Understanding Islamic Finance - Doha Academy of Tertiary Studies

Trading in Islamic Commercial Law 147documents representing debt at a price other than their nominal value incompatible withthe tenets of the Sharī´ah. Even on face value, the sale of debt is allowed only when thepurchaser has recourse to the original debtor, as in the case of Hawalah.“Al Kāli bil Kāli”, a maxim in the Fiqh literature forbidding the sale of debt, meansthe exchange of two things both delayed or exchange of one delayed counter value foranother delayed counter value. The practice of Bai‘ al-Kāli bil Kāli was prevalent amongthe pre-Islamic Arabs and was also termed Bai‘ al-Dayn bid-Dayn. What is prohibited bythis contract is the purchase by a man of a commodity on credit for a fixed period, and,when the period of payment comes and he finds he is not able to pay the debt, he says: “Sellit to me on credit for a further period, for something additional”. The Prophet is reportedto have prohibited such a sale. This principle has near universal application and has earnedcanonical authority in Islamic law as Ijma‘a or consensus.The best example of this practice in the present age is “rollover” in Murabaha, where thebanks, in a case of default on the Murabaha receivable, enter into another Murabaha forgiving more time to the client and thus charge more on their receivables. All Sharī´ah boardsand Sharī´ah scholars prohibit this practice and any return on this account is not consideredlegitimate income for Islamic banks.In the early 1980s, banks in Pakistan were allowed to purchase trade bills, consideringthe same as a Murabaha contract. But the Council of Islamic Ideology and the Sharī´ahCourts in Pakistan disapproved of such transactions. Islamic banks should not trade in suchsecurities and debts for the basic reason that debts/debt instruments are not saleable at apremium or discount.However, a debt can be assigned or transferred on the basis of “Hawalah”, which impliesthe transfer of debt obligation from the originator to a third party. 76 The difference betweenthe “sale of debt”, which is prohibited, and the “assignment of debt”, which is permissible,is that in the latter, there is recourse to the assignor or the original debtor if the assigneedoes not pay the debt for any reason.The sale of certificates, or Sukuk, is an important area in this regard. As already indicated,an object of sale in the Islamic law of contracts must be a property of value. When ashare or certificate is supported by an asset, as evidenced via the securitization process, itis transformed into an object of value and therefore qualifies to become an object of trade,whereby it can be purchased and sold in both the primary and secondary markets subject tothe condition that a return on it is based on cash flow from the asset backing the instrument.Investors do have the right to sell such instruments.Semi-debt instruments like leasing contracts resemble debt in the sense that they obligatethe user to a certain specific commitment (rent). Such contracts can be traded under certainconditions since such trading represents the sale of leased assets, which can be conductedon negotiated prices.6.11 AL ‘INAH SALE AND THE USE OF RUSES (HIYAL)Fiqh literature contains mention of a number of legal ruses that people have used to circumventthe prohibition of Riba. Fatāwa Alamgiri, Mahmasāni’s Falsafa al Tashri, Shātbi’s al76 Tirmidhi, 1988, No. 1331, pp. 30, 31; Muslim, 1981, 10, pp. 227, 228.