listening to the discussions on this subject, the committee concluded that the condition of seeking a guarantee from the working agent (Mudarib) regarding the capital sum is counter to the purpose of the agreement and is therefore not lawful.


Al Murabaha:

1. Doubts concerning Murabaha sale on credit:

Question:

Some people have raised certain doubts about the permissibility of Murabaha sale on credit for a term, because it involves what resembles interest. They also question the permissibility of a credit sale to the buyer and raise the following doubts: 1. This agreement implies the sale of a thing which a person does not have in possession; 2. It involves a delay in exchange; 3. It is a sale of a dollar for a dollar whereas the sale is delayed or it is a kind of mutual exchange of identical currencies; 4. The Maliki school forbids making fulfillment of promise as binding in a sale; 5. This agreement involves embellishment with falsehood which is not permissible.

Fatwa:

Murabaha sale is well known in Islamic law, and by consensus it is permissible whether cash or on credit, and the doubt that it involves interest as a sale on credit, in fact does not arise in this case nor in the credit sale on terms.As to the form of Murabaha sale to the buyer the committee affirms the resolution of the second conference on the Islamic bank held in Kuwait involving reservations concerning compulsion. The text of this resolution reads:

The conference resolves that the mutual promising for Murabaha sale to the buyer after the ownership and possession of the commodity, and then selling it to the buyer at a profit specified in a prior agreement is legally permissible, so long as the bank bears any liability for any disaster before its delivery, and what accrues from the return of the merchandise if a return was necessary. As to the promise and its being binding for the buyer or the bank or for both, this compulsion safeguards the transaction and brings stability in dealings, and it is in the interest of both the bank and the agent. And to make it compulsory is quite lawful, and every bank has the right to adopt a course that its Islamic supervisory body may find suitable. To those who question the validity of the Murabaha sale to a buyer, our answer is this: This agreement does not involve or imply a sale of something which one does not possess, because the agreement made with the buyer is concluded after actual possession, besides the fact that any doubt of prohibition of sale of that which one does not possess was never agreed upon. The question of delaying the exchange between the two also does not arise, because ownership of commodity takes effect against a cash or credit payment. Exchange in a loan on interest based transaction occurs between a thing and something similar to it. A usurious lender lends a hundred dollars to someone for a certain period at the end of which the lender has to pay him a hundred and ten dollars. As against this in a Murabaha sale on credit the exchange is between the two different things, i.e., a commodity and cash payment for it. It can then a Murabaha sale be compared to one conducted on the basis of interest, especially when in Murabaha even though the profit is fixed, this might result in loss to the seller in comparison with the market price if there is an increase in prices in the market, or if the opposite happens the buyer may lose, which emanates from demand and supply of the commodity rather than demand and supply of cash. The prohibition according to the Maliki school is conditional upon two things and neither of these are found in the present case. These conditions are: If a person supplying the commodity is one of the owners of the capital sum and if the person requiring the commodity seeks to benefit from its price and not from the commodity as such.


2. Taking a surety in a Murabaha sale

Question:

Is it permissible to demand that a buyer have a guarantor in a Murabaha sale on credit?

Fatwa:

It is permissible to demand a guarantor from a buyer as in any other sale on credit.


3. Settling Murabaha debt in another currency at the rate current on the day of settlement

Question:

Is it permissible for the Islamic bank and its client to agree on settlement of debt of Murabaha sale in another currency at the rate current on the day of settlement?

Fatwa:

Based on the explanation given by the bank manager who asked this question and explained that sale is conducted through the bank in a foreign currency, and through a client designated for that currency, it is permissible to make a payment of equivalent value in local currency on due date at the exchange rate current on that day. There can be no objection to it from Shari'a standpoint, because it is payment on the debt by exchanging the foreign currency stated in the debt (collected by default) and the local currency which is collected at the time of payment at the current rate for that day.

(Fourth Albaraka Seminar, Fatawa No. 5)

4. Circular Murabaha sale within a fixed ceiling

Question:

What is the Islamic position concerning what is known as circular Murabaha sale within a single fixed ceiling, whereby a client is given authorization to purchase on behalf of the bank and then sell it to himself for an agreed upon fixed profit and within the limits of an agreed ceiling?

Fatwa:

The situation presented here is true mostly in the case of small clients and retailers who need to purchase diverse materials frequently and for whom it is difficult to approach the bank for a separate agreement each time they want to make a transaction. The basis of the justification for this sort of Murabaha sale in the form presented here is similar to the authorization given by the bank to the client for purchasing on behalf of the bank by right of the power of attorney invested in him, so that he sells it to himself for a specified profit which is previously agreed upon and within an agreed ceiling (adopted by majority).


Agency

1. Restricting the agency to sell for cash

Question:

Is it permissible to stipulate for the agent that what he is entrusted with selling, he will sell for cash only, and if he sells on credit he will be treated as a guarantor for purchases on credit?

Fatwa:

The client may legitimately stipulate a condition for his agent to sell for cash only, and if he sells on credit he may be held liable for it.


Use of Credit Cards

Question:

What is the Shari’ah judicial rule in the use of credit cards that are not legitimated by a Shari’ah authority, particularly those with agreements imposing charges on outstanding or overdue accounts?

Fatwa:

As has been noted in the Fatwa’s of some committees concerned with this issue, if the holder of the credit card has taken the precautions that render this forbidden (Haram) condition inapplicable, he or she can benefit from the card and sign its agreement in spite of this condition because its in the state of being legitimately revoked, is renounced and its effects are being excluded. The Shari’ah evidence to this is the Prophet( PBUH) saying to Aisha "Accept it and give them faith conditionally, because faith is given to the ones who emancipate", and in another narration " Buy it, emancipate it and give them faith conditionally". According to the Muhaddith, this means “Don’t care, because their condition is against "Alhag" the rightful", and that should not be permitted for all, and what is meant here is to ridicule and to disregard the existence of the condition.

As for imposing charges against delayed settlement of accounts being a forbidden offensive under Islamic Law, this is agreed upon by Islamic jurists as a form of "Riba" usury.

(Dr. Abdul Sattar Abu Ghuda Albaraka Inv. & Dev. Shari’ah Board member)

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