Understanding Islamic Finance - Doha Academy of Tertiary Studies

48 Understanding Islamic FinanceHow to DistinguishThe question arises, how does one distinguish between various types of transactions to judgetheir permissibility or prohibition? The answer lies in differentiating the contracts on thebasis of their nature; all real sector business transactions involve:1. Sale/purchase that may be either cash or credit.2. Loaning.3. Leasing.When executed, these transactions have different implications in respect of transfer ofownership, risk and liability.In Bai‘, or sale, ownership of the commodity being sold is transferred to the buyer justat the time the sale is executed and this transfer is definite and permanent. It makes nodifference whether the payment of the price is on the spot or deferred. This ownershiptransfer is against on-the-spot or credit payment that may also involve a profit margin forthe seller. In the case of Salam, a special kind of forward sale, although goods have to bedelivered at a future stipulated time, both parties are obliged to give/take ownership at aspecified time on agreed terms, irrespective of whether the price rises or falls at the time ofdelivery. If the transaction is that of a gift (Hibah), ownership of assets will transfer thereand then on a permanent basis free of any payment.A loan, which is always free of any charge in Islamic finance, leads to the temporarytransfer of ownership of goods/assets free of any payment, meaning that the debtor is liableto return or pay back the same asset to the creditor. Riba (in loans or debts) also meansthe temporary transfer of ownership of goods/assets, but that transfer involves payment ofinterest, which is prohibited.Ijarah is a totally different transaction in that ownership of the leased asset does not transferand only the usufruct of the asset is made available to the lessee against the payment of rent.As ownership remains with the lessor, he is entitled to rental and is also liable for expensesrelating to ownership and loss of the asset, if any. It is important to observe, however, thatanything which cannot be used without consuming its corpus, or which changes its shapealtogether in the process of its use, cannot be leased out, this includes yarn, money, edibles,fuel, etc. Yarn, when used, takes the form of cloth; it can be bought and sold but not leased.That is why, in Islamic finance, taking rent on leasing of assets like houses, vehicles, etc. ispermissible while charging rent on money is prohibited.Hence, we have to determine whether a transaction is that of a sale or a loan; and if it isa credit sale, at what time the sale transaction is executed and generates a debt, after whichthe seller will not be in a position to charge any addition over the price. Verse 2: 275 ofthe Holy Qur’ān has very important implications in respect of payment of debts/liabilitiesarising from credit transactions. It reports the usurers saying: “The sale is very similar toRiba.” Their objection was that one can increase the price of a commodity in the originaltransaction of sale because of its being based on a deferred payment, which is treated asa valid sale. But if they add to the due amount after the maturity date and the debtor isnot able to pay, it is termed Riba, while the increase in both cases is similar. 11 The Holy11 This is specifically mentioned by famous exegetist Ibn-abi-Hātim in his Tafsir, 1997, p. 545. Sayyuti and Ibne Jarir Tabari havealso reported a similar situation of Riba involvement in which a person sold any commodity on credit; when the payment was dueand the purchaser could not repay that, the price was enhanced and the time for payment extended (Sayyuti, 2003 and Tabari, n.d.,p. 8).