Apakah bunga bank termasuk riba

Pertanyaan dari mbak N,
beserta Jawabannya dari Ust. Cecep:

Apakah bunga bank termasuk riba?


Sebuah realita menunjukan bahwa semakin tinggi interest rate suatu mata uang semakin tinggi pula tingkat inflasinya, dan suatu negara yang mempunyai inflasi yang tinggi berarti ekonominya dalam keadaan collaps. Dan begitu sebaliknya semakin rendah interest ratenya semakin rendah pula nilai inflasinya dan semakin bagus pula neraca ekonominya.


Artinya bahwa sistem interest tidak pernah menghasilkan sebuah solusi karena tidak ada sistem interest yang berada pada posisi nol kecuali yang benar-benar melepaskan sistem interest tersebut secara total dan menggantinya dengan sistem sharing.



Para ulama sepakat bahwa riba adalah haram hukumnya, hal itu berdasarkan al Quran, hadits, ijma (aklamasi ulama), tinjauan ekonomi, tinjauan sosial dan tinjauan psikologis.



Riba ada dua jenis (secara global): riba fadhl (tambahan) dan riba nasaai (disebut pula riba jahiliy). Riba fadhl adalah melakukan barter sebuah komoditi yang sama dengan melebihkan salah satu komoditinya, hal ini hanya berlaku pada enam jenis komoditi saja yaitu emas dengan emas, perak dengan perak, gandum dengan gandum, jelalai dengan jelalai, kurma dengan kurma dan garam dengan garam (sebagaimana disebutkan dalam sebuah hadits yang diriwayatkan oleh Ubadah bin Shamit). Adapun riba Nasaai adalah pinjaman uang dengan tambahan uang yang ditentukan dari nilai nominal pinjaman atau jumlah tertentu untuk waktu tertentu, dan apabila waktunya tiba sedangkan ia belum bisa membayarnya maka si kreditor harus membayar kembali jumlah tambahan yang ditentukan di muka tadi untuk waktu tertentu lagi, dan begitulah seterusnya.



Para ulama secara ijma (aklamasi) sepakat bahwa kedua jenis tersebut haram hukumnya, barang siapa mengingkarinya maka ia disebut kafir (menolak hukum Allah) dan pelakunya berhak untuk diperangi sebagaimana musuh Allah lainnya.



Yang jadi pertanyaan, apakah bunga bank termasuk riba?

Mayoritas ulama mengatakan bahwa bunga bank adalah riba dan hukumnya haram. Dan sebagian yang lain mengatakan bahwa bunga bank adalah bukan riba, maka hukumnyapun tidak haram.



Mayoritas ulama berargumentasi bahwa bunga bank tidak berbeda dengan riba hanya dalam bentuk dan tekhnis operasionalnya saja (dalil-dalilnya sama dengan apa yang diungkapkan oleh MUI).



Adapun sebagian ulama yang mengatakan bahwa bunga bank bukan merupakan riba berargumentasi dengan dalil-dalil secara globalnya sebagai berikut:

1. bahwa bunga bank sifatnya fluktuatif dan ditentukan berdasarkan keuntungan yang diperoleh secara standar dari neraca ekonomi sebuah negara. Jadi bunga bank adalah sama dengan keuntungan dari sebuah perusahaan yang membagikan keuntungan yang diperolehnya.

Pendapat tersebut jelas sekali tidak sesuai dengan realitanya, karena bunga bank ditentukan bukan berdasarkan keuntungan standar yang dihasilkan oleh ekonomi negara tapi ditentukan oleh banyak faktor, salah satunya adalah tingkat inflasi, cadangan devisa negara, strategi ekonomi, pertumbuhan ekonomi suatu negara dan lainnya.

2. bahwa bank adalah sebuah lembaga investasi yang mana mereka menginvestasikan dana nasabahnya dalam bentuk-bentuk investasi yang menguntungkan. Jadi fungsi bank dalam hal ini adalah sebagai mudharib (pengelola dana untuk di investasikan) dan bukan sebagai broker atau mediator yang meminjamkan lagi dana nasabahnya kepada pihak ketiga dengan sistem bunga. Bila fungsi bank sebagai mudharib/ patner of share maka hal itu dibolehkan dalam fiqh Islam.

Melihat realita, fungsi bank lebih dominan kepada mediator untuk meminjam kembali uang nasabahnya kepada pihak ketiga dengan rate bunganya lebih tinggi dibandingkan yang diberikan kepada nasabahnya.



Adapun ulama lain mengatakan bahwa bunga bank adalah haram tapi karena madharat maka hal itu dibolehkan. Pendapat ini untuk 20 tahun yang lalu mungkin bisa diterima tapi untuk kondisi sekarang, dimana bank-bank syariah sudah menjamur dimana-mana bahkan bank-konvensionalpun sudah mulai membuka cabang syariahnya (dual system).



Dari uraian singkat di atas. Jelaslah bahwa bunga bank dalam berbagai bentuknya baik rekening biasa, rekening berjangka, rekening deposito dan instrument-instrument lainnya yang menggunakan bunga adalah haram.



Dalam hal ini, saya sependapat dengan fatwa MUI.



Apa hukum investasi dalam saham atau reksadana dalam pandangan fiqh islam?



Saham (share/ stock) adalah sertifikat bukti kepemilikan modal pada suatu perusahaan atau lembaga keuangan.

Saham mempunyai bentuk dan jenis yang beraneka ragam. Tergantung dari sudut mana pembagiannya.

Secara umum bahwa investasi dalam bentuk saham adalah boleh dengan alasan sebagai berikut:

- saham adalah mengikutsertakan modal tanpa ikut andil dalam pengelolaannya. Maka bentuk tersebut sama dengan mudharabah yaitu menyerahkan modal pada mudharib (pengelola) untuk diinvestasikan pada proyek yang menguntungkan dengan sistem pembagian keuntungan yang ditentukan melalui presentasi dari keuntungan.

- Investasi dalam bentuk saham it dibolehkan dengan syarat-syarat sebagai berikut:

a. Perusahaan pemilik saham tidak melakukan aktivitas yang diharamkan oleh syariat seperti melakukan transaksi komoditi yang diharamkan oleh syariat seperti komoditi arak, komoditi daging babi dan anjing dan lainnya.

b. Perusahaan tersebut tidak menggunakan sistem interest rate, apabila ia terlibat dalam bisnis yang menggunakan interest rate system, maka saham perusahaaan tersebut menjadi haram.

Walaupun secara global investasi dalam saham dibolehkan dengan syarat-syarat tadi tapi ada beberapa bentuk saham yang tidak dibolehkan seperti saham istimewa dan saham pembukaan yang mana nilai jualnya lebih murah dari nilai nominal yang tertulis di dalam sertifikat sahamnya.



Saham istimewa (Preference shares) diharamkan apabila memenuhi hal-hal berikut:

- Apabila pemiliknya mempunyai hak istimewa dalam mendapatkan keuntungan dengan jumlah tertentu dan sebelum pembagian keuntungan pada pemilik saham lainnya. Hal tersebut diharamkan karena menghilangkan keadilan yang seharusnya dinikmati oleh semua pemilik saham.

- Apabila pemiliknya mempunya hak istimewa ketika pembubaran perusahaan, sehingga dia mendapatkan prioritas dalam mendapatkan pengembalian sebelum pemilik lainnya.

- Apabila pemilik hak pilih yang lebih dibanding pemilik lainnya dalam musyawarah umum pemegang saham

- Apabila pemiliknya mendapatkan keuntungan tahunan tetap (fixed interest rate), baik perusahaan itu rugi ataupun untung karena hal itu tidak jauh beda dengan sistem bunga.



Adapun saham pembukaan yang menjual saham dengan harga dibawah harga nominal yang tertulis dalam sertifikat saham adalah haram karena cara tersebut merugikan pemilik saham lainnya yang harus membayar saham dengan nilai nominal yang sama seperti yang tertulis dalam sertifikat saham



Reksa dana adalah wadah yang dipergunakan untuk menghimpun dana dari masyarakat pemodal untuk selanjutnya diinvestasikan kembali dalam portopolio efek oleh manajer investasi.

Investasi dalam reksa dana tidak jauh berbeda dengan investasi dalam bentuk saham, hanya yang membedakannya adalah bahwa investasi dalam saham adalah mengikutsertakan modal pada perusahaan secara langsung dengan hak dan kewajibannya sebagai pemilik saham. Adapun investasi dalam bentuk reksa dana adalah menyerahkan modal pada sebuah lembaga atau perusahaan reksa dana yang kemudian perusahaan tersebut akan menginvestasikan dana pemodal tersebut pada lapangan yang sekiranya bisa menguntungkan.

Investasi dalam reksa dana menjadi halal apabila perusahaan reksa dana tersebut menginvestasikan dana tadi dalam investasi yang halal dan tidak berinteraksi dalam sistem bunga.



Obligasi (bond) adalah surat utang yang dikeluarkan oleh perusahaan atau pemerintah dengan bunga tertentu yang ditetapkan untuk waktu tertentu.

Investasi dalam obligas adalah haram hukumnya karena menggunakan sistem bunga.



Apa hukum transaksi financial derivative dalam pandangan fiqh islam?

Derivatives adalah alat finansial yang tidak mempunyai nilai dasar, tapi nilainya berasal dari yang lain. Mereka membendung resiko kepemilikan sesuatu yang menjadi subyek dari fluktuasi harga yang tak terduga sebagai contoh mata uang asing, gandum, saham dan bond pemerintah.



Ada dua jenis: futures, yaitu kontrak untuk penyerahan transaksi di masa datang dengan harga yang telah ditetapkan sebelumnya. Dan options, yaitu memberikan suatu pihak kesempatan untuk membeli dari atau menjual pada pihak lain dengan harga yang telah ditetapkan sebelumnya.



Apa hukum forward contract (future) dalam pandangan fiqh islam?

Forward market yaitu pasar dengan kontrak (atau yang dikenal dengan future) yang menyebut penyerahan barang atau surat berharga pada tanggal tertentu dan pada harga yang tetap.



Sebenarnya, forward market dengan definisi seperti di atas tidak ada masalah dalam fiqh islam selama tidak menggunakan unsur bunga ataupun unsur penipuan karena hal itu termasuk bagian dari perjanjian. Tapi yang menjadi masalah adalah ketika perjanjian untuk penyerahan dan dengan harga yang ditetapkan itu dijadikan lahan spekulasi dan lahan jual-beli. Maka dalam kondisi ini, transaksi tersebut menjadi tidak boleh lagi karena mengandung unsur-unsur yang diharamkan oleh syariat, yaitu:

- Menjual barang yang tidak ada dan belum dimiliki yaitu perjanjian itu sendiri karena dalam kontrak tersebut belum ada barang yang bisa diperjual belikan dan belum menjadi miliknya karena baru sebatas perjanjian. Maka hukumnya dalam hal ini adalah tidak boleh.

- Menjual barang yang tidak dengan spekulasi, artinya karena fluktualisasi harga dan inflasi ekonomi dunia yang tidak jelas, maka forward market dijadikan sebagai ajang spekulasi untuk meraup keuntuntan, padahal barang tersebut belum jelas.

- Biasanya untuk mendapatkan forward contrak itu ada fee (interest) yang dikenakan pada pembelinya, adapun ratenya ditentukan tergantung fluktualisasi ekonomi dunia atau negaranya atau barangnya atau mata uangnya.

Berdasarkan pertimbangan tadi, jelaslah bahwa forward transaksi dalam bentuk tadi adalah mengandung tiga unsur yang diharamkan oleh syariat.



Adapun forward rate, yaitu menentukan kurs mata uang asing dengan harga tetap untuk dibayarkan di masa yang akan datang adalah tidak boleh, karena hal itu mengandung riba fadhl sebagaimana disebutkan dalam hadits enam jenis komodidti yang tidak boleh melakukan barter dalam jenis tersebut kecual dengan matsalan bi mitslin dan yaddan bi yaddin. (jumlah yang sama dan dalam waktu yang berbarengan). Adapun alasan kedua transaksi tersebut menjadi haram karena dalam penentuan harga tetap itu menggunakan sistem bunga juga yang disebut dengan fee for forward contrak.



Tidak jauh beda dengan forward transaction dalam bursa efek. Transaksi tersebut mengandung unsur spekulasi dan syarat harus membayar kompensasi bila transaksi forward itu dibatalkan atau harus bayar bunga tertentu bila transaksi itu diundurkan lagi. Bahkan banyak sekali pialang yang melakukan transaksi forward transaksi dengan pembeli padahal dia sendiri belum memiliki saham atau obligasi yang akan dijualnya.



Jadi jelas, bahwa forward transaction dalam busrsa efekpun menyalahi aturan syariat, seharusnya kita meninggalkannya dan menggantinya dengan sistem syariat yang sekarang ini sudah mulai semarak.



Adapun tentang option, yaitu perjanjian yang memberikan hak opsi (pilihan) kepada pembeli opsi (dengan fee tertentu) untuk merealisasikan kontrak jual beli valuta asing atau saham atau obligasi yang tidak diikuti dengan pergerakan dana dan dilakukan pada atau sebelum waktu yang ditentukan dalam kontrak, dengan kurs atau harga yang terjadi pada saat reaslisasi tersebut. Biasanya option mempunyai dua jenis, yaitu put option (hak untuk membeli) dan call option (hak untuk menjual).



Transaksi option mengandung tiga unsur yang diharamkan syariat. Pertama adalah adanya bunga yang ditentukan untuk mendapatkan option tersebut, kedua jual beli yang tidak dimiliki dan tidak ada dan ketiga adalah jual beli gharar (spekulasi). Dengan ketiga unsur tadi, jelaslah bahwa transaksi dengan menggunakan sistem option adalah bertentang dengan hukum islam dan tidak dibolehkan melakukannya.



Untuk itu, syariat islam telah memberikan beberapa alternatif untuk menggantikannya, yaitu transaksi dengan menggunakan bentuk salam, bentuk al bae li ajal (jual beli yang pembayarannya ditangguhkan) dan murabahah. Semuanya dengan syarat dan kondisi yang sudah diatur oleh para ulama.





Apa hukum transaksi swaps dalam pandangan fiqh islam?

Swap adalah mempertukarkan atau barter suatu sekuritas dengan sekuritas lain. Barter bisa dilakukan untuk mengubah jatuh tempo obligasi portopolio atau mutu emisi suatu portopolio saham atau obligasi, atau karena tujuan suatu investasi sudah berubah.



Transaksi swap tidak pernah lepas dari sistem bunga, adapun besar dan kecilnya tergantung pada kualitas portopolionya, baik dalam bentuk saham ataupun obligasi.

Berdasarkan hal tadi, jelaslah bahwa swap adalah transaksi yang bergantung pada suku bunga. Maka hukumnnyapun adalah haram.

Wallahu a’lam bishawab.


Wassalam,

-Cecep-

ECONOMICS OF TAWARRUQ : How its Mafasid overwhelm the Masalih

A position paper to be presented at the Workshop on Tawarruq: A Methodological issue in Shari`a-Compliant Finance

This paper examines the impact of tawarruq on the economy. It demonstrates through macroeconomic analysis that the harmful consequences of tawarruq are much greater than the benefits generally cited by its advocates. It concludes that a financial instrument whose mafasid (harms) are much greater than masalih (benefits) cannot be characterized as shari`a - compliant.

TAWARRUQ

Tawarruq is the mode through which some Islamic Financial Institutions (IFI) are facilitating the supply of cash to their clients. The client— the mutawarriq—buys X on deferred payment from the IFI and sells X for a cash amount less than the deferred price to a third party. Also tawarruq enables IFI to guarantee a predetermined percentage rate of return to its term-depositor, buying XX from him/her on deferred payment then selling XX for cash, the deferred payment being larger than the cash price.

Every tawarruq transaction creates a debt. Furthermore, the debt a tawarruq transaction creates is invariably larger than the cash it transfers to the client---the mutawarriq, in the first case, and to the IFI in the second case (mediated in both cases by another transaction). In what follows, we trace the macroeconomic consequences of both: creation of new debts and the fact that the debt is larger than the cash received. But before doing so, let us examine the potentials of the new creation: the paper resulting from tawarruq. As it currently stands, both in the conventional and in the Islamic financial markets, debt documents, like those resulting from tawarruq, are subject to repeat financial and speculative transactions. At their limit, these transactions sever all links with the real assets with which they could have been associated with at the start (assuming the cash so acquired result in the production of wealth). This process leads to an inverted pyramid of financial instruments with a small asset base. The process also moves the transaction of tawarruq from that of the asset market to the money (debt) market, where the underlying signaling and equilibrating mechanisms no longer are linked to the real market.

ROLE OF DEBT IN THE ECONOMY

Mere debt creation does not increase the net wealth of society as every addition to social wealth through it is cancelled by deduction of a similar amount of wealth owed. Meanwhile the cash acquired through a debt can be put to uses that may or may not result in actual wealth creation. If wealth is in fact created, it may be equal to, larger than or less than the cash input. The economic consequences will be different in each case. If the additional wealth so created is larger than the cash invested, then society stands to gain in view of the net increase in social wealth after the debt is repaid. If the additional wealth is equal to the cash invested and, therefore, to the resources used, there is no net gain, as the social wealth remains what it was, after the debt is repaid. In case the cash invested results in wealth creation but by an amount less than the cash invested and the resources used, society is poorer to the extent of the loss, as the borrower must repay the debt by compensating for the loss out of existing wealth owned or acquired by him/her. The same applies to cases in which invested cash is totally lost, no wealth creation having taken place. In both cases a redistribution of wealth in favor of the creditors is involved.

As a method of creating additional or new wealth, debt creation (or debt finance) is inefficient as well as inequitable. It is inefficient as the finance so provided goes not for the most promising projects for wealth production but to the most credit-worthy borrower. It is inequitable as it redistributes wealth in favor of suppliers of finance, irrespective of actual productivity of the finance supplied. Since both these points are well argued in Islamic economic literature, I will not repeat them in this paper[i]. One important point to note, to exchange money now for more money later is fundamentally unfair due to the uncertainty that accompanies the passage of time. Money needs to be converted into goods and services before it can enter into the process of production, the source of possible additional value creation. The results of such process of production have to be reconverted into money before money can be paid back to the one who gave it in the first instance.

THE MARKET FOR DEBTS

Debt instruments can easily change hands. The economic consequences of this fact are independent of the terms on which debts change hands. These terms have their own consequences. The key aspect of this equation is what happens to a debt instrument between the time it is created and the time it is extinguished on repayment. Owners of debt instruments can benefit from these instruments in a number of ways. Financial innovations are providing them with newer and novel ways all the time. Debt instruments are substitutes for other forms of wealth, e.g. as securities can bring in some payment over and above their repayment. Insofar as they are substitutes for cash (generally but not necessarily at a discount) they can be characterized as near money. These uses of debt instruments create a demand for them that increases as the economy grows and the market expands. With ever-increasing supply and demand, we have a market for debt instruments. Like in every market, speculation plays a role in debt markets too[ii]. But the special nature of debt instruments enhances the role of speculation in this market to a degree unmatched by any Debt instruments are very heterogeneous[iii]. The probability of a debt being repaid as other market. promised varies from debt to debt, depending on the debtor, the guarantor if any, and the country of origin. There are no standard, uniform methods of evaluating the quality of debts with respect to their recoverability. Debt prices are also vulnerable to wide fluctuations in response to news, even rumors. Instances abound of manipulating debt prices by planting false news or manufacturing rumors. All these factors account for the observed reality of the market for debt instruments being much more vulnerable to gambling-like speculation than the markets for goods and services[iv]. In short, it is better not to have a debt market. However, by allowing tawarruq, this leads to a debt market.

THE DISCONNECT BETWEEN THE REAL MARKETS AND THE FINANCIAL MARKETS

The emergence of a market for trading in debts transforms the economy in a fundamental way. As compared to the situation in which all trade was focused on goods and services (or papers representing ownership rights over goods and services), this new economy has a new tier. This tier is a super economy focused on creation/production and trading/distribution of and benefiting from the consumption of debt instruments. What is the relation between the two, the real market and a financial market dominated by debt instruments? In what ways are we human beings benefited or harmed by the ways in which the two interact? These are questions too big to be answered in this paper. But we can nevertheless hardly afford to ignore these questions.

Before we venture to offer some answers, let us note another development that naturally accompanies the emergence of a market for debts. Like all other markets, people can make money by also playing in the debt market, that is, by borrowing further to do this. The prospects of doing business in the debt markets tend to increase the volume of debt in the economy. The larger the volume of debt is the greater the scope for speculation. Furthermore, the debt market is, generally speaking, more speculative than the market for goods and services as debts extend way into the future. Expectations regarding future values could exercise greater influence on debt prices than on the prices of real assets. Also, it is in the nature of speculation to invite more speculation. Thus, the market for debt in a competitive economy tends to be increasingly speculative with the passage of time.

People enter the real market in order to profit from the enterprise of producing and selling goods and services that are in demand. When those seeking profits enter the debt market, there is a diversion of entrepreneurial talent and resources to an activity that does not increase the social wealth as we have seen earlier. Insofar as making money in the debt market results from gambling-like speculation, the distribution of income and wealth in the society tends to get distorted. Society suffers on both counts of efficiency and of equity.

The normal connect between the real and the financial market is a one to one correspondence between real and financial assets. Financial instruments representing ownership of real assets and deferred prices of real assets conform to this rule. However, debts do not belong to this category. A debt instrument does not represent any real asset. As noted above tawarruq generates debts, adding to the hiatus between the real sector and the financial sector of the economy. This is at odds with the Islamic economy that claims a distinct advantage over the conventional debt based economy in effecting a closer integration between the real and the financial sectors.

It is important to point out that the common assertion that tawarruq does integrate between the real and the financial assets as it involves the sale and purchase of real assets as opposed to lending and borrowing with no real asset sale and purchase in between, is not sustainable. As noted by almost all scholars, a single car enables dozens of tawarruq deals without moving from its spot. Therefore, the financing facilitated by tawarruq, like its counterpart, lending in the conventional system, is free and unhinged from the real sector of the economy.

IMPACT OF EASY AVAILABILITY OF LOANS

Borrowing is a serious business as it adds to one’s obligations. Excepting cases of dire (consumer) needs, it would be irrational to venture into indebtedness unless one is fairly sure of using the command over resources so obtained for producing added value (or of future income from other sources). But uncertainty of future values makes this surety less than perfect. It is in the interest of all concerned, that indebtedness is incurred with due care so that failures causing pain and suffering are avoided. The social mechanisms developed over centuries to enforce due care include collaterals, penalties consequent upon failures to meet obligations and social ostracization. In earlier days, the same applied to governments and foreign nations. But the past few decades of aggressive debt financing have moved away from these earlier norms, a movement further accentuated by the flood of liquidity resulting from the oil booms in recent times. Borrowing made easy has resulted in mountains of credit card debts and other consumer debts, government borrowing has skyrocketed and loans have been thrust upon third world countries with little prospects of repayment.

The Islamic prohibition of interest serves as an effective check on the above trend as it shifts lending to the voluntary sector, as an act of charity rather than for business. The only exception is the traditional trade credit whose economics are entirely different from bank lending[v]. Tawarruq sabotages this unique feature of Islamic finance by introducing lending as a means of doing business. It makes it easy to borrow. It puts IFIs on par with conventional financial institutions, both under competitive compulsion to lend in order to make use of surplus liquidity.

MONEY AND ITS MANAGEMENT IN A DEBT-BASED ECONOMY

Money creation as well as monetary policy, including monetary expansion, in a debt based economy proceeds on the basis of debt. Money issued by the central bank, by derived bank deposits as well as money created by the commercial banks are based on debt. As the money supply increases to meet the increasing demand due to increases in population and rising incomes, so do the volume of debts. As we have seen, larger volumes of debt have been associated with enhanced speculative activity leading to greater inequities and instability. The larger the volume of debt, the more the gambling like speculation, and the greater the redistribution of wealth in favor of the rich. It has been rightly argued that monetary management in an Islamic economy will be free of this defect. Monetary expansion will mainly proceed on the basis of investment 6. As regards the fiat money issued by the central monetary authority, a number of possibilities are being explored, but debt creation does not figure among these possibilities. Another common feature of all proposals about monetary management in an Islamic economy is to keep money supply linked to the needs of the real sector of the economy. This is seen as the most effective way of keeping inflation under control. The introduction of tawarruq into the body of Islamic economy is sure to act like a virus destroying its immune system that which would protect it from increasing indebtedness leading to speculation, monetary fluctuations, instability and inequity.

It is important to note, at this juncture, that there is nothing wrong about debt at the individual level. It is not fasad. Lending and borrowing at the individual level is harmless. What corrupts the financial system is debt proliferation in the economy and money creation through debt creation. It is a monetary system based on debt creation and speculative finance based on debt that amounts to fasad. The insight that distinguishes between the impact of an act at the micro level and its impact at the macro level was not available to us before the advent of macroeconomic analysis. From individual instances of debt here and there to an organized debt market is a qualitative change calling for a fresh assessment of its impact.

THE PRICE OF MONEY

We noted above that the debt created by a tawarruq transaction is larger than the cash obtained through it. This disparity has its own consequences. One of these consequences is the compulsion to create additional wealth through the use of the cash so obtained. But the environment in which enterprise is conducted does not guarantee this. Insofar as the cash was obtained for non-productive uses, even the possibility of creating additional wealth does not exist. This creates a situation that cannot be handled except through transferring part of the existing wealth to the creditors and/or creating more debts in order to meet the contractual obligations of the debtors. The inequity of either “solutions” is obvious. In effect, it takes us back to an interest based lending system with all the ills associated with that regime. It is an unfair transferof wealth; it is inefficient as it penalizes entrepreneurs and rewards rentiers; it leads to instability as it creates obligations irrespective of whether they can be met or not.

On the level of the economy as a whole, the compulsion for economic grow is created by the fact that the total amount to be repaid is invariably larger than the total amount obtained through loans and this has devastating consequences. It leads to overuse of natural resources and is very destructive of the environment. Since the increased payment must also follow a timetable, it increases anxiety levels by enforcing rigid timetables all round. It is also one of the factors leading to commercialization of almost all spheres of life, including family relations, education and health care as these spheres too come under debt-financing with its compulsions of repayment with an addition at an appointed time.

CURRENT SITUATION

The history of tawarruq in Islamic finance has hardly completed its first decade. Yet its practice has been scholars. Juristic discussion has been focused expanding due to its endorsement by a section of shar?`a primarily on the contractual aspects and little attention has been paid to the masalih-mafasid calculus, which is so important in public policy and financial transactions. Even the recently issued AAOIFI “standards” are blissfully oblivious to this essential dimension of Islamic Law, with its considerations of largely the masalih. Other than the two pure forms mentioned in the opening paragraph of this paper, hybrids of tawarruq in sukuk and leasing instruments are becoming popular everyday. All efforts to block sale and purchase of debt (bay’al-Dayn) have come to naught, as effective ways have been found to circumvent the prohibition This is often through making debts a minority part of a large pack of assets.

The market has enthusiastically welcomed this development mainly because it takes us back to familiar grounds long trodden under conventional finance[vi]. As a result, several scholars who approved tawarruq in the first instance are raising their voices against its indiscriminate widespread use. But profit-maximizers have rarely been amenable to moral exhortations. The Islamic debt market in Malaysia is leading the way[vii], with the Gulf following. The shari`a scholars in Malaysia have allowed sale of debt[viii]. Those in the Gulf area who disallowed it, permitted inclusion of amounts receivable as a minority component in a larger package of securities. The end result is no different: all debt-obligations are now sellable. An effective check on the spreading virus needs treating tawarruq as a matter of public policy, focusing on the harms (mafasid ) associated with it and declaring it not suitable for a modern Islamic economy.

HARMFUL EFEECTS (MAFASID) OF TAWARRUQ

The calculus of masalih and mafasid has been an essential tool of Islamic jurisprudence since the earliest days [ix]. Behind that calculus stands the Islamic view on life, the purpose of honoring humankind by laying the resources of the universe at their disposal so that life is sustained for all, and the command from Allah that wealth be shared equitably. Measures that increase inequality in the distribution of wealth and lead to its concentration do not qualify in that framework. The same applies to the strategy of risk-shifting, i.e. debt finance, as compared to risk-sharing involved in other Islamic modes of finance.

It will be useful at this stage briefly to recount the harmful effects (mafasid) of tawarruq.

· It leads to creation of debt whose volume is likely to go on increasing.

· It results in exchange of money now with more money in future, which is unfair in view of the risk and uncertainty involved.

· It leads, through debt proliferation, to gambling like speculation.

· It leads, through debt finance, to greater instability in the economy. In a debt-based economy, the money supply is linked to debt with a tendency towards inflationary expansion.

· It results in inequity in the distribution of income and wealth. It results, through debt finance, in inefficient allocation of resources.

· It contributes, by consolidating debt financing, to raising anxiety levels and destruction of environment.

It is worth noting that giving priority to public interest over individual interests has been an accepted principle in Islamic jurisprudence. The benefits of tawarruq to individuals in certain circumstances must be over ruled in view of the huge public benefits of not allowing it. It will, however, be necessary to make some social arrangements for taking care of the individual problems sought to be solved through tawarruq.

The subject we are considering is not the permissibility of a certain activity. Rather it is a matter of public policy on which hinges the welfare of society as a whole. We are duty-bound to examine whether tawarruq leads to fasad or salah. In verse after verse the Quran tells us that Allah does not like fasad or those who perpetrate fasad [x]. The great jurists all emphasized examining maslaha and mafsadh as measures under consideration not specifically mandated by text[xi].

WHY THE FUQAHA DID NOT SAY NO TO TAWARRUQ?

The above raises a tricky question: How has a whole array of Islamic jurists in the past, starting as early as the second century hijri, have allowed tawarruq?

Two facts explain the apparently puzzling situation: The Fuqaha in the past were dealing with a different world, and the tools of macroeconomic analysis, required to find out the harmful effects of tawarruq, were not available to them. The harmful impact (mafasid) of tawarruq on the economy as a whole, to the extent present, were not visible at the time, whereas its benefits (masalih) in certain individual cases were easy to see.

Let me first elaborate, though briefly, the first point. Debt did not play as big a role in the economy during the times our fuqaha as it plays today. Money was not based on debt. Debt instruments hardly existed, much less traded. There was nothing even remotely resembling the debt markets of today. Traders’ speculation focused on prices of real goods and services rather than that of debt instruments. Economic fluctuations originated in droughts, famines and crop failures or in big changes in population rather than in the financial sector. Debt financing of business was secondary. Trade, industry and agriculture were largely financed by self-owned wealth, trade credit, partnership and sharing. Loans (based on interest) did exist but their role was not dominant.

Macroeconomic analysis that deals with rates, ratios and entities related to totals or large numbers was not feasible without empirical studies yielding data—numbers and statistics. The early social scientists, which our great jurists no doubt were, had to make do with direct observation and reports about the past. Projection of current tendencies into the future was a matter of conjecture at best. Juristic thinking was dominated by analogical reasoning. Empiricism played a little role, though through the familiar categories of istihsan, istislah, urf , sadd zara., These speak volumes about the pragmatic approach of the great jurists with whom these categories are associated. But for reasons that can hardly be elaborated in this paper, later day developments leaned heavily on systemized analogical methodology and avoided the nebulous methods based on intuition and empiricism.

CONCLUSION

Islamic economic movement was launched to usher in a financial system that would help remove the zulm and fasad, inequity and inefficiency, perpetrated by the currently dominant system based on debt. It is our duty not to endorse a process that could someday take us back to the same system. That this should happen at a time when globalization, financial innovation and the spread of information technology is generating a move towards greater reliance on equity participation and asset based financing at the world level, is ironic indeed. An innovative recourse to sharing based modes and asset based financing may get a boost from closing the door to tawarruq.

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[i] For detailed references and a summary of literature see, Siddiqi , Mohammad Nejatullah: Riba, Bank

Interest and the Rationale of its Prohibition (2004) Jeddah, Islamic Research and Training Institute, Islamic

Development Bank, chapter 4. Also, Khan, Mohsin S and Abbas Mirakhor (eds) [1987] Theoretical Studies

in Islamic Banking and Finance, Houston Texas, The Institute for Research and Islamic Economics; Mirakhor, Abbas (1995) ‘Theory of an Islamic Financial System”, in Encyclopedia of Islamic Banking and

Finance, London, pp. 31-49; Abbas Mirakhor: Globalaization and Islamic Finance, Paper presented at the

Sixth International Conference on Islamic Economics and Finance, Jakarta, November 21-24, 2005.

[ii] On speculative finance, see Minskey, Hyman P.: Stabilizing an Unstable Economy (1986) Yale

University Press, New Haven and London, pages 43,117 and 177.

[iii] Stiglitz, Joseph E. and Bruce Greenwald: Towards A New Paradigm in Monetary economics

(2003),Cambridge University Press, page 271.

[iv] Gambling inheres in creating a risk for the pleasure of betting on it. Normal business speculation inheres

in expectations of price changes. Gambling-like speculation maneuvers expectations in order to profit

thereby.

[v] The far-reaching consequences of this change are too many to be assessed in this paper. As an example,

consider this insightful remark: “The most important difference between investment model with debt and

equity financing is that in the latter the firm is not in a position to exercise discretion in the determination

of its level of investment. It can do nothing but passively adapt investment to what the market is willing to

supply.” Jan Mossin, Theory of Financial Markets (1973), Prentice Hall Inc. Englewood Cliff, N.J., page

160. The author further observes that, “the fact that the share prices and the allocation of investment

capital among firms are determined in the market rather than in the firms themselves represents a kind of

investor sovereignty which may have a certain appeal on ethical grounds (whatever it is).” Ibid, page 162.

See also, Mills, Paul S. and John R. Presley. Islamic Finance, Theory and Practice. Macmillan Press, UK,

St Martin Press, USA. 1999. pp.77-78.

[vi] The Islamic debt market is currently estimated to be $10 billion in size. Vide, Gulf Times, 8 March 2006.

[vii] According to the Star online, December 11, 2006:” In the debt market for instance, Islamic bonds account

for 66% of total new corporate bond issued to date. Islamic bonds are expected to trend higher to 88% of

total corporate bonds issued by end 2006.”

[viii] Securities and Exchange Commission (2002) Resolutions of the Securities Commission, Syariah

Advisory Council, Kuala Lumpur, March 2002

[ix] Some good readings on the subject are : Abdul Wahab Khallaf (1955) Masadir al-Tashri’ al-Islami fi ma

la Nassa fih, Egypt, Matabi’ Dar al-Kitab al-Arabi.; Husain Hamid Hassan, Fiqh al-Maslaha wa

Tatbiqatuha al-Muasirah (1993) Jeddah, Islamic Research and Training Institute, Islamic Development

Bank, especially pp.39-48.

[x] Al-Quran (2:204-05; 28:4; 30:41; 26:150-52; 7:74).

[xi] As Ibn al-Qayyim put it: “Everything that lapses out from justice into injustice, and from mercy into its

opposite, and from maslahah to mafsadah, and from wisdom into the frivolous, does not belong to shar?`a, even if it is inducted into it by interpretation (ta’wil ).” Ibn al-Qayyim (n.d) I’lam al- Muwaqqiin.., Egypt, Matbaah Muniriyah, vol.3,page 1,also see vol. 4,pp 309-11. Earlier, Izzuddin Ibn Abdussalam had noted that: shar?`a is focused on what is good for human beings. (Izzuddin Ibn Abdussalam (1955).Qawaid al-Ahkam,Cairo, Maktabah Husainiyah, pages 65-66.

(Written by Mohammad Nejatullah Siddiqi on February, 1, 2007)

Renting an Item to Who Sold It Is It Different from Bay' Al-Wafa' Contract?

Bay' al-wafa' is a contract whereby the owner of an estate (house or land) sells it, with a condition that he will have it back once he returns its price to the buyer (See Articles 118 and 396-403 of Majallat al-Ahkam al-Adliyah). In other words, he who needs cash sells is estate in cash, with the condition that whenever he returns the cash to the buyer, the latter returns to him his estate. Thus, it is a sale contract with an attached condition of abrogation, the seller returns the cash and the buyer returns the estate.

This sale contract has various other names with the Fuqaha' who dealt with it, such as bay' al-'uhdah (custody sale) because both parties pledge to return the substitute or the alternative after a specific period or because the buyer guarantees the item; bay' al-idah or bay' al-wa'd (promise sale) because the sale happens as a result of a binding promise instead of a condition; bay' al-amanah (trust sale) because the item sold is entrusted with the buyer; bay' al-nass (people's sale) because people used it frequently and became used to it; al-bay' al-jaa'iz (allowed sale) because some fuqaha' have legitimized it to the point that there is no other contract being legitimized as such and al-bay' al-mu'ad (the retuned sale) because there is a sale and a repurchase. It seems that this kind of sale is as old as the Fifth Century after Hijra.

The people of hiyal (stratagems) have artificially made it a controversial contract: Is it allowed or is it forbidden? Is it a sale or a rahn (mortgage, collateral) for those who allowed it? The reality is that it does not bear any controversy; it is simply a usurious stratagem, i.e. a usurious loan in a form of a sale. There is an amount that is advanced and then returned and the financier benefits from the estate during the period of the loan, either by usage or exploitation. This means that the benefits derived from it are either living in a house, or planting a land. The estate may even be rented out to a third party or to the seller, and the financier benefits from the rent in return for his finance.

If the estate was rented out to the seller, this means renting the estate (or selling it on installments) to who sold it in cash. Such renting could be ijarah muntahiya bi al-tamleek (a renting contract that ends with ownership) or a sale with installments in a form of a sale contract, in other words a sale under the guise of renting. Renting is used here nstead of sale with installments so that the seller keeps the ownership of the item, based on guarantee or mortgage/collateral. In fact, this is better for him than the mortgage or the collateral, because in this case the item remains his ownership while in case of mortgage or collateral, the item belongs to the buyer.

This transaction of sale and leaseback is similar to Bay' al-wafa' contract or bay' al-istighlal which can be considered as a form of Bay' al-wafa' contract, allowed by some fuqaha', as mentioned earlier, but not by Majma' al-Fiqh al-Islami in Jeddah in 1412AH (1992). Without doubt, the people of stratagems were hoping that it would be allowed. Now, they are trying to allow it under another name. One form of stratagems is to call things with other names that are not relevant, in order to make them acceptable to the public.

Bay' al-Istighlal (the exploitation sale) is to sell an estate with a promise condition, whereby the seller leases out his estate and whenever he pays back the price, he gets back his estate (See article 119 of Majallat al-Ahkam al-Adliyah). It is called Bay' al-Istighlal (exploitation sale) because the buyer exploits the estate sold. In other words, he benefits from its rent by way of renting it to the seller. Thus, Bay' al-Istighlal is a form of bay' al-wafa', whereby the estate is leased to the seller. Bay' al-wafa' is itself a form of bay' al-eenah, which is not allowed by the hadith (Musnad Ahmad 2:42, Sunan Abi Dawud 3:274, Nayl al-Awtar 5:233) because the main feature of bay' al-eenah is that the merchandise returns back to the seller. In al-eenah contract, there are two sales in one: one with a spot specific price and the other with a deferred higher price. For example, someone sells an item for SR1000 and buy it back cash for SR900, which means he borrowed SR900 to be repaid SR1000. Thus, the riba in bay' al-eenah is the difference between the two prices. As for bay' al-wafa', riba will arise in the use of the estate involved or its exploitation, as explained above. Riba can arise in a sale or a loan by raising the price for the borrower or by reducing it for the lender, just as riba can arise from a loan for a loan. Imam Ibn Batta reported on the authority of Al-Awza'i that the prophet (pbuh) said: "There will come a time on people where they allow riba contract under sale contract" (Ibn Taymiyyah, 3:130 and Ibn al-Qayyim, 3:178).

The reader might wonder why the contemporary concern in bay' al-wafa', when it is an old sale. The reality is that although it is old, there are many attempts to revive such old contracts, which are no more than stratagems for riba. On 23^rd and 24^th Shawwal 1424AH (17^th and 18^th December 2003) a fiqhi seminar was organized in Riyadh where a paper by Nazih Hammad was presented under the title: "Renting the estate to who sold it" as well as four comments. The first was of Siddiq al-Dharir, the second was that of Mughammad Taqi Othmani, the third was by Hussein Hamid Hassan and the fourth by Abdus-Sattar Abu Ghuddah.

Nazih Hammad mentioned in his paper that the earlier scholars disagreed on the legitimacy of renting an estate to who sold it. The majority of scholars do not allow it, in opposition to Malikis and Ibn Taimiyyah from Al-Hanabilah. This is not right Renting an Item to Who Sold It, Is It Different from Bay' Al-Wafa' Contract? because what the Malikis and Ibn Taymiyah allowed is: "I sell you my house for such an amount provided that you sell me your animal for such an amount". Two different items are involved here but in our case, we are talking about one item that returns back to the seller. It goes on cash sale and come back on installment or on Ijarah muntahiya bittamlik. This is similar to the prohibited bay' al-eenah. So, it is not true as Nazih Hammad claims that the allowance of this contract applies to the case under discussion. Siddiq al-Dharir agreed with him but based his argument on the principle of natural permissibility of things, even concerning compound contracts which are made up of more than one contract, each of which may be permitted on its own but not allowed when put together in one contract, such as sale and loan in one contract.

With this, Dharir contradicted his saying, in his book Al-Gharar (1967, p.98): "I believe that the approach of the Islamic jurisprudence realizes the stability of transactions, by emphasizing the principle of not allowing the multiplicity of contracts in one and making it a basic rule". The basic rule for him, then, was the prohibition of multiple contracts in one transaction.

Both Osmani and Abu Ghuddah confirmed in their comments on Hammad that many Shari'ah councils believe that al-eenah disappears with time: a year, in which market changes occur (price changes). This is hard to digest! Where does this year come from? Besides, market changes can happen anytime.

Hammad discussed the renting ending with ownership of the estate to who sold it and allowed it on the basis of the restrictions of Majma' al-fiqh al-Islami 2000. But by booking at these restrictions, especially number one and two, I believe that they are theoretical restrictions that cannot be realized in practice. The actual realization of these restrictions means it would no longer be an ijarah muntahiyah bi-al-tamleek (renting leading to ownership). This is what can also be taken against the comment of Hussein Hamed Hassan. It seems to me that this kind of approach in issuing fatwa is like holding the stick in the middle. If it passes, the mufti would say: did I not tell you? But if it does not, he would claim that the conditions were not met.

What is important is that renting the estate to who sold it is a stratagem in order to get around the prohibition of bay' al-wafa' (promise sale) by Majma' al-fiqh al-Islami, giving it a different new name among the many new names given to this contract, which can also be considered as a form of bay' al-eenah. Branches of Islamic banks and windows of conventional banks should avoid and refrain from the use of such compound contracts which lead to sale and loan or mutual loans or eenah or tawarruq (especially if it is in a form of eenah but under the name of tawarruq) or similar contracts such as bay' al-wafa' (promise sale) or bay' al-istighlal (exploitation sale) or any of the old and well-known riba based stratagems.

I had made it clear earlier and warned against such practices in a verbal intervention in the first seminar of Dallah Al-Barakah held in Madinah in 1403AH. Al-eenah and tawarruq are compound contracts. If the rule concerning the 'simple single contract' is the permissibility, the rule concerning the compound contracts (multiple contract in one) is the prohibition. This is based on the hadith of the Prophet (pbuh) which prohibits two sale contracts in one and two transactions in one. The promise, if not binding and was jointed to a contract, this does not make the contract a compound one. However, if it is binding, then it becomes a condition that leads to the compounding of the contract. It is well known that a condition changes the ruling. For instance, a non-conditional riba is allowed but a conditional riba is not, and if someone lends someone an amount without
condition and later borrowed from him, this is allowed but if he lends him on the condition that the latter lends back, this is not permissible.

It is important to note that the secular laws which allowed "the promise sale" cancelled it later when they allowed lending at interest because there was no longer any need for it. This is another proof that the promise sale and similar contracts are but means and excuses to justify riba loan, hidden under the guise of sale. The way out of this "promise sale" is that the seller sells definitely his estate in cash without any condition attached to it and when he has the means to buy it back at the market price he can do so.

I wonder about the fiqhi mentality that propagates the prohibition of riba and yet goes on allowing it at higher rates, under various pretexts and stratagems. This is like closing the "white" door and opening tens of "black" windows, to the point where the ijtihad of contemporary fuqaha', if we can call it ijtihad, focuses on no other than the inherited old stratagems. It seems that the whole of fiqh has been reduced to mere stratagems. Without doubts such stratagems make the banking operations more costly, complex and ambiguous. Ayub al-Sukhtiani commented by saying: "had they faced it, i.e. came to it through its door, it would have been much more easier" (Bayan al-daleel fi Butlan al-tahleel, p.374). Ibn Taimiyah says: "The clear cut riba is more beneficial to them than these stratagems. The legislator is wise and merciful, He does not prohibit what is beneficial and allows what is less beneficial, He does not prohibit what is harmful and allows what is even more harmful. If he has prohibited such transactions, then his prohibition of these transactions (stratagems) is even stricter". If it happened that he has allowed it, then the permission of clear riba would have been more acceptable" (ibid). Ibn al-Qayyim says: "Our Sheikh (Ibn Taimiyah) used to prohibit the issue of tawarruq. He was asked many times to review his decision, while I was in his presence, but he never did and he said: "the reason why riba was prohibited exists in it with the extra cost of buying a commodity and selling it at loss. Shari'ah does not prohibit a lower harm (riba) and allows what is more harmful (al-tawarruq)" (I'lam al-Muwaqqi'een, 3:182).

RAFIC YUNUS AL-MASRI
Islamic Economics Research Centre
King Abdulaziz University
Jeddah, Saudi Arabia

References

Abu Dawud (n.d.) Sunan, Dar Ihya' Al-Sunnah Al-Nabawiyah, Cairo.
Ahmad, Al-Imam (1398) Musnad, Al-Maktab Al-Islami, Beirut.
Al-Dharir, Siddiq (1386) Al-Gharar Wa Atharuhu fi'l Uqud, n.p., Cairo.
Hammad, Nazih (1424) Ijarat Al-Ain Liman Ba'aha, paper presented to the Al-Rajhi Fiqh Seminar, 23^rd and 24^th Shawwal 1424AH, Riyadh,
Ibn Al-Qayyim (1374) I'lam al-Muwaqqi'een, Al-Maktabah Al-Tijariyah Al-Kubra, Cairo.
Ibn Taimiyah (1416) Bayan al-Tadleel fi Butlan al-Tahleel, Maktabat Leena, amanhoor, Egypt.
Ibn Taimiyah (n.d.) Al-Fatawa, Dar Al-Ma'rifa, Beirut.
Majallat al-Ahkam al-Adliyah (1349), Sharh Al-Atasi, n.p. Hims (Syria).
Majma' Al-Fiqh Al-Islami, Al-Majallah, Issue 7, vol. 3, Jeddah.
Al-Shawkani (n.d.) Nayl Al-Awtar, Maktabat Al-Babi Al-Halabi, Cairo.

ECONOMICS OF TAWARRUQ : How its Mafasid overwhelm the Masalih* (1)

This paper examines the impact of tawarruq on the economy. It demonstrates through macroeconomic analysis that the harmful consequences of tawarruq are much greater than the benefits generally cited by its advocates. It concludes that a financial instrument whose mafasid (harms) are much greater than masalih (benefits) cannot be characterized as shar`a - compliant.

TAWARRUQ

Tawarruq is the mode through which some Islamic Financial Institutions (IFI) are facilitating the supply of cash to their clients. The client-- the mutawarriq--buys X on deferred payment from the IFI and sells X for a cash amount less than the deferred price to a third party. Also tawarruq enables IFI to guarantee a predetermined percentage rate of return to its term-depositor, buying XX from him/her on deferred payment then selling XX for cash, the deferred payment being larger than the cash price.

Every tawarruq transaction creates a debt. Furthermore, the debt a tawarruq transaction creates is invariably larger than the cash it transfers to the client---the mutawarriq, in the first case, and to the IFI in the second case (mediated in both cases by another transaction). In what follows, we trace the macroeconomic consequences of both: creation of new debts and the fact that the debt is larger than the cash received. But before doing so, let us examine the potentials of the new creation: the paper resulting from tawarruq. As it currently stands, both in the conventional and in the Islamic financial markets, debt documents, like those resulting from tawarruq, are subject to repeat financial and speculative transactions. At their limit, these transactions sever all links with the real assets with which they could have been associated with at the start (assuming the cash so acquired result in the production of wealth). This process leads to an inverted pyramid of financial instruments with a small asset base. The process also moves the transaction of tawarruq from that of the asset market to the money (debt) market, where the underlying signaling and equilibrating mechanisms no longer are linked to the real market.


ROLE OF DEBT IN THE ECONOMY

Mere debt creation does not increase the net wealth of society as every addition to social wealth through it is cancelled by deduction of a similar amount of wealth owed. Meanwhile the cash acquired through a debt can be put to uses that may or may not result in actual wealth creation. If wealth is in fact created, it may be equal to, larger than or less than the cash input. The economic consequences will be different in each case. If the additional wealth so created is larger than the cash invested, then society stands to gain in view of the net increase in social wealth after the debt is repaid. If the additional wealth is equal to the cash invested and, therefore, to the resources used, there is no net gain, as the social wealth remains what it was,
after the debt is repaid. In case the cash invested results in wealth creation but by an amount less than the cash invested and the resources used, society is poorer to the extent of the loss, as the borrower must repay the debt by compensating for the loss out of existing wealth owned or acquired by him/her. The same applies to cases in which invested cash is totally lost, no wealth creation having taken place. In both cases a redistribution of wealth in favor of the creditors is involved.

I am grateful for the insightful inputs from Professor Mohammad Anas Zarqa and Dr. Abbas Mirakhor. 1 As a method of creating additional or new wealth, debt creation (or debt finance) is inefficient as well as inequitable. It is inefficient as the finance so provided goes not for the most promising projects for wealth production but to the most credit-worthy borrower. It is inequitable as it redistributes wealth in favor of suppliers of finance, irrespective of actual productivity of the finance supplied. Since both these points are well argued in Islamic economic literature, I will not repeat them in this paper.1 One important point to note, to exchange money now for more money later is fundamentally unfair due to the uncertainty that accompanies the passage of time. Money needs to be converted into goods and services before it can enter into the process of production, the source of possible additional value creation. The results of such process of production have to be reconverted into money before money can be paid back to the one who gave it in the first instance.


THE MARKET FOR DEBTS

Debt instruments can easily change hands. The economic consequences of this fact are independent of the terms on which debts change hands. These terms have their own consequences. The key aspect of this equation is what happens to a debt instrument between the time it is created and the time it is extinguished on repayment. Owners of debt instruments can benefit from these instruments in a number of ways. Financial innovations are providing them with newer and novel ways all the time. Debt instruments are substitutes for other forms of wealth, e.g. as securities can bring in some payment over and above their repayment. Insofar as they are substitutes for cash (generally but not necessarily at a discount) they can be
characterized as near money. These uses of debt instruments create a demand for them that increases as the economy grows and the market expands. With ever-increasing supply and demand, we have a market for debt instruments. Like in every market, speculation plays a role in debt markets too.2

But the special nature of debt instruments enhances the role of speculation in this market to a degree unmatched by any other market. Debt instruments are very heterogeneous. 3 The probability of a debt being repaid as promised varies from debt to debt, depending on the debtor, the guarantor if any, and the country of origin. There are no standard, uniform methods of evaluating the quality of debts with respect to their recoverability. Debt prices are also vulnerable to wide fluctuations in response to news, even rumors. Instances abound of manipulating debt prices by planting false news or manufacturing rumors. All these factors account for the observed reality of the market for debt instruments being much more vulnerable to gambling-like speculation than the markets for goods and services 4. In short, it is better not to have a debt market. However, by allowing tawarruq, this leads to a debt market... (to be continued)

* A position paper to be presented at the Workshop on Tawarruq: A Methodological issue in Shar`a-Compliant Finance February 1, 2007 by Mohammad Nejatullah Siddiqi

RIBA IN FIQH

1. The Four Schools

'Abd al-Rahman al-Jaziri's al-Fiqh 'ala al-Madhahib al-Arba'ah, is a compendium on the juristic opinions of the four predominant schools of Muslim jurisprudence. It is held in high esteem and considered to be an authority on the subject. Given below are some relevant excerpts from this book on the subject of riba.

Definition and Classification

Riba is one of those unsound (fasid) transactions which have been severely prohibited (nahyan mughallazan). It literally means increase...

However, in fiqh terminology, riba means an increase in one of two homogeneous equivalents being exchanged without this increase being accompanied by a return. It is classified into two categories. First, riba al-nasi'ah where the specified increase is in return for postponement of, or waiting for, the payment; for example, buying an irdab (a specific measure) of wheat in winter against an irdab and a half of wheat to be paid in summer. As the half irdab which has been added to the price was not accompanied by an equivalent value in the commodity soled and was merely in return for the waiting, it is called riba al-nasi'ah. The second category is riba al-fadl, which means that the increase mentioned is irrespective of the postponement and is not offset by something in return. This happens when an irdab of wheat is exchanged hand to hand for an irdab and a kilah (another measure) of its own counterpart, the buyer and the seller both taking reciprocal possession; or when ten carats of gold produce are exchanged for twelve carats of similar gold produce.

D. Riba al-Nasi'ah

There is no difference among Muslim jurists about the prohibition of riba al-nasi'ah. It is indisputably one of the major sins. This is established by the Book of God, the Sunnah of His Prophet, and the consensus of the ummah. The Qur'an says:... (Verses 2: 275-9).

This is the Book of God which has prohibited riba vehemently and has reprimanded the taker so severely that it makes those who believe in their Lord and dread His punishment tremble with fear. Can any reprimand be harsher than God equating the takers of riba with those who have risen in revolt against Him and are at war with Him and His Prophet? What will be the state of that feeble human being who fights with the Almighty and Overpowering God, Whom nothing on earth or in the Heaven can frustrate. There is no doubt that by resorting to riba such a person has adopted the course of self-destruction and deprivation.

The obvious meaning of riba to be understood from this noble verse of the Qur'an is the riba known by the Arabs in the Jahiliyyah period as explained by the commentators of the Qur'an. More than one of them has mentioned that when a loan extended by an Arab matured, he would ask the borrower for the return of the principal or for an 'increase' in return for the postponement. This is also the 'increase' that is known to us. This increase was either in quantity, like postponing the return of a camel now for two in the future, or in age, like postponing the return of a camel aged one year against a camel aged two or three years in the future. Similarly, the Arabs were familiar with situations where a lender would advance money for a period and take a specified amount of riba every month. If the borrower was unable to repay the principal when the loan matured, he would be allowed an extension in the time of repayment [rescheduling with the continuation of the riba he has been receiving from the borrower. This is the riba which is prevalent now and charged by banks and other institutions in our countries. God has prohibited it for Muslims...

The noble verses have decisively prohibited riba al-nasi'ah which involves, what is generally understood in our times as the giving of a principal amount on loan for a given period against the payment of riba in percentage terms on a monthly or annual basis. Some people try to justify this kind of riba in spite of its conflict with Islam. It is far removed from Islam and is in discord with its basic philosophy in form as well as meaning. Some of them claim that what is prohibited is the charging of riba many times the principal amount as stated by the Qur'an: "O believers! charge not doubled and redoubled riba, and fear God so that you may prosper" (3: 130). This claim is however absolutely wrong because the objective of the verse is to express a repulsion against riba...

Riba al-Fadl: Its Legal Position

Riba al-Fadl...is prohibited according to the four schools of jurisprudence. But some of the Prophet's companions, among them Sayyid 'Abdallah ibn 'Abbas (may God be pleased with him), allowed it. Nevertheless, it is reported that he recanted his opinion afterwards and talked abouts its prohibition. Riba al-Fadl does not have substantial effect on transactions because of the rarity of its occurrence; it is not the objective of people to buy or sell one thing in exchange for the same thing unless there is something extra from which each of the parties may benefit. Notwithstanding this, it has been prohibited because it might lead to the defrauding or deception of less sophisticated persons. For example, a shrewd trader may claim that the irdab of a specific brand of wheat is equivalent to three irdabs of the other kind because of the excellence of its quality, or this unique piece of gold ornament is equivalent in value to twice its weight in gold; in such transactions there undoubtedly is defrauding of people and harm to them.

The authority for the prohibition of riba al-fadl lies in what the Prophet, peace be on him, said:

Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt - like for like, equal for equal, and hand-to hand; if the commodities differ, then you may sell as you wish, provided that the exchange is hand-to-hand.

This hadith indicates that it is neither proper to sell these homogeneous commodities against themselves with addition nor is it proper to delay the reciprocal taking of possession. Hence it is not proper to sell a gold guinea against a gold guinea and ten qurush, neither on a hand-to-hand, nor on a deferred basis, just as it is not right to sell a gold bar weighing ten carats against a gold bar weighing twelve carats. Similar is the case with wheat and barley and other items mentioned in the hadith.

And if such is the case, then does riba enter into every commodity or is it confined to just the commodities mentioned in the hadith, namely, gold silver, wheat, barley, dates and salt? There is no difference of opinion among the four schools of jurisprudence that analogically riba enters into other commodities not mentioned in the hadith. If there is any difference it is in the analogy ('illat) used to arrive at the conclusion that the 'addition" [riba al-fadl] is prohibited for all commodities wherever the analogy holds. Only the Zahiriyyah (a juristic school which was opposed to analogical reasoning) confined riba al-fadl to only the commodities specified in the hadith. ('Abd al-Rahman al-Jaziri, al-Fiqh "Ala al-Madhahib al-Arba'ah, Cairo: Al-Maktabah al-Tijariyyah al-Kubra, 5th ed., n.d., vol. 2, pp. 245-8).

Even though the above except is sufficient to convey the views of the four schools of jurisprudence, the reader may wish to go through the following sample of opinions from prominent Qur'an commentators and/or jurists of the various schools, particularly the Ja'fari school, which is not covered in the above-quoted book. It may be seen that there is hardly any difference of opinion on the subject except in presentation and in certain minor details.

2. Fakhr al-Din Al-Razi (Qur'an commentator and philosopher)

Riba is of two kinds: Riba al-nasi'ah and riba al-fadl.

Riba al-nasi'ah is what was well known and conventional among the Arabs in Jahiliyyah. They used to give loans on the condition that every month they will receive a stipulated amount with the whole principal remaining outstanding. Then, when the loan matured and the borrower was unable to clear his obligation, the amount was raised and the period was extended. This is the riba that was practised in the Jahiliyyah.

Riba al-naqd [al-fadl] is, however, the selling of one maund [a unit of weight] of wheat, or anything similar to it, against two maunds. (Al-Tafsir al-Kabir, Tehran: Dar al-Kutub al-'illmiyyah, 2nd ed., n.d., wol. 7, p. 85).

3. Abu Bakr al-Jassas (Qur'an commentator and Hanafi jurist).

The literal meaning of riba is increase...but in the Shari'ah it has acquired a connotation that its literal meaning does not convey. The Prophet, peace be on him, termed the increase, [which is a condition] for waiting, as riba as is evident from the hadith narrated by Usamah ibn Zayd in which the Prophet said: "Riba is in waiting..." Hence God abolished the riba which was being practised at that time. He also invalidated some other trade transactions and called them riba. Accordingly, the Qur'anic verse "God has prohibited riba" covers all transactions to which the connotation applies in the Shari'ah even though the indulgence of the Arabs in riba, as mentioned above, related to loans in dirhams and dinars for a specified period with the increase as a condition. The term riba hence signifies different meanings. One is the riba prevalent in Jahiliyyah; the second is the disparity or differential (tafadul) in the volume or weight of a commodity [in spot transactions]...; and the third is postponing (al-nasa); this implies that it is not permitted to sell a commodity against future delivery of the same volume, weight or other measure of the given commodity. (Ahkam al-Qur'an, Cairo: Al-Matba'ah al-Bahiyyah al-Misriyyah, 1347 AH, vol. 1, pp. 551-2).

4. Muhammad ibn 'Abdallah ibn al-Arabi (Qur'an commentator and Maliki jurist).

Riba literally means increase, and in the Qur'anic verse (2:275) it stands for every increase not justified by the return... (Ahkam al-Qur'an, Cairo: 'Isa al-Babi al-Halabi, 1957, p. 242).

It may be clarified here that the 'waiting' involved in a loan is not considered by the jurists to be a return justifying the increase (riba) on the principal amount.

5. Ibn Qayyim al-Jawziyyah

Riba is of two kinds: Jali and Khafi. The Jali has been prohibited because of the great harm it carries and the Khafi has been prohibited because it is an instrument for the Jali. Hence prohibition of the former is deliberate while that of the latter is precautionary.

The Jali is riba al-nasi'ah and this is what was engaged in during the Jahiliyyah, like allowing the postponement of repayment of principal against an increase, and every time there was a postponement, there was an increase...

However, riba al-fadl has been prohibited to close the access to riba al-nasi'ah. (A'lam al-Muwaqqi'in, Cairo: Maktabah al-Kulliyyat al-Azhariyyah, 1968, vol. 2, pp. 154-5).

6. Shah Wali-Allah Dihlawi

Remember that riba is of two kinds: One is primary (haqiqi), the other is subject to it. Primary riba is only on loans. The other riba is called riba al-fadl...and is akin to primary riba. (Hujjat Allah al-Balighah, Lahore: Qawmi Kutub Khana, 1953, tr. Mawlana Abdul Rahim, vol. 2, pp. 474-5).

7. 'Abdallah ibn Ahmad ibn Qudamah al-Miqdasi (a Hanbali jurist)

Riba is of two kinds: riba al-fadl and riba al-nasi'ah. The prohibition of riba al-fadl involves the exchange of one commodity against itself and covers all commodities which are exchanged by volume or by weight regardless of whether the quantity exchanged is small, like one date for two dates or one grain for two grains...(p. 64).

Riba al-nasi'ah is involved in the exchange of two commodities one of which is not the price. (p. 73) (Al-Muqni', Qatar: Matabi' Qatar al-Wataniyyah, 1973, vol. 2, pp. 64-77).

8. Hasan ibn al-Mutahhar (Ja'fari jurist)

Riba literally means increase and, technically, it refers to the increase in the exchange of two commodities, one against its own kind...Riba is of two kinds: Riba al-fadl and Riba al-nasi'ah and the jurists are agreed on their prohibition. (Tadhkirah al-Fuqaha', Najaf: Matba'ah al-Najaf, 1955, vol. 7, p. 84).