Understanding Islamic Finance - Doha Academy of Tertiary Studies

Trading in Islamic Commercial Law 1391. The basic principle in the Qur’ān and the Sunnah of the Prophet (pbuh) is that a personshould be free to buy and sell and dispose of his possessions and money, within theframework of the Islamic Sharī´ah.2. There is no restriction on the percentage of profit a trader may make in his transactions.It is generally left to the merchants themselves, the business environment and the natureof the merchant and of the goods. Regard should be given, however, to the ethicsrecommended by the Sharī´ah, such as moderation, contention, leniency and indulgence.3. Sharī´ah texts have spelt out the necessity to keep transactions away from illicit acts likefraud, cheating, deceit, forgery, concealment of actual benefits and monopoly, which aredetrimental to society and individuals.4. Governments should not be involved in fixing prices except when obvious pitfalls arenoticed within the market and the price, due to artificial factors. In this case, governmentsshould intervene by applying adequate means to get rid of these factors, the causes ofdefects, excessive price increases and fraud.The Sharī´ah does not allow excessive profiteering (Ghaban-e-Fahish), which means thata person sells a commodity stating explicitly or giving the impression that he is chargingthe market price, when actually he is charging an exorbitant price, taking benefit from theignorance of the purchaser. 36 If the purchaser comes to know afterwards that he has beencharged excessively, he has the option to rescind the contract and take back his money.Although jurists in general do not recommend any specific profit rates in trading, we findinferences in books that the maximum profit rate to be charged in trade should be 5 % inrespect of wares, 10 % in case of animals and 20 % in real estate. 376.5.3 Cash and Credit PricesIn medieval Islamic trade, not only was buying and selling on credit accepted and apparentlywidespread, but also the credit performed many important functions in trade transitions. Wefind a lot of detail in Fiqh books on various aspects of trade transactions on credit.Most jurists believe that the seller can indicate two prices, i.e. one for cash and anotherfor a credit transaction, but one of the two prices must be settled in the same meeting. They,however, qualify this with the condition that the difference should be a normal practice ofthe market, the aim should be the business of trade and the seller should not resort to thepractice of Ghaban-e-Fahish. The following tradition is important in this regard: “The personwho makes two bargains in one sale, the lower of the two is lawful for him or he would becharging Riba”. 38 Jurists like Semāk, Aozāii and others have interpreted this as a situationwhere a person declares in the sale contract that in the case of credit, the sale price will beso much, and in the case of cash, so much. 39Besides the situation described above, another situation is where the seller declares onlyone price, the credit price, higher than the price prevalent in the market, and the buyer agreesto buy at that price. Jurists differ regarding the legality of charging this excess on account ofthe period allowed for the payment of the price. The jurists who disapprove argue that theseller himself may not differentiate between the cash and credit price, but if the purchaser36 For detail on Ghaban-e-Fahish, see Al Jaziri, 1973, 2, pp. 570–573.37 Al-Atasi, 1403 AH, Majallah, Article 165.38 Abu Daud, 1752, 3, p. 274.39 Thanwi, n.d., 14, p. 273.