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Fiqh of Financial Transactions Summer 2011

Fiqh of Financial Transactions III

Required Textbook: Understanding Islamic Finance by Muhammad Ayub
Grading: There will possibly be a take home final exam
When: Sundays 7:15 PDT - 8:30 PDT June 5, 2011 to July 30, 2011 (Please note that the last class is on a Saturday and not a Sunday)

Basic Outline of the Course:
Main topic of discussion will be Gharar and Ribaa

Topic 1: Avoiding Gharar (pp. 44-57; 75-76; 110-111; 143-144)
Topic 2: Avoiding Ribaa (pp. 43-44; 74-75; 111-112; 142-143)

2011-06-05 Class Notes

Welcome to the third session of fiqh of financial transactions.


Regarding the textbook, we have not been following the book closely in previous sessions.  Starting around chapter 9, we will start analyzing what is said in the book.  Other than that, there is a lot of important material that is not covered in the textbook.

The two topics covered in this session, gharar and ribaa, are not covered in any depth or in any one section in the textbook.  

The islamic finance industry is about $3 billion.  There is a book called, “Islamic Finance in the global economy,” that provides a nice coverage of industry’s history.  However, do not take this book as a fiqh book of any kind. (Sheikh Jamaal handed a copy of the book to the first person who registered for the course.)

Trade as a means to generate wealth
Much of Islamic economics and the theory of Islamic finance starts with the fundamental concept of trade (in arabic: ).  We know this as buying and selling goods and services.  This is the fundamental cornerstone of all economies.  This is the main form of wealth generation in a society.  It is considered a good thing as it is a win-win proposition; in general, when someone buys something, the value given to that thing is more than what you are paying for it; it is rare that a price comes down to what you think it’s worth.  The one who is selling is happy to get the money he is getting for selling the goods/services.  

Core constituents of trade
The concept of trade requires the contracting parties, the offer and acceptance (about the object of the transaction)

Shariah mandated constraints on trade
The shariah gives us some parameters; things that should be avoided, after which we are free to do what we want.  It does not give us exactly all of the rules; there is room provided for the innovation of ideas as long as certain things are prohibited.

We will study the following topics during the course of the sessions
Types of sales which are explicitly prohibited
Types of merchandise which are explicitly prohibited.
Aspects of the contract that are explicitly prohibited.

The above topics will be discussed while studying Gharar and Ribaa.

Dhulm and Jahaalah
Two very important Islamic concepts that permeate the essence of Islam, which are al dhulm (الظلم) and jahaalah (الجهالة). Dhulm means to know the right thing to do, but choose not to do it. And jahaalah is ignorance. These correspond very closely to gharar (jahaalah) and ribaa (dhulm). These are two aspects of reality that Allah swt emphasizes in different realms.

If you can remove these from the system, the doors will be opened for a prosperous economic system.

Traded item should have shariah economic value
For example, in order for a transaction to be sound, you must avoid selling what is prohibited to be sold.  That would include things that have no economic value according to the shariah (since the items have no shariah value, they cannot be sold).  Sometimes these need to be discussed as the conditions may change.

Examples of items that have no shariah value
- Selling idols
- Selling alcohol
- Selling pork
- Selling of carrion (meat of a dead animal, mayta)
- Selling gold and silver utensils
- Selling musical instruments
- Selling drugs and narcotics

Example of something that changed its state depending on changing circumstances and/or are controversial

Dung: It is used as a fertilizer now, but in the past it was considered not to have any economic value.
Just because something is beneficial, it doesn’t mean you can sell it.  However, the burden of proof is on the one who says it cannot be sold.

Trade related to controversial topics
Sheikh is putting forth the following topics for discussion, he is not stating what is the legal ruling for them, these are just questions put forth for us to ponder. (Controversial topics)
- What about selling medical marijuana, for example in California where it is legal to sell it for medical purposes?
- Human trafficking
- Selling human body parts
- Selling human blood
- Selling a mushaf
- Selling a mushaf to a disbeliever. (that’s questionable. How are you going to make dawah? You don’t need to sell mushaf to make dawah).

Footnote: These things are in general forbidden. There’s a sheikh in south of India (not originally from India). He has four wives, however one of his female student wanted to marry him, and she proposed to become his slave, in order to circumvent the restriction on four wives for a Muslim. So he said ok. In general, you cannot enslave a free person. Even if the person is willing to become a slave.

Some things are prohibited due to the circumstances of the sale
For example, buying and selling after the athan of jumuah.  The verse is clear on this issue.  This is something that people have become very lax about.  As people are coming to the prayer, sometimes they are coming late and they are buying and selling. This is haraam and sinful transaction. Difference of opinion if it’s just a sin, or whether the sale itself is void.

Question about many shifts of Friday prayers at one masjid. Here the hikmah is the adhan for the shift that you are planning to attend is applicable to you.

Any transaction that involves deception, cheating or taking advantage of others.
During the time of the Prophet saas, people used to go out to meet the caravans before they reached the city to get a lower price than what would be offered in the city.  They are essentially taking advantage of the fact that the caravan is not aware of the local price.  

Another thing that was done was that the udders of the goats/cows would be tied up and would cause swelling.  The swelling would give the appearance that the animal produces a lot of milk.

Just like the example in ads they used to starve dogs to make them rush to eat the food so that it shows the dog is crazy about the food. Similar to the example above.

Q: Is sale tied to its intended use, for example sale of idol but not used for the purpose of worship, or alcohol
A: If you are selling halaal and you know that the person is going to use it for haraam, then you are not allowed to sell, for example selling grapes to a party who is going to make wine is not permissible.
If you sell idol made out of gold, the person should destroy the idol and sell the gold, because you cannot control its usage after you sell it.
You should transform an object and sell it so that it is not used for haraam purposes.

Discussion about cellphones. they can cause cancer (depending on usage profile and situation). In Australia, they have been saying for a while that it can lead to cancer. (no verdict given by sheikh). Sheikh is not a big fan of cell phones anyway, but if there’s a benefit and if harm is confirmed, than harm will outweigh the benefit but if it’s not proven, then you cannot give a verdict on it.

Q: Why do pork and alcohol have no economic value?
A: Pork and alcohol have no economic value under the shariah. Shariah says these items have no value, period. (See notes from previous sessions.)

Q: In US, even though we are a capitalist country, we still have anti-trust law. We have laws, for example, att and t-mobile want to merge they need to go through all the laws to see if they’re not violating.
A: In Islamic state, it would depend on the time and place and how it’s being done.
If a muslim business man is trying to run others out others of business, his goal is sinful even though it’s through all halaal ways.

For example, salaah, you can be doing one of the best deeds but the worst of sins like what hypocrites did. Because of intention they are sinful. The munafeeqeen during the time of the prophet, they used to pray which is the best deeds that you can perform, however their intention was to deceive, they did not believe and were doing the deeds to just display their peity, hence they were in reality committing a sinful act.

Q: Question about gold and silver utensil, can it be bought and sold?
A: Gold and silver utensils, we don’t use them and we don’t sell them. Gold plated is different from pure gold and silver. We are not getting into that discussion but there’s a difference of opinion on gold plated and real gold.

Technology itself is neutral. You cannot say that going into media is not halaal but content of what you’re giving is not good then that’s something wrong.

In the US, if a person leaves an item as trash or puts it in dumpster, then they lose the rights of ownership. The owner gives up ownership upon discarding the item.

Al Gharar

If we can understand these two concepts, gharar and riba. We are in good shape in matters related to trade.

A good friend of a good friend of the sheikh has come up with a good explanation of gharar and what it really is about.  One of the claims that people make about gharar is that its meaning is unclear and uncertain.  One author, Zaki Badawi (UK), says that the precise meaning of gharar is not explicitly given and is extrapolated based on cases.  This is an unfair statement in general.  There are several good definitions out there.   

The text related to it: .... text of the hadith ....
Imam Muslim records from Abu Hurairah.  Abu Hurairah said that the Prophet saas forbade ???sales??? that have gharar to it.  This is a general statement, an ‘am statement and includes all sorts of transactions.  For the majority of scholars, any contracts that have gharar in it will be null and void.  

Lexical meaning of Gharar
Lexically, gharar (غرر) refers to hazard, chance, risk and is also the implication of delusion and deception.  It is a kind of risk where someone is deceived into thinking that they will profit from it.  One of the dangerous properties of gharar transactions is that they can be very alluring to human beings, it s’rt of entices them into it.  

Q: What is the difference between gambling and gharar?
A: We will discuss it later

Q: Debit card contract - overdraft protection, should you refuse it?
A: As a Muslim, shaikh said that you should refuse the overdraft protection.  (also as a Muslim, we should not spend what we don’t have :) ).

Footnote or joke about stolen credit card. A victim says I am not reporting the theft of the credit card because the person who stole it is using it for less expensive items than my wife.

Salient features of Gharar
In the traditional approaches to al gharar, they emphasized two aspects of gharar:

1.  A contract in which it is not known whether the consequence or result will occur.  

An example, if I sell you a baby camel (while it is still gestating in mother’s womb), then there is a chance that the baby camel will not be born. There is some chance that the event will not occur.

In the case of you buying this box, what you’re paying should be known and what you’re buying should be known. If you don’t know what’s inside the box, this is purely gharar transaction since there’s great risk, you don’t know what’s in the box. Either unknown quantity or end result is unknown.

Both of them together are what gharar is about.  Either the quantity is unknown or the end result is unknown.  

For example, insurance, why is there gharar involved in insurance.  If you buy a policy today and that policy costs you $100 a month.  Let’s say full coverage on your car.  Suppose, at the end of one month your car is totalled.  How much do you make off of this?  You make more money than the premium you paid for the month.

Case #1: Suppose you tell a diver that you will pay him $1000 for whatever he finds in the ocean? In this case, you’re not paying for effort but you’re paying for whatever he comes up with. This is gharar case.
Case #2: Suppose you tell a diver that you will pay him for one hour of his services and you will purchase the items that he will find in the dive?

Case #1 is gharar and case #2 is not gharar, because you are explicit in paying for his services and you will pay for items that he will find in the dive.

Types of acceptable risks (gharar) in a transaction
Risk is present in almost every transaction you take a part in.  There is risk that is acceptable and risk that is not acceptable.  This is where the scholars of the old, there may be a gray area or a fine dividing line. But the contemporary scholar we will be discussing really clarifies this transaction.

There are three conditions for gharar to be accepted in a transaction.
1.  The gharar must be negligible.  Risk is present in any transaction.
2.  The gharar must be inevitable.  There is no way of getting around it.  If you could get around it, you must avoid it.  What is meant here is that for this kind of contract, the risk cannot be avoided.
3.  The gharar must be unintentional.  When you take part in the transaction, you are not doing it for the risk.  Your goal is something else and there is some risk involved.


All you can eat kind of place. There’s obviously a kind of gharar there.
Suppose you go to a berkeley organic holistic all you can eat salad bar. Is it a gharar transaction. Risk is, they don’t know how much you’re going to eat and you might not know how much you’re going to eat.

Most people have the size of hands, you can kind of take an average price. Thing about these three things, is it negligible, inevitable and unintentional? It’s probably negligible, what about unintentional? it’s unintentional..because you’re not going there to see how much you can eat for $10. How about inevitable? what they say, for that kind of transaction you can’t get around. E.g: you buy 5 pieces of chicken, negligible gharar, you can’t avoid that kind of gharar, this is what they mean by inevitable. They’re doing their best to make all the chickens the same but it can’t always be done. One piece might be bigger than the other. So now, all you can eat place, gharar or not? Concept of gharar is, you don’t know how much you need to eat to get $10 worth. Even from your internal evaluation.


2011-06-12 Class Notes


One of the keys to understand the fiqh of finance is to understand what is prohibited, and everything else will be permissible in the Shariah once you understand what is prohibited.

The two main issues to understand in fiqh of finance in islam, they are what is permissible and what is prohibited and other issues are either lesser or are subsumed under the two above, and in what is permitted or prohibited then it is to understand al gharar and al ribaa.

Islamic Economists view of Gharar
Shaikh had sent out an article on Gharar and he is discussing it now.

Towards an objective measure of Gharar in Exchange By Sami al Suwailem, published in Islamic Economic Studies Vol. 7, Nos. 1 & 2, Oct. ’99, Apr. 2000. The author is Director of the Research Center, Al-Rajhi Banking & Investment Corp., Riyadh, Saudi Arabia.

From the abstract of this paper:
This paper develops a framework for analyzing gharar based on economic aspects of game theory. The framework is consistent with Shari’ah maxims as well as individual gharar transactions widely studied in classical fiqh resources. In addition, the framework brings insights into explaining different fiqhi positions on
controversial gharar contracts. When extended to contemporary practices, the measure helps understanding the logic of instrument design, and where violation of Islamic rules exactly lies. The moral, ethical, and social aspects of this framework show the deep consistency between Islamic rules of exchange and general Islamic principles of human behavior

That article is an attempt to model, using economic theory, the issue of gharar.  In attempting to do so, the author has chosen a specific way of modeling it and the sheikh believes his approach is good but not perfect; it is a good approach to understand the issue as a whole.

This work has been critiqued, in particular by one person.  The sheikh has critiqued the critique.  

In Arabic, there are a couple of dissertations (each a few thousand pages long) each on gharar, looking at different applications and financial themes.

The class textbook does not discuss all of the details of gharar in a coherent fashion, so we will be covering topics chapter to chapter.

Linguistic definition of Gharar
Gharar comes from a root in the Arabic language that means to deceive or to make someone believe something that is false or vain.  We see different words coming from this root in the Qur’an.

A derivative of the word means to put someone in a dangerous position due to deception.

The word itself, gharar, means risk, danger, peril.  Many of the definitions outline the fact that outwardly it looks very attractive but in reality it is something much different.

It has basically three components: risk, peril and deception (someone thinking they will get something really good but in reality or most cases they don’t get that something).

Usage of word gharar in Quran
We see in the Qur’an that Allah swt says, What is this world but a deception.
Al Imran, verse 185.
An Nisa, verse 120.
Surah Fatir verse 5 (another verse you should look at)

Usage of word gharar in hadith
As a technical term, the Prophet saas prohibited any kind of buying or selling that contains gharar.  

We have this general statement of prohibition of a sale containing gharar.  We also have specific transactions prohibited that fall under this prohibition.

Transactions prohibited by the Prophet
Some transactions that the Prophet saas specifically prohibited:

1) Selling of produce many years in advance.  
For example, a farmer sells his crops to a customer for X number of years in advance.  
This is prohibited due to the uncertainty concerning the outcome; it is too risky.

2) Crops cannot be sold until they have started to ripen
What they used to do in Jahiliyya, buying crops for the current year from a farmer.
There were a lot of disputes between farmers and people buying under these conditions.  The Prophet saas stated that crops and produce cannot be sold until they have started to ripen (not exactly harvest time but close to harvest time).  After they have started to ripen (better translation of the word that the Prophet saas used), you have a good idea of whether the crop will be good or bad and a skilled farmer will be able to estimate the yield (as will the customer).

When the Prophet (saw) said started to ripen, you don’t have to wait till they are harvested or are completely ripe in order to sell them. THere is still risk involved in this but is less than before that. The same hadeeth is used to show that gharar is prohibited however a small amount of gharar maybe permissible.

If you sell something when it has ripened, is there still risk involved?  Yes.  However, the risk is much less than well in advance before the start of the ripening.  A small amount of gharar is permissible because the Prophet saas did not state that a sale must wait until the harvest but rather at the start of ripening.

3) Selling of a baby camel while still in the womb of the mother
In this case, the outcome is uncertain.  Will the calf survive, will it be deformed, something could happen to the mother, etc.

4) Selling milk that is still in the udder
In this case, the quantity (amount) is not certain. Someone is going to lose in this case, someone will overpay or underpay.

5) Selling a lost camel or a run-away slave
In this case, the item of sale is not in the possession of the seller (we are confident that it exists... somewhere).

Eventually, what will happen is the camel is found or is not found.  What will happen is that one of the party will eventually lose; there is no chance of cooperation here, it is pure competition.  There is no question that someone will lose.

You don’t have enough information to make a proper educated price setting, it is like or similar to gambling, somebody has to lose in order for somebody to win.

6) Throwing a pebble or touching an item (garment) to indicate that you have purchased it.
Mulaamasah - touching a garment to indicate that you want to purchase the item.  

In this case, the garment exists but which one you will end up with is unknown. The fuqahah have understood that all of the transactions mentioned above are prohibited.

[A lot of classroom discussion about the above transactions prohibited by the prophet.
The following is in response to buying crop that is about to ripen. You are not buying all of the crop, you are specifying that you are going to buy 10 tomatoes, 5 kumquats, etc. ]

7) Doling out parcels of the farm between parties in advance
Prophet also prohibited, two parties agreeing on splitting a farm and specifying that you get whatever is grown on specific part of the farm and the other party on another part of the farm. Here the parties are rationing out parts of the farm before the outcome of the yield of the crop is known to them.

What are the key components of gharar as understood by the above prohibited transactions?
Excessive risk - kind of a vague term; excessive risk due to what?
Underlying conditions are:
#1 Uncertain outcome
#2 Uncertain quality
#3 Uncertain quantity
#4 Not in possession of the item for sale/purchase
#5 Zero-sum game (non-cooperative): if one person wins, another has to lose (not necessarily the same amount)

Some questions to consider:
How do you define excessive?
What about dealing with something that does not exist at time of purchase?

Gharar has some flexibility to it (and there is some reason for that).  Ribaa is much more strictly defined than gharar and the respective laws are stricted respectfully so.  There are no laws permitting a negligible amount of ribaa but there are statements from the prophet saas allowing a negligible amount of gharar.

[Note: For a definition to really be useful, it has to be all-inclusive (include everything that falls into that category) and all-restrictive (everything that falls outside of it should be excluded) and should avoid anything that is unnecessary or superfluous.]

Definitions of gharar from different madhabs
Some definitions given by different madahabs:

As-Sarakhsi (a famous Hanafi scholar, author of Al Mansoob) - he defined gharar as that whose consequences are hidden.

Shirazi (a famous shafi scholar) - gharar is something whose nature or consequences is hidden.

Al Isnawi - Gharar is that which emits two possibilities, the less desirable one being more likely.  

Ibn Taymiyyah said - gharar is that whose consequences are unknown (as opposed to hidden).

His student, Ibn Qayyim - gharar is that which is undeliverable whether it exists or not.

Ibn Hazm says - gharar is where the seller does not know what has been sold and the buyer does not known what was bought (in terms of the value of what was sold or bought).

Wahb az-Zuhaili (a contemporary scholar) - gharar sale is any contract which incorporates a risk which affects one or more of the parties and may result in loss of property.

Professor Mustafa Zurka - gharar is the sale of probable items whose existence or characteristics are not certain which makes the risk of sale similar to gambling.

Muhammad Ayub, the author of the textbook - gharar is the sale of thing whose presence is not on-hand (???you do not have possession of the item???), whose consequence is unknown, or a sale involving hazard where one does not know whether it will come to be or not.

Ad Dhureer -  He said you have to combine both aspects of not knowing the outcome and the unknown aspects of the transaction.

Sheikh Jamaal Zarabozo - defines gharar as the following, where the outcome is unexpectable and/or the contract contains unknown qualities or quantities thereby involving a great deal of risk.

Some scholars emphasize the doubtful nature of whether or not the item of sale will come to fruition while others emphasize the unknown aspect(s) in the transaction.  The best view, which Dhureer ended up with, is a composite of both where the consequence is unknown or unexpectable and/or there is some unknown quantities or qualities involved leading therefore to a great deal of risk.  

There is dispute regarding what constitutes a prohibition of a sale.

In order for one to sell something, does it need to exist, to be owned by you, to be available and to be under your possession?

The sheikh believes that Ibn Hazm’s definition does not quite cover the aspect of unknown outcome.  [he cites the lost-camel example - you don’t really know the final outcome of the transaction, who loses, etc]

Gambling is the ultimate zero sum game. Mayseer or Qimar are also prohibited. Gambling involves
no skill, basically luck (except for things that involve games e.g. poker).

If you are going to sell something, is it a requirement that the item you are selling exists at the time of the contract?  

Like the example of a house you’re going to build. It is not necessary that the selling item has to exist at the time of the completion of the contract.

Ibn al Qayyim’s statement on gharar
There is nothing in the book of Allah swt nor the sunnah of the Prophet saas nor the statements of his Companions that the sale of something non-existent is forbidden. Sunnah admittingly bans that do not exist as well as things that do exist, so the Illah for prohibition is not the existence it is the uncertainty (gharar) [long statement]  The essential element of the sale is the delivery of the sold item and if the seller cannot deliver then it is gambling and risk.  

Types of non-existent items of sale (can be divided into three cases)
Sales where the object of sale is nonexistent can be divided into three types:

1) The object exists now but will change in nature by the delivery date.
For example, unripened fruit, crop that has not yet matured, baby camel in the womb.
Is it possible to sell something now but deliver it after it changes?  Like the camel that is unborn and the crop that has not started to ripen.  Is this permissible?  No.  If we agree on the sale now but by the time of the delivery date it changes its nature, you cannot tell the nature of what you are essentially receiving.

2) Item of sale does not exist at the time of sale but will exist on delivery date.
This looks like it is permissible.

3) Uncertainty surrounds the existence of the object of sale on the delivery date.
Some scholars restrict gharar just to this case. And this opinion is wrong, because the Prophet specifically prohibited transactions that fall in category #1 too.

If there is a camel that is lost and you ask for payment now with the stipulation of delivering it in a month; the uncertainty here is whether the camel will exist on the delivery date (i.e. camel is found by the delivery date).

Minority opinion of Ibn Tayymiyyah and ibn Qayyim
Ibn Tayymiyyah and Ibn Qayyim generally don’t require any of these conditions for a sale to be made (existence, ownership, availability and possession).  This is a statement about them and is not a direct quote from them.  The principal legitimizing factor is the seller’s ability to deliver at the time of contract.

Riba is much easier to understand, as compared to gharar. Because there is always some risk or gharar associated in all economic transactions, some risk taking is good for the growth of economy, otherwise there will be stagnation. However the shariah limits some gharar and hence the difficulty of understanding it.

Next time we will discuss the paper by Suwailem.

2011-06-19 Class Notes

We will continue our discussion on gharar and will be spending more time than previously planned due to email questions.

We are still in the process of discussion what the essence of gharar is.

One of the sources of gharar and possible issues is the possibility of existence of the subject matter at the time of the contract.  We mentioned the fact last time that scholars like Ibn Taymiyyah and Ibn Qayyim in general don’t consider existence, ownership, availability and possession of a commodity to be essential prerequisites for a valid contract.  

[Note: We will treat gharar, risk or uncertainty as the same thing]

What if the thing in question does not exist at the time of the contract?  Could this be a problem?
If you sign a contract and the thing does not exist at the moment, would this be forbidden?

You may have reasonable expectations but there will still be risk and uncertainty.  However, there are some contracts with these characteristics that are allowed (in these cases, payment is typically due now at the time of the contract)

Bay’ us-Salam  بيع السلم (forward purchase - fungible and homogeneous items) and
Bay’ al-istina’  بيع الاستصناع (commissioned manufacturing)

In both of these cases, you do not buy something that exists at the time of the contract.  We have text showing as bay’ us-salam (bus) is acceptable.  Are these exceptions to the general rule or are these cases that prove that there is no general rule is that existence is required.  Ibn Taymiyyah and Ibn Qayyim are of the view that they are not exceptional.

But Sheikh is of the opinion is that this is not the strongest view, and that the strongest view is that the goods must exist at the time of contract.

“Futures” contracts are very big now and definitely the Islamic banks want to be involved.  

Ibn Taymiya and Ibn Al-Qayyim’s view all you have to believe is that item will exist on the delivery date, that is sufficient for them, and this is possible because of the fungible and homogeneity of the item being traded, for example a potato is a potato, you can exchange one potato for another potato.


Controversial points for gharar contracts or what lies at the root of gharar:
1) Uncertainty about the Existence at time of contract
2) Uncertainty about the Possession at the time of contract
3) Uncertainty about the Price at the time of contract

Points 1) and 2) share risk because they are not under your control (example: it might turn out to be too expensive).

For example, Junaid comes to shaikh and asks to buy a computer from him and Shaikh does not have it, can he go and purchase it from somebody else and then sell it to him. Is this permissible?

Are there are any text related to this issue?
Two hadith that discuss this issue:

Hadith #1: Hakim ibn Hazam asked the Prophet saas: Someone approaches him to buy goods for him but does not have it.  The Prophet saas told him, do not sell what you do not have.

Hadith #2: Hadith from Amr ibn Shoaib: and do not sell what you do not have.

Footnote material dealing with the topic of futures trading and this two hadith:
In the book Islamic Commercial law: an analysis of futures and options by Mohamed Hashim Kamali, the author discusses the two hadith.

Let’s examine what he says about these two hadith. Neither Bukhari or Muslim have recorded these two hadith but it does appear in other collections like At-Tirmidhi and Abu Dawud.  [Note that it was never the intent of Bukhari and Muslim to include all of the authentic hadith].  
He goes on to talk about the chain and says that the principle narrator, Hakim ibn Hazam, is not reliable, is not accepted by scholars except Ibn Hiban and is described as obscure by others .  The Sheikh thinks this is one of the most amazing, mind-blowing paragraph he has ever read, this is an exaggeration but it is okay to exaggerate on matters related to Shari’ah.   

How can somebody do something, meaning write those paragraphs about the hadith?

Asif was asking about who the author was (to set the scene up in a way). He is from Afghanistan, now living in Malaysia. He has written a book about usool ul fiqh and also usool ul hadith.

Kamali, the author of the book, has completely misidentified who he is speaking about.  He is confusing the son with the father.  He is confusing Hazam ibn Hakeem ibn Hazam and Hakim ibn Hazam.  Hakim is obviously a sahabi and asked the Prophet (SAWS) directly in the hadith.  Kamali is talking about the son.  The author should know that there is no way the father is not the person he is talking about.  The narrator of the hadeeth is found in At-Tirmidhi and Abu Dawud.  How could this be the same person? It is clear that he is a sahabi and it is also clear that this is the same person he is talking about.

This passage from Kamali was quoted by another scholar in another book and they copied it verbatim. Shaikh finds it astonishing that somebody would quote this author without verifying the sources.

Later on Kamali quotes al Qaradawi, discussing these two hadith, stating that these don't reach the status of sahih but rather reach the status of hasan and are valid and meritorious to act upon.  ie. these cannot establish halal or harram, at most it can establish mustahab and makrooh.

He then asks what can be understood from this hadith?  This is a kind of prohibition from the Prophet saas. Kamali argues that if a prohibition is not accompanied with a warning, then it is not tahreem. Instead, the author says the prohibition, since it’s not attached to a warning, is not haram but is rather disliked.

Now shaikh is quoting from Kamali’s book on Usool al Fiqh, in which Kamali says, “The primary meaning of nahy’ or tahreem is prohibition unless there are indications to the contrary.” In his own book he does not mention warning as a grounds for tahreem. So shaikh is making his point that what Kamali says about prohibitions in his Commercial Law book is contradicted by what he says in his own Usool al Fiqh book.

Also note that Al-Albaani says it is Saheeh, Shuaib Al-Arna’oot says it is Hassan lighairihi. Ibn Hajr also says it is hasan. Ibn Al-Qayyim also said it was Sahih.

A lot of authors who write on this subject now are educated in economics instead of usool ul fiqh and the sciences of hadith.  You have to be very careful when reading books on Islamic finance. Shaikh says that the hadith, do not sell what you do not own, is authentic.

So what Kamali does when he says a sahaba is majhool al haal is astonishing and then another scholar who takes this opinion and use it verbatim is more shocking. Shaikh is not mentioning this other scholar as a courtesy and out of respect.

Views on possession

First view is that ownership and possession is a requirement for sale

Opinion of Ibn Qudamah, and also the Majma al Fiqhi by the OIC commission.

Bit of a problem for financial transactions with respect to settlement: When you buy a property, the property will not be completed for another two or three days. And in this interim, the property may be bought and sold many hundreds of times. According to the shaikh, this might be one of the causes of the economic catastrophe.

Some Muslim economists discussed this issue of not selling what you do not have and concluded that we would not be in the mess we are in if we followed this principle.  By fungible, it is meant that the risk and liability is yours.

Second view is that it’s not a requirement but that the one who is selling must have the ability to deliver

In the case of Ibn Taymiyyah and Ibn Qayyim (As Shafi shares the view), they make ta’weel regarding these hadith.  They basically say that the one who is selling it has the ability to deliver it.  The sheikh feels this goes against the hadith of Hakim ibn Hazam which implies that he just goes to the market and buys it for them.

Third view is that fungibles (homogeneous goods) and non-fungibles have different rules

If it’s a fungible, it means that it will be readily available.  Hakim ibn Hazam’s hadith seems to refer to fungibles.

Uncertainty about price

Imam Ahmed says that the contract is valid even if the price is not stated.  For example, I will sell you something at the market rate (not stated).

This opinion of Imam Ahmed is contradicted by others. According to the shaikh, the price must be known at the time of the contract.

The three points noted above are obviously issues that lead to a lot of risk and uncertainty.  Scholars differ on these points and therefore come to very different understandings as to what gharar really is.

Opinions on Gharar

(Edit: Shaikh is going to present this topic gradually in different versions, and then present the final version of it)

Version 1 of the opinion of contracts dealing in gharar - One that is contaminated with things that are already known to be haraam
Sometimes they are mixing different entities; it is not necessary to mix these entities in the sheikh’s opinion.

Four reasons for a contract to be invalid. The presence of any one of the following will make a contract haram:
1) If the contract contains riba.
2) If the contract has an unacceptable amount of gharar.
3) If the contract has jihaalah  -- جهالة  -  unspecified portions that are basic to the nature/essence of the contract. (it is not known who is buying, selling, what the price is, what is being bought or sold).  This is a well-known concept that stands along from al gharar and should not be combined with gharar.
4.) If the contract contains or is based on Maisir (gambling)

What is gambling?
One perspective is that it is an extreme form of gharar.  But essentially, gambling has some qualities to it; for example, the one who wins gets something in exchange for nothing.  This is known as akl al maal bil baatil (أكل المال بالباطل). This is one of the characteristics of gambling.

Additionally, the turnout or result will be more due to chance than skill such that no matter your effort you cannot determine the final outcome.  

Every form of gambling is gharar, but not all gharar is gambling.

If you play long enough and you have a system to beat the odds, like counting cards, you might win. But here we are talking about improving your probability of winning, the root cause of getting something for nothing is still there.

The house always wins, the games are rigged for the house to win.

This is not wealth creation and is not positive for the economy.  Not to mention other negative ramifications and issues that are due to gambling.

Acceptable forms of gharar as described by Suwailem in the paper sent by Shaikh
It has to be negligible
It has to be Unintentional
And it has to be Unavoidable

Terminology from the economics paper and some concepts from Game Theory.

There are three kinds of transactions as described in the Economic paper:
Zero-sum Transactions
We did not discuss it yet


Positive-sum TransactionsWe have two parties, A and B.  We have two possible outcomes, outcome 1 and outcome 2.  
The outcome for both parties will be the same, either it will be + for both of them or - for both of them, they will gain together or lose together, the absolute values for the two parties might be different.  

Here, cooperation is a good thing.  Outcome 1 is the goal of the game.  

Positive Sum Outcomes

A

B

Outcome 1

+

+

Outcome 2

-

-



An example of positive sum transactions in Shariah is a pure partnership.  

There is one additional question to ask: is there risk involved?  If something is very risky, it still may not be halaal. For example, there is no risk on playing lottery, that is the reason why we see poor people play the lottery, there is very little risk and the reward might be very high.

Answers to some questions:
You don’t enter a contract if the probability is less than 50%. You will not enter a transaction knowing that the risk is very high. Venture capitalists are risk takers and they enter a contract even when the risk of success is very low.


Mixed-sum
We have two parties, A and B.  We have two possible outcomes, outcome 1 and outcome 2. One party always wins. Both parties could loose, but that outcome is not important for us to discuss here. For sake of simplicity, we can say that outcome #3 is not a goal, and that outcome #1 and outcome #2 are equally likely.

Mixed Sum Outcomes

A

B

Outcome 1

+

+

Outcome 2

-

+

Outcome 3

-

-



Is this type of transaction, halaal?

When analyzing transactions, you must examine the goal of the transaction.

An example of mixed sum game is sharecropping.
Sharecropping is an example of this type of transaction. I am a land owner and I will lease this land for you, and you will take care of all of the expenses, cultivate the land, and then at the end of the year we will split the gross. Is this halaal?  What will it take to make this halaal?

Why and how it could be halaal? Or why and how it could be haraam?

This is called muzaara’ah. Think about it and we will discuss it later.

Footnote: You can make the models as complex as you want, but why? As long as the model works, why complicate it Perfect knowledge, perfect competition are the two corner stones of western capitalism. Paper by Milton Friedman on irrelevancy of assumptions in economic theory???

http://www.ppge.ufrgs.br/giacomo/arquivos/eco02277/friedman-1966.pdf


2011-06-26 Class Notes


Positive sum games are halal. What about mixed sum games?

Sharecropping - muzaara’ah
Land Owner
Farmer - All expenses typically are put on the farmer

Gross revenue is split 50/50.

Mixed Sum Game
In sharecropping, you have the land owner and the farmer. All expenses are on the farmer, then they split the gross revenue 50/50.

Mixed Sum Outcomes

Landowner

Farmer

Good Season (outcome 1)

$250,000 (+)

$150,000 (+)

Bad Season (outcome 2)

$75,000 (+)

-$25,000 (-)

Outcome 3

-

-



The table above is known as a payoff structure.

Outcome 1: $500,000 revenue, $100,000 expenses.
Outcome 2: $150,00 revenue, $100k expenses

good season outcome 1 (landowner gets 250k, farmer gets 150k)...both of them are relatively happy.

Bad season: $150,000 revenue, $100,000 expenses. Then landowner makes $75K and the farmer loses $25K

It should be the case that if it’s haram, it’s haram. There should be one ruling. There’s something very important going on, look at what the land owner gets. When the land owner gets into this kind of agreement, would you consider this competitive or cooperative. The more the farmer wins, the more the land owner wins. There’s no competition here, one is not winning at the expense of the other. ultimate goal of the games is the positive sum outcome. Even though both of them have the same goal there’s some risk involved, as we said before, shariah has not outlawed every form of risk. Since the ultimate goal of the game is for both parties to win, this would be considered a permissible transaction (Sami Suwaylum’s argument), the risk of the farmer losing can be considered overlooked from the shariah. We have to consider the risk in the first place (beginning of the transaction), there has to be some good probably that venture has to be successful. You don’t enter a very risky venture in the first place. Because that is pure gharar like gambling. 2 aspects, how risky is the venture and is it a competitive or cooperative arrangement.  The positive sum outcome is the one desired by both parties. This is a mixed sum game, majority of transactions/investments are mixed sum games. Discussion about difference b/w bank loaning money and this transaction.
1. If crop gets destroyed completely, land owner does not get anything, whereas bank would always want interest payment regardless of the outcome of the investment.
2. Here the landowner wants the farmer to be completely successful, whereas bank really does not care if farmer wins or loses, other than default bank doesn’t really care. They don’t mind if people don’t pay on time. Bank is not interested in welfare of the farmer.
3. Return is not fixed in this type of transaction, whereas bank usually dictates fixed interest rate (win-win) for bank.
4. The major difference between this and bank lending money is that money is not a means of production. Land is a factor of production, labor is a factor of production and is deserving of return. Money does not deserve any return though. Since it is not a factor of production, money needs special rules.

Q: We usually have a rule that says that you can’t sell something until you have it. Doesn’t that apply?
A: This is not a sale, it’s an investment.

Q: Is this like the Zamindari system?
A: Zamindari system is more like renting the land.

Sami Suwailem’s view: given the venture is not too risky, then this type of mixed sum game is halal according to the Shari’aih. As long as the the two people’s interests are aligned, then it is not competition, it is co-operation. What we want to avoid is one party gaining wealth for nothing. (Akl al maal bil baatil).

Zero sum games

Zero sum game

A

B

Outcome 1

+

-

Outcome 2

-

+





Zero sum games do not necessarily have to have zero sum. Game theorists prove that games with unequal gains by parties can be mapped to zero sum games. Therefore for our discussion zero sum game simply means, one cannot win without the other one losing. Extreme zero sum game is gambling. Flip a coin. The only way I can win is if you lose. What Sami Suwailem is saying, if you look at gambling, it would be zero-sum game. It’s completely competitive. Ibn Taymiyah said, gharar transaction lead to enmity and hatred. First example that he gave is selling the lost camel. It is forbidden in shariah, prophet (saw) forbade selling the lost camel. In the case of selling Sheikh’s stolen car. He sells it to Asif for $1000. Now in this case, if you look at the sales contract, the amount he is going to pay is fixed but the return is not fixed, what he is getting for the payment is determined (pink slip). By law, he knows what he is getting. Ultimate result of the transaction is the problem here. Not necessarily what’s being sold. There’s some issues of the state of the car and whether the car would be found, ultimate outcome is unknown. You can do a payoff scheme in the case of stolen car. You can compare two cases, the cases of selling the car and No Sale. Suppose before my car was stolen it was worth 10k. When I sell it to Asif, do you think Asif is going to pay $10k? He will expect some kind of discount. Finally agreed for $1000. Why would Sheikh be willing to sell his $10k? He’s trying to make at least $1000 out of it. Why would Asif be paying $1000? Because he is also trying to take advantage of Sh. Jamaal’s situation. Already there is this competition. Intentions behind it are not very good. So if we compare what happens. We have two cases when the car is found. The car is found in good shape  (example of sheikh and his wife going to the zoo and forgetting what this car looked like in the parking lot) and Car not found. We have two parties (A,B)...A the seller and B the Buyer. If the car is found and it’s in excellent shape, how much does Sheikh make of the deal and how much does Asif. How much did Sheikh lose? -9k for A and +9K for B. If the car is not found, A is $1k and B is -$1k. Matches the table below.

Sami then throws in regret theory. Sometimes something bad happens to you, you actually end up being worse off because you thought you got something over somebody else but while in reality you didn’t. That adds to the losses and makes you worse than the numbers show. The essence of gharar is zero-sum theory. Is this gambling? One of the difference here is, there is an exchange. It’s unfair but there is an exchange. One of the parties would be worse off in the long run. In gambling, there’s no real exchange.
There may be subsequent transactions based on the lost car scenario very much like the insurance scam where the insured objects are bundeled and sold over and over with new twist and derivatives to hide risk. For example, if Asif cannot find the car in one week, he may try to sell the pink slip of the last car for $100 to another sucker (there is a sucker born every minute) who is willing to take bigger risk for a bigger return.

Q. Is VC investment halal? A. yes, it is a positive sum game inherently. If the venture is truly a gamble then you should not get into it.

Q. Are raffles/sweapstakes zero sum games? A. they are not zero sum games as normally you do not need to invest in these schemes.


Stolen Car

Owner

Finder

Outcome 1

+

-

Outcome 2

-

+




He talks about the concept of the two fundamental properties of normal exchange. And the two fundamental properties are (section 4.2, page 71):

A) exchange utility is certain,
B) the right to use the utility and the obligation to bear its liability are held by the same agent.

The one who is selling it he’s the one responsible and has the right to use it at that time (on top of having possession). And then he says, if either of these two is violated, then the transaction is illegal. Basically author is saying that it is Gharar transaction.

e.g. in the case of lost camel the utility is uncertain (violation of condition A above)
When you analyze a number of different kind of transactions, you see this separation of utility and liability.

The classical example of this separation is full car insurance coverage. You own the car (utility) and someone else bears the responsibility of paying the damages if you wreck the car. So here you are separating utility for liability. There is a disconnect now between utility and liability -- and this is one of the key aspects of gharar transactions -- this happens in the case of insurance.

There are some kind of transactions there is a difference of opinion amongst the fuqaha about deciding what the appropriate level of Gharar is.

Ja’aalah (جعالة)

Bonus or reward contracts are a kind of ja’aalah contract (certain criteria is met to payout).
An example of Ja’aalah contract is the bonus contracts at work. If one reaches this goal, then there is some bonus reward in return.
Fundamentally how it started, I have a piece of land and I want to find water or oil in it. So I put out a contract that If you find oil I will pay you $100K (I may not have equipment) Is this Halal?
A: This is different than hiring someone and paying him say $100 per hour to find the oil. Here is you don’t find the oil you get nothing. Fundamentally this a cooperative mixed sum game, where both parties want to win. But there is a great amount of risk involved. There are two situations here which are conflicting. We have situation of Gharar and we have situation of positive outcome (since oil can be found and both parties win).

So the Hanafis say this is haraam, because they emphasise the risk. It is acceptable to pay someone $100/hr to dig for you. There’s some risk for you, but then there’s no risk with respect to the contract.

But if you emphasize the positive outcome, then you will say that it is halal.
Hanbali and Shaafi say that it is Halal, since they focus on the positive outcome.
By the same token you can say that bonus is halal if you emphasize the positive outcome, but there is a great deal of risk involved as your wife may not see you for a month and in the end you did not meet your sales quota and did not get anything.

Maliki say Ja’aalah contracts are Halal unless the one who is offering the reward cannot benefit from the failed effort of the Majool (the one doing the labor). For example, Sh. JZ says look for water on my property. You dig 40 feet, then you give up. And Sh. JZ by digging 20 more feet gets the water. Then to Maliki’s this is Haram, since the failed effort still brings benefit to the one who offered the bonus reward.

Sh. JZ warns the students during Q&A: In Islamic Jurisprudence it is very important not to confuse the different contracts al-baie, muzaraah and jaaala. If we confuse the different forms of contracts then we will always reach the wrong conclusions.
Q: Companies when putting the Ja’aalah contract, they put reward for a goal which is not very easy to achieve in the first place. Which means the person may have to work a lot harder then it is “healthy”. Is it halal in this case?
A: Sheikh’s opinion: Emphasizing the positive outcome of the jaala contract is the stronger opinion (Hanbali and Shafaii position). The Maaliki point is good as well to not overlook the scavanging of the failed effort of the majool by the one offering the reward.

Question for next time: Bay’ al-’urboon  -- a non-refundable deposit.

In US real estate there is concept of “Earnest Money” which is a deposit to show you are serious in your offer, but they cannot keep the deposit if you change your mind for some reasons.


2011-07-03 Class Notes

So far  we have proven that Shariah allows some gharar in transactions. Do you agree? It is a premise that we are using, did we prove it? Hadeeth of the prophet saas in which he forbade selling the fruits on the tree until it becomes to mature or ripen and then you can sell the fruits still on tree. Still at that time, there is a possibility that some of the fruit might be damaged and that is overlooked, since he allowed those types of transactions. The fuqaha and the contemporary Muslim economists are trying to develop a model to describe which type of gharar are allowed and which are forbidden.

We have discussed the ja’alah transactions as an example of an model from the Muslim economists on type of gharar allowed in transactions. Sami Suweilam came up with criteria to show which type of transactions with gharar are permissible. Prior to that, we saw that Hanafis do not allow ja’alah transactions.

We have to show that Sami Suweilam’s criteria are consistent with Quran and Sunnah in order to show their permissibility. We have to see whether it fits with Quran and Sunnah. Sami gives you opinion of fuqaha but he rarely gives you evidence from Quran and Sunnah.

Sami concluded that it is allowed as long as it is not risky from the beginning based on the premise of the win-win game model of the transaction. Then he shows the opinion of the fuqaha.

If we can show from Quran and Sunnah that ja’alah is not permissible, then we can stop here and conclude that the model does not make sense. This is the weakest aspect of the paper, because he did not prove his model based on Quran and Sunnah.

Are we aware of any evidence from Quran and Sunnah with respect to ja’alah transactions?


Surah Yusuf, verse 72:

Sahih International: They said, "We are missing the measure of the king. And for he who produces it is [the reward of] a camel's load, and I am responsible for it."

Muhsin Khan: They said: "We have missed the (golden) bowl of the king and for him who produces it is (the reward of) a camel load; I will be bound by it."


Some people point to Surah Yusuf as evidence for ja’alah. In Surah Yusuf verse 72, Allah swt says, they are offering reward for stolen property of the king. Is this ja’alah? Yes it is the essence of ja’alah.

Is the shariah of previous prophets our shariah? Can we follow it? Is there difference between the practices of Jews and Christians and the practices of the previous prophets.

If we find something from their prophets, then there is one view that we follow the shariah of the previous nations, as long as it does not contradict the final shariah for humanity, ie contradict the shariah of Quran and Sunnah. This point is still disputed by scholars, it is not followed by all of the scholars. This is a strong view. We follow them as long as it does not contradict our shariah.

So this verse from Surah Yusuf may not be sufficient. If there is something that contradicts it, then we cannot follow it. Is there some hadeeth that contradicts this practice? Or is there anything in our shariah that affirms this practice from the time of Prophet Yusuf? Either would do, and shaikh is joking since he is not involved in any kind of ja’alah transactions.

What is the concept of ruqiyah? [narrated in both Sahih Muslim and Bukhari]
Is this a kind of ja’alah? They were not hospitable to the Muslims and they said that if somebody from their tribe was cured then they would give them something, so ... they prayed for the individual by reading a verse from the Quran. And then they asked the prophet whether what they did was permissible? And the prophet allowed it. Is this support for ja’alah? Because if they had prayed for the individual and he was not cured then they would not have received any compensation for it.

There is also a narration in Sahih Muslim that has to do with the battle of Hunayn, where the Prophet saas announced that anyone who has killed an enemy shall possess his spoils.  This was during the battle at the time when the Muslims began to flee during the battle; the statement was made as they began to flee (mid-battle).  

You don’t know in advance whether they will receive compensation for the actions that they are performing????

Is this decent evidence for supporting ja’alah? Yes

Do we have any evidence of prohibition of ja’alah?


Quick review of criteria of how transactions are evaluated:
(Note: The following are criteria for deciding the permissibility of gharar in transactions)
1. The Shariah allows some gharar
A. Ultimate Reference - the Qur’an and the Sunnah - It has to be supported from evidence or permissibility or that it is forbidden
B. Al-Suwailem’s criteria - He describes the win-win game model for allowing gharar
C. Need

Now to discuss C:
Question of a need for a particular type of transaction. Should it enter how we evaluate a particular type of transaction.

Suwailem’s criteria: was it consistent with Quran and Sunnah? Yes,  We do not have any evidence that prohibits it and so far it is consistent with Quran and Sunnah.

If his model does not stand this test in any case then we have a problem.

Suwailem in his mixed-sum game, one party is not benefiting from the loss of another party. Both parties are trying to help each other win. And hence he says that some type of gharar is allowed in this kind of transactions.

The author tries to make room for both fiqh views, both those who say it’s permissible and those who say it’s not permissible.  How he does that here is he says if the win-lose outcome is more likely (the dominant outcome) so that the zero-sum part of the game prevails, it becomes more of a gharar transaction and is consistent with the Hanafi position.  This idea of trying to make both opinions correct (the true hanafi position is not being presented here; they clearly say that ja’alah is not permitted and in no way mention the zero-sum game portion of the issue) is not good.

An innovative ja’alah contract that banks use: reference Figure 13.1 of the texbook.



A case of parallel ja’alah in an innovative “Islamic” banking scheme:
The Shell company asks the bank to give them $500K if they find oil. The bank goes to a person and says that go to this land and find Oil, and i give you $100K if you find oil. The person finds oil, get $100K from the bank, and the bank makes $400K based on the contract from Shell Company.

The problem with this is that bank is not doing anything i.e. effort or risk. All they did is find Shell and the guy who looked for Oil. The bank is just being intermediary and this is quite shaky (from Islamic perspective and we will discuss it when we study chapter 13).

So far Suwailem’s model passes the test.

Footnote: The arabic term ja’alah is also written in English as ja’alah, jaala or jawlah???  They refer to one and the same thing.  Similarly for the next term that we are going to study.

al-3arabun (Arabic text - to do for Br Waleed if he reads the notes...)
This is al-3arabun. Also is called al-3urbaan (Sh. JZ will most probably will use  Al-Urboun)

It is non-refundable deposit.

For example you are planning to buy something, you put a deposit and it promises you a certain price for it, which is locked now and you agree to buy it a later date.

Another example, you want to buy office furniture for your boss. You pay $1000 deposit since you are waiting for approval from your boss. And when come later to buy it, you pay the rest of the amount and you buy the furniture. But if your boss does not approve it, then you loose the deposit. And lets say that there is a time limit for you to complete the transaction.

Do the above examples of non-refundable deposit sound halaal?  
What happens when you decide not to buy the furniture?

There is gharar involved in the transaction.

Shaikh is now allowing classroom discussion for which we did not capture notes....

Is this (waiting period) something that shariah will allow you to sell? If you wait can you be charged for waiting, does shariah allows it ?

The basic ruling of islamic financial transactions is that of permissibility, meaning it is allowed by the shariah.

Are there any texts of the Qur’an or Sunnah that could be invoked with respect to al-’urboun?

What would Suwailem’s analysis on this be?  Is it a zero-sum game?

Is it analogous in any way to buying something and then returning it?

Using Sami Suwailem’s framework, is this a mixed sum game? Yes it is a mixed-sum game because one party is not profiting at the expense of another party.  This is not zero sum or positive sum game.

It’s better off for the seller to sell; if the person doesn’t buy it, the seller still has this item that he must sell.  His ultimate goal, even if he makes $1000 for almost nothing, in general both parties for the validity of an al-’urboun in the long run is that both parties must prefer the win-win outcome in the long-run.  If one prefers the win-lose, this is a zero-sum game and Suwailem would say that this is not halaal.  The ultimate goal is that both parties want the transaction to go through which would be considered a + +outcome.  Based on Suwailem’s criteria, this would be permissible.  Among the fuqaha, only the Hanbalis permit al-’urboun.  The majma al fiqhi of the OIC concluded also that it is permissible given that there is a time limit involved even though they had three papers on it, one of which was strongly against it.  A lot of contemporary scholars are in favor of it and the Islamic banks like it as it can be used in many different ways.  

One student is proposing that Al ‘urboun is similar to ja’ala based on his understanding of the ruqiya. Shaikh is asking him, what is the other party gaining from it in the case of ruqiya? No the other party is not gaining any financial from the ruqiya. So now the student is asking isnt it similar to bonuses..... Shaikh responded that is the reason why the Malikis do not allow it.  The company benefits from your effort without you getting a bonus.  

Another student asked isnt it similar to pawning? (I don’t think this is the “pawning” we think of here in the US) Shaikh responded that we will discuss transactions dealing with “pawning” later.

Can you present any evidence from Quran and Sunnah for al ‘urboun?

If there is no text then we would have to involve need. But there are texts. There is a hadeeth recorded by Abu Dawood, which has the word al 3urbaan in it. Regardless of any criteria from Sami Suweilam there is a text and that is the reason why three madhab reject al 3urbaan. This hadeeth pretty much considered weak by many scholars like Al-Albaani, An-Nawawi, Ahmed Ibn Hanbal, Al Arnaout, others. Ahmad Shakir accepts this hadeeth.

Another hadeeth as evidence, it is narrated from Ibn Abbas and Hasan al Basri that Bay al 3urboun is not allowed.

Most Madahib do not allow it since one party makes some money without giving any thing to the other party.

As Shawkani leans towards accepting this hadith as he states there are supporting hadith.  Contemporary scholars like Muhammad Sideeq Ad-Dhareer  also makes a similar statement.

As for narrations allowing it in Musanaf of  Abdur Razzaq where Zaid ibn Aslam is asking the question and Prophet (saw) allowing it. This is definitely weaker than other hadeeth.

Nafi ibn al Harith bought a prison house from Sufwan ibn Umayyah for Umar ibn al Khataab (ra) and said that if Umar is pleased with it then we will go ahead and purchase it and if he does not like it then i will not buy it. Imam Ahmed  was asked did you accept it and he said how can i not as this this Umar. However no deposit was involved here.

We have no sound hadith for either side of the argument; we also have the sahabah also differing on it.  We cannot make any conclusion from the text and we cannot make a clear conclusion from the actions of the sahabah as they differed on this issue.  

Is there a need for this kind of transaction?

We will have to make our conclusion about al-’urboun next time.

What about call options and put options?  are these like al-’urboun?
You put a deposit to either buy or sell stocks based on the price. It is like al 3urboon and we will discuss it later.


2011-07-10 Class Notes

Today we will continue narrowing down what is gharar.  As you can tell, we have been spending a lot of time on it because there is a number of people in the literature that say gharar is not well defined and as such we cannot invoke it.  We will finish with Sami’s paper today and go onwards to the critiques of the paper.  After that, we will move on to riba.  There are two types of riba, in this quarter the intention was to handle only one of hte two, the lesser-known riba.  In the next term, we will be covering the other, more well-known type of riba (and practiced form).

On any issue, you will have:
1.) The text of the Qur’an and the Sunnah
2.) Dr. Sami al-Suwailem’s criteria for identifying what is gharar
There might be, on some occassions, 3.) Need (less than necessity).

Darura is very urgent case of need. Here we talk about need and not urgent need (Darura).

Samy Suwailem

Qur’an + Sunnah

Conclusions

Selling a lost camel

Gharar/Forbidden

? (will revisit)

Forbidden

Pure Partnership

Gharar/Permissible

Permissible

Share-cropping

Permissible (both parties want positive outcome)

Permissible

Ja’ala

(reward contracts)

Permissible

Evidence was presented

Permissible

Al-’Urboon (non-refundable deposit)

The sale of fruit after it has ripened





Al-’Urboon, if it’s refundable, is it a problem? Is that permissible? If it’s time constrained it’s ok, not open ended.

If you buy something and you have the option of returning in 30 days, is there any difference b/w that and putting a deposit and if you don’t buy it you get money back and the contract is finished. Is there any diff b/w the two. So it is like a contract with an option to return so it’s permissible.

‘Urboon is different, you’re going to lose the deposit. If the contract doesn’t go through, seller will end up with money and what “real” (not imaginary) did he give up for that money..nothing. Is it allowed to take somebody’s wealth without anything in exchange. According to Samy’s analysis of al-urboon. If the contract goes through, it’s a plus for the buyer and the seller. If it doesn’t go through, then the one who pays the deposit loses the money and the one who receives the deposit gains the money for very little (he didn’t do much).


Lets look at the payoff structure. We have Depositor and Depositee:

Person 1 (Buyer)

Person 2 (Seller)

Outcome A

(goes through)

+

+

Outcome B

(doesn’t go through)

-

+





This is a mixed-sum game (see table above, “Payoff structure for depositor and depositee”). What kind of mixed-sum game will Samy say is haraam? if outcome B is preferred to the seller, then you get mixed desired outcome. One party wants one outcome and the other wants another and that outcome is one where one wins and the other one loses. When he sells, he gets deposit plus the price, so theoretically, seller also wants outcome A. +/+ because both want outcome A. Samy in this situation would say it’s minor gharar and allowed.

What about evidence from Quran and Sunnah about al-urboon?
We only have to disprove his model by one clear case of gharar transaction (Ed: from the sunnah of the prophet). We have a hadeeth that prohibits it and a hadeeth that permits but neither of them is authentic.

Dr Dareer, a contemporary author, wrote a 500 page document on gharar (and wrote for majma’ al-fiqhi), he concludes it’s not halaal...one of his arguments is that the hadeeth prohibiting al-urboon, both are weak but one is stronger (weak) so he leans towards that argument. If you’re saying they are weak then they are not authority...to say one is closer to being authority than the other is not a sound approach. So in this case, we have no authentic text concerning al-urboon.

Evidence about Al ‘Urboon from the sahaba
Concerning the sahaba we have the story about buying a prison during the time of khalifa of Umar (ra), it doesn’t give us the details about whether it was non-refundable or not. So we have a mixed set of opinions amongst the sahabah.

Qur’an and Sunnah conclusions about Al ‘Urboon
So should al-urboon be permissible or not? If outcome A is the desired one, it should be permissible. Historically speaking, only hanbalis say it’s halal and the others say it’s gharar without getting anything in change and they do not allow it.

Q:
A: If someone puts a condition on yourself, then you have to live by those conditions according to ...., this is not a statement of the prophet.

Basic rule is of permissibility
They say that the burden of proof is to show it is haraam and they conclude that no evidence has been presented to rule it haraam.

Now if ‘Urboon is considered permissible, then it brings us to the call option and put option. This becomes important only if you say ‘Urboon is permissible and it is related to buying stocks.

Call Option
It is a contract with a non-refundable deposit, you will have the right to buy a stock at a strike price (let’s say $100.00).

http://en.wikipedia.org/wiki/Call_option
A call option, often simply labeled a "call", is a financial contract between two parties, the buyer and the seller of this type of option. The buyer of the call option has the right, but not the obligation to buy an agreed quantity of a particular commodity or financial instrument (the underlying) from the seller of the option at a certain time (the expiration date) for a certain price (the strike price). The seller (or "writer") is obligated to sell the commodity or financial instrument should the buyer so decide. The buyer pays a fee (called a premium) for this right.


Is the person who is involved in call or put option, is he a long term investor in the company?
If he was interested in long term viability of the company, then he would not be worried about normal price fluctuations on a daily basis. Most likely, it is somebody who is not interested in the long term viability of the company.

Let’s say you are tracking the stock price over 3 months, and he hopes to buy the stock at the highest price with the call option of $100.00 This would give him a nice profit, because he will make the most amount of gains and he could sell it immediately.  Is this al ‘urboon?

The call option is for a time limit. And if within the time limit, the price of the stock does not exceed $100, then the deposit is lost. Also even if the price goes above $100 and you do not execute the call option, then you loose the deposit.

Put Option
You own stock and agree to sell it at a strike price by paying a non-refundable deposit.

An option to sell assets at an agreed price on or before a particular date.

en.wikipedia.org/wiki/Put_option
A put or put option is a contract between two parties to exchange an asset, the underlying, for a specified amount of cash, the strike, by a predetermined future date, the expiry or maturity. One party, the buyer of the put, has the right, but not an obligation, to sell the asset at the strike price by the future date, while the other party, the seller, has the obligation to buy the asset at the strike price if the buyer exercises the option.


Real transaction v/s Financial transaction
If you buy something then it is real transaction. If it is money for money, that is what a stock is, then it is financial transaction


What about Employee Options to buy shares at a predetermined price?

Sometimes the company will give their company options to their employees to buy their stock at a specific price it usually is time related. Whats the employee going to do? he’s going to wait till the price of the stock goes above, will try to go to the highest point so he can make the most. There’s no deposit in this case, so that’s not the problem. In general would this kind of thing be halaal, assuming stocks are halaal?
In the case of employee options, the payoff outcome, both parties want the price to go up. In that case, it’s a win-win situation. Both company and employee are happy. That could distinguish it from the previous kind of transaction (there’s no deposit necessary in this transaction).

Sale of fruit, after it has begun to ripen. We use that to show that some amount of gharar is permissible from the sunnah. Fruit that’s already shown it’s going to be healthy. Prophet forbade before it became healthy but permitted afterwards. Payoff structure, is it a mixed sum? If the fruit goes bad after the sale, who loses? the buyer. Why would anyone buy before the food matures. You’re going to get a better price. If the fruit got bad, buyer loses, the seller gets +/+ in both cases. Buyer is a plus and a possible minus. What is the desired outcome for both parties. What’s the loss for the seller? From Islamic perspective, given all those factors, both parties would want the +/+. There could be a case where some fruits are more susceptible to going bad. For example, like Dates, were pretty strong crops but fruits like oranges etc.....if the harvest is susceptible all the way till the time of harvest, then we cannot apply this principle to those fruits.

What about crops that are underground. Like truffles; they’re underground and hard to find. Potatoes and onions. Can you possibly sell potatoes and onions before they are harvested. Number of scholars, like Ibn Taymiyyah...allow it given the condition that you can safely assume it, and it’s beyond the risky stage, then you can do it.

So what about insurance, how does insurance work. Does anyone like their insurance company? In general, nobody likes insurance company and that’s why they advertise the most! Especially the health insurance. Because you know they’re going to do whatever they can to get out of paying. That itself, they are making a lot of money out of that and that itself is profitable. Using analysis of dr suwalym, what about Insurance company. It’s a win-lose. It’s a zero-sum game. Everyone agrees?

Full insurance, you’ve separated the benefit from the risk and also, is there riba involved in insurance? How is there riba? What do you give insurance companies? money. What do you get back? Money, Allah Forbid, if you get into an accident. Not the same amount, not spot. This is pure riba. So we have gharar wrt to the outcome not just the payoffs. Does statistics remove gharar from the model? For each individual, those models are not for each individual. Secondly those models are flawed that’s why all insurance companies keep insuring.

What about warranties? Zero-sum. Number 1) it’s stupid, Number 2) it’s zero-sum game.
It is not acceptable a person says to another, guarantee/insure this for me and I’ll pay you that amount of money. This is not halaal because this is gambling and gharar.

Commercial insurance (kenneth..), insurance is exchange of money for money. In economics, if I trade a good, e.g. cup of coffee for a cup of water. When will you exchange the coffee for water? Marginal utility, happiness from coffee will be more than from water. So trade makes everyone better off. If giving money, similarly it’s going to make him better. That’s how the total goods and economy will grow, by real transactions. Nominal transactions are just exchange of money to money and it does not lead in growth or real happiness.

What about forward contract? WE sign a contract right now that I’ll sell you 100 barrels of oil in december. Both the exchange of good and money happen in future. By Ijma’ this is haraam. It is usually done as a speculation and hedging. [The statement above is Ijma of Scholars, i am assuming ???]

Futures, give you money now and get it later, that’s salam. E.g. 100 tons of wheat in november and I pay you now, that’s ok, as long as it’s fungible.



Shaikh explained ‘pareto optimal’ criterion from the paper in relation to the zero-sum game. As the diagram above shows, the two parties are trying to optimize their utility in the transaction. As long as you move in the arc shown by the arrow in the quadrant, the muslim economists and the captial economists are happy.

Footnote: The economists have a hard time determining the usage of resources. So if you have three outcomes, x, y, z. Which is better? Is y better because it is using resources more optimally than x and z? They cannot say anything about it, because all three are normative. Generally, policies of politicians determine which one of x,y,z is chosen in society.


2011-07-17 Class Notes


Review: How would you explain gharar to some one who has not attended this class?

two aspects:
1) Risk structure: There has to be likelihood of success, if there is no likelihood it is not even permissible to enter the contract, the only way people would enter the unlikelihood scenario is when the pay off is huge, which is like gambling
2) Payoff structure: One party wins at the expense of other party.

Excessive risk in a transaction where one party wins at the expense of another party. These type of transactions are not permissible.

Speculation is a dealing in Gharar and becomes Zero Sum game in the long run. Speculation does not add anything of value in the society. In Islam if both parties want to benefit then it is allowed with little uncertainty (gharrar).

Mahmud El-Gamal does not agree with Sami Suwailam and offers his criticism in an article published in Institute for Halal Investing http://instituteofhalalinvesting.org/Articles/Mahmoud-El-Gamal.htm
and here is the link to the paper that critiques Sami Suwailam
http://instituteofhalalinvesting.org/content/el-gamal/gharar.pdf

However, Sh Jamaal Zarabozo does not like the critique written by El-Gamal and disagrees with nor does he recommend it as reading. To disprove Sami Suwailam, you have to present one evidence from Quran and Sunnah that proves the contrary to his definition of gharar.

Mahmud claims that there are many examples of pure zero sum game that are not forbidden based on gharar and there are many prohibited contracts based on gharar in shariah which are not pure zero sum games.

Mahmud claims that there are many examples of pure zero sum game meeting Suwailem’s definition of gharar and are permitted by the Qur’an and the Sunnah.  He presents only one example, which is described below:

Two traders leave Madras for Jeddah, one trader is carrying spices and the other is carrying silk, They both intent to trade when they get to Jeddah and plan on selling what they have and use the money to buy dates and go off to Yemen. Aboard the ship they check out each others merchandise and both think that the others merchandise is more valuable. And they both decide to exchange their merchandise. Is this a valid transaction? yes

Now they both arrived at Jeddah. e.g. I traded my silk for spices, but I found out I cannot get as much money for my spices as I thought, I sell it for $100, where I thought I would sell it for $500, the one who got the silk from me sold it for $250 whereas I thought it would be worth $80. The only way I can feel better off if he loses, Is there any Gharar involved? No, Is this zero sum game? According to Mahmud, it is zero sum game. It is not zero sum game, as there is nothing in this transaction that says that the only way I can win is that you loose. The one who is getting less price for his spices then he thought can hold on to the spices till he goes some other place, e.g. Somalia and sell it for $1000. It is not the situation that one can win at the expense of other. Both initially thought they are getting a good deal (win-win).

Suppose the one who got spices finds out when he arrives in Jeddah his goods are worth less than he thought and the person who got silk got $100 when he thought he would get $80 (i.e. the silk ended up being worth more in Jeddah than he thought).  And then he says that only way the person who got spices would win is if the other person also loses.  

Is there gharar involved in the transaction?


Regardless of their motivation, they would not be able to assess the final value of their goods at whatever destination they end up at.  This is obviously not a zero-sum game.  This example does not disprove Samy Suwailem’s model.  

What else did he claim?  He claimed that we will see many examples of pure zero-sum games that are not forbidden under gharar.  This was not provided.  He said that we will see other contracts that are forbidden under gharar but they are not zero-sum.  Either of those would put a big dent in Suwailem’s model.  The sheikh has seen much worse models in economics that have been used for 50-60 years.

He goes on to claim that certain contracts are forbidden due to gharar that are not zero-sum games (is this accurate or did I hear this wrong?) and the example of this contract is two sales in one contract. For example, A sells watch to a person B for $80 and then over time B sells back to A for $100. Such contracts are forbidden based on hadith mentioned below. The watch is irrelevant., it applies to other items.


One of the classical forbidden contract is two sales in one contract. Hadeeth of Prophet (saw) which we will be discussing in the future. The hadeeth is, “Naha rasulallah (saw) two sales in one contract”.  
(Hadith can be found in Muwatta of Imam Malik, and Sh. thinks may even be in Bukhari).  

Classic case of two sales in one contract is Al ‘Eena. You buy goods as a loan, then you sell back the goods overtime at a higher price. It is pure financing, it is Riba, Watch is irrelevant. This is forbidden based on Gharar, but it is not a zero sum game. One person gets watch, other gets $80 now or $100 over time, it is all ++++ in the game, so it is win-win situation. It is neither gharar, nor zero sum game. (his def of gharar is that either you are going to get $80 or $100). There are four components of a forbidden contract, riba, gharar, jihalah and Mayser, this is the contract which has unspecified price (jihala), this is forbidden because of unspecification not based on gharar.

El-Gamal claims that the watch contract above is not zero-sum. Has El-Gamal refuted Suwailum? El-Gamal is basing it on the fact that it is Gharar.

There are four components (don’t get these confused):  Riba, Gharar, Jihala, Gambling (Maysir).  This is a contract that has an unknown quantity; this is forbidden because the amount is not quantified.  This is not a gharar transaction.

Later El-Gamal goes on and says other gharar sales are forbidden by hadith, for example pebble sales (where you throw a pebble to purchase the item that gets hit for the stated price).  Gambling is the epitome of zero-sum games.  He is “mis-classifying” this transaction. There is no way you can classify pebble sales as zero-sum games.

After mentioning these examples, he says in all such cases it is easy to see it is not zero-sum-ness that is being forbidden but rather excessive risk attached to the sale.  How we quantify it is as a zero-sum game.  

It’s not the issue of the presence of gharar, as agreed upon by Samy Suwailem, that makes a transaction forbidden.

In the case of jaa’la, we have the strongest evidence.  It is not a transaction, it is ignorance.

Analysis of Gamal’s paper
The whole point of Gamal’s paper (he goes through bigger game theory) is that he tries to show, through scenarios, where if you agree to share risk, this is better than if you agree to ensure against your risk.  If you have two trading partners and one insures the trade with the other, he is trying to show that if you ensure, you do not ensure properly.  If risk is shared, it would be a more efficient solution than ensuring.  He comes to the same conclusion as Suwailem’s conclusion without adding anything to the definition.  He says for example, it would be better for a social planner (eg the govt) to prohibit gharar transactions than to allow insurance and to avoid gharar through insurance.  This would be more efficient economically according to him and would be Pareto-optimal.  In order to develop and differentiate his model, he had to downplay Suwailem’s model and present his more “complex” model.  From a fiqh perspective from trying to identify gharar and what is to be allowed and not allowed, his model and arguments do not help.

Maysir is completely based on exogenous factors;  it is more “luck” than anything else, while risk may still have some skill involved that differentiates it from pure gambling.

Major Gharar leads to haram transactions
With respect to gharar, for something to be haram it must be a major gharar.  From Suwailem’s model, we look at the type of economic game the transaction falls under and if it falls under the win-win game model.  The question of need, if you have something that is not explicitly touched upon by the Qur’an and the Sunnah or it looks like it would be permissible by the Quran and Sunnah and it looks like it is acceptable by Suwailem’s model but there is a good amount of risk involved.  

Issue of need in case of start ups with major risk needs to be moderated
Take start-up companies for example, they involve high risk for long-term failure.  One can argue that there is a need for this kind of company and the concept of al-hajah can be invoked here.  This is a case where one can invoke necessity but it must be balanced by evaluating for cases of extreme risk; this cannot just be a blanket statement but rather must be looked at in a case by case basis.


Share-Cropping (Al-Muzaraa)

There is a difference of opinion among scholars, however, strongest opinion looks like is that it is halal, since Prophet (pbuh) entered upon such contract with the Jews of Khaybar. In this case, Jews needed it.

Maliki and Hanbali consider it halal. Imam Abu Yusuf, Muhammed and majority of Hanafi considers it halal. Majority of Sahabi and Tabayeen consider it halal. Imam Abu Hanifa does not consider it halal. Imam Malik and Imam Shafee put conditions on it for it to be halal.

Some quote Ibn Kathir as saying that Muzaraa is clearly forbidden, ibn Kathir is shafaii scholar and they put conditions on the muzaraa to be halal, so don’t get confused by his position.

There is an example of a Muzaraa contract in the modern context, it is called share cropping.


Transactions involving Gharar with Riba

We will now move on the Riba.  Suwailem talks about gharar and it’s relationship to riba in his paper (you can read on your own).

His argument is that a riba contract on a loan is a zero-sum game with uncertain payoffs.  One of the things that you hear a lot unfortunately, even with Muslims, is that if you don't pay me back for a loan, it’s an opportunity cost for me as I could have used that money for something else.  So I am deserving of return. In economics money is never a factor of production. If I am lending you money, the money that I am getting is fixed (e.g. 10%) but what I am foregoing (profit) is uncertain, it can be 3% or 100%. So this is pure gharar from opportunity cost point of view. E.g. If I could have made 100% from that money and if I am getting 10%, then I have lost and the other party wins. On the other hand if I could have made only 3% and I got 10%, then I have won and the other party lost. So the biggest argument used to justify riba (lost opportunity cost) is actually an argument against it. As lost opportunity is zero sum game with uncertain payoff.

(Note: From our previous notes, in shariah there is no such thing as opportunity cost involved with money. In shariah, riba is forbidden, you cannot make money by lending money.)

Suwailem’s analysis: Riba and Gharar are two faces of the same coin
Riba becomes an exchange of a known price, interest, for an unknown quantity in the end.  The money obtained from the loanee is certain, but the money lost by the loaner is unknown.  This shows that riba and gharar is two faces of one coin.  

Gharar separates real transactions from risk.  Interest separates real transactions from time.  You cannot have gharar with respect to time (eg the past), it is only for the future really.  He’s looking at it just from the point of view of opportunity cost.  Riba is almost a footnote in his article, it is not the main point.

In economics, money is not a factor of production, as money never produces anything.

Fiqh point of view: Gharar and Riba
From a fiqh point of view, riba has nothing to do with gharar.  Whether it is zero sum or not, that does not matter.  Suwailem is trying to show from an academic perspective how gharar and riba are related and how both should be forbidden for similar reasons.

Three type of Riba as practiced in the West
There are three types of riba as practiced in the West.
1) Sales Riba (riba al faudal, riba al bay’ou)
2) Interest on loans - simple
3) Interest on loans - compound

In the textbook, on pages 46 and 47, he presents three hadith, #’s 5, 6 and 7, all of them authentic.  
If the commodities differ, you may sell as you wish as long as the trade is hand-to-hand (hadith #5).
Sell the lower quality dates to collect proceeds for buying the higher quality dates, do not exchange the dates hand-in-hand for the higher quality dates.

In the hadith we have 6 items:

Gold

Silver

Wheat

Barley

Dates

Salt

Gold

=, S

S

F

F

F

F

Silver

S

=, S

F

F

F

F

Wheat

F

F

=, S

S

S

S

Barley

F

F

S

=, S

S

S

Dates

F

F

S

S

=, S

S

Salt

F

F

S

S

S

=, S



Key to the read the above table:
S means hand to hand or Spot transactions
= means the items that are involved in the transaction have the same value
F means free transaction & no restrictions of exchange of items

Footnote:  Any exchange of money has to be Spot and equal (=, S).  See highlighted cells in above table.

The table generated above is directly from the hadith mentioned above.

What about Oil? Can we add it to this table. Is it a separate category?


2011-07-24 Class Notes


RIBA

Lets begin today by asking a question, “Is it allowed to lend money to someone else?”

What did we leave off with last time? If I lend you money and you pay me back after a year, isn’t that violating the hadeeth (on spot transaction and equal amounts)?

This goes back to the question of identifying what you’re dealing with, mutually onerous business transaction, where you are trying to get some benefit/gain, is different from loaning money.

Loaning money from shariah point of view can never be a business transaction. Loaning money is a brotherly act of charity.

What about donating money, you give money and you get nothing in return? Don’t you think it is dhulm? (Edit: Shaikh is asking these leading questions for us to think and understand the concepts.) This is called hiba, giving a gift. Hiba is also a different category.

What about foreign exchange?
Exchanging dollars for rupees. It’s like gold to silver, it has to be spot it does not have to be equal but has to be spot transaction.

You cannot enter any futures market for foreign exchange. What if they charge you though, the bank charges you for it. Is that halal? They have a transaction fee. So what about that, is that fee halal? You giving them x amount of dollars for y amount of rupees plus an additional. (class discussion on this)

There is only a slight change between changing hand to hand and changing over a period of time. This would open the door to riba. That is the reason why shariah is very careful about exchanging gold for gold, or silver for silver, either not on the spot, or over a period of time.

With respect to foreign exchange transaction fee, is there any way we can get around it? is there any way we can analyse it and say it’s halaal under this circumstances? When you exchange gold for silver, the rate of exchange is up to you (decided between the two trading parties). Just tell me how many pounds are you giving for $100. in that amount, they include their charge etc. Whatever we agreed on is acceptable.

Have any of you, ever exchanged, gold for gold, silver for silver, currency for currency....and have you ever got more than what you got or got less than what you give? Would anyone give and take back less?

What about when you exchange your spare change and get bills in supermarket?
There is a fee deducted from the change. This is strictly forbidden by the hadeeth. Even banks charge you some fee unless you role up the coins in bundles.

What about when you buy jewelery? So when you buy jewelery, gold for gold, you’re paying more than the gold you’re getting. Is that halaal?

If you can pay for the workmanship for the jewelry. Why not charge for my cash?

Most ulema say that it is not halaal to charge for the workmanship of the jewelry, the amount charged for labor can be used to buy more gold so it means you have a transaction in which amount of gold to gold transaction is not equal which goes against the hadith.

However, Ibn al Qayam is of the opinion that it is permissible to charge for the labor to make jewelry from gold.

Let us say that I make jewelry, how much amount am I going to sell it for?  I am selling it on the Santa Cruz board walk?

How about if you are selling some Calfornia medjool dates and I have some other type of dates, can I exchange two pounds of one type to another?  If no, then why should I be able to exchange more gold for gold jewelry with workmanship.

Gold jewelry is liquid or equivalent to cash and is a medium of exchange. Since these transactions can lead to riba. Hence the reasons to block any means by which riba can be introduced through these transactions. Riba-al-fadl is prohibited in the shariah as it is a means to the greater riba (direct interest), likewise these transactions have to be scrutinized to block any means to riba.

Precious stones have never been used for exchange as a currency. They are not very common and not used as a medium of exchange. On the other hand water is so common (barring exceptions), that it cannot be used as medium of exchange. Gold is abundant and has been used as a medium of exchange.

Principle: There is no riba even in the case of necessity. You can consume alcohol or pork if you are dying due to starvation, but there is no exception for riba. We will discuss this in the next quarter.

Exchanging large bills for change and if there is a shortage of change (coins), there might be a case of necessity. But be careful there can be no exception for riba, it is forbidden under all circumstances.

Gold for gold, silver for silver, has to be hand to hand and equal in amount. When you send money overseas, there is some effort involved in the transaction. This would be similar to the case of exchanging gold for gold with ornamentation due to workmanship. You have to be very careful about these transactions. Since this is the essence of riba. (Shaikh quoted a hadeeth of where the messenger said to Bilal “....hada ainoo riba” - ...that is the essence of riba. and this is related to exchanging lower quality dates to higher quality dates)

Currency exchange, could be considered as gold for silver.

Shariah-Principle: (1) The more homogeneous or closer the things of exchange are, the rules are quite strict for example hand to hand and equal amount for gold-gold.
(2) if they are close to homogeneous, but different entities, then they can be unequal in amount but the transaction has to be on spot.
(3) If the items are heterogeneous then you are free.

An increase in debt does not add any value to the economy. It is exchange in heterogeneous objects that wealth is generated and economy thrives.

Cashier’s check fee: It is equivalent to getting money out of the ATM. For a $100 cashier’s check, you have to pay $108. These are doubtful things and you should only resort to them when absolutely necessary. Because you are justifying the additional $8 for the work done by the bank, what is stopping you from charging somebody else for the money that you exchange with them over time.

What about ATM fees?
You could say that there is some expense to stock the ATM machines, but you are exchanging dollar for dollar, gold for gold, You have to be conscious of it and be careful about it.

What about buying dates with a debit card?
If you buy dates for gold, it is listed as FREE in the table. You are free. So you can buy dates with a debit card. So the shaikh is not sure about that fatwa.

Dollars for jewelry is equivalent to gold for silver and the only condition is that it should be a spot transaction.

Question about charge on delivery.  Most people don’t use cash on delivery now.
Don’t charge until it is shipped. But the ownership has to be transferred to the buyer when shipped and this is not the ‘urf of the land(US). The

Q: This is related to the above Q - for selling gold jewellry online, alternative is if the below Answer can be used - Shk did not give any opinion on this.
If you extend ibn al Qayam’s fatwa and say the jewelry is not like currency, then you can do it. Shaikh will check on it.

Q: Zakat on Gold Jewellry - the question was not related to Zakat but related to the consideration of wether gold as jewellery different than Gold as currency.
A: Just because it has zakat on it, does not mean that it is equivalent to currency and something does not have to be currency for it to have Zakat on it, e.g. Animal Farms etc..

What about purchases with ATM card and they charge 2% to the merchant.
We still have a long way to go and we will discuss it later????


What does Riba mean?
Riba means to increase, to grow. One can find many words in Quran based on this root. The word Yurabi Sadaqat in Quran is refering to increase in wealth.
Also tarbiyaa (to nurture or to grow) is from the same root.

Riba al-Fadl that we discuses last time, what are the items that are explicitly mentioned by Prophet(saw).
In the hadith we have 6 items (this chart is from last lecture):

Gold

Silver

Wheat

Barley

Dates

Salt

Gold

=, S

S

F

F

F

F

Silver

S

=, S

F

F

F

F

Wheat

F

F

=, S

S

S

S

Barley

F

F

S

=, S

S

S

Dates

F

F

S

S

=, S

S

Salt

F

F

S

S

S

=, S





S means hand to hand, Spot transaction
= means the same value
F means free transaction & no restrictions
RED: Medium of change, Measure, store of value
GREEN: Staple foods

Footnote:   Any exchange of money has to be Spot and equal (=, S).  See highlighted cells in above table.

Do we understand from this hadeeth that these are the only items that are subject to Riba Al fadl or can we by analogy extend this to other item? If that is the case we have to know what is the illa (the reason) that puts it into this category. What do you think about this, are these only items? Can we add oil to this list?


What is common among the six items (Gold, Silver, Wheat, Barley, Dates, Salt) listed in the table?

1. Gold and Silver - common feature is they are a medium of exchange, measure and store of value.
2. The foods listed are staple food items, and they do not perish (i.e. non-perishable).
3. As a whole, these are  necessities of life.
4. They are fungible and it applies to all of the items in the table.
5. Almost any fungible can be used as money and they have been used as money.
6. One thing with necessities is that it is more likely that people may borrow and barter in these things.  They are more likely to be in need of these things and are more likely to borrow (or forced to borrow).This opens the door for time, etc.

The Dhahiris (literalists) considered these as the only items, the other four madahab don’t consider these to be the only items).  Once you agree that these are not the only items then the next important thing is to understand what is the illa for those items that are included in this set?  For example, oil (the thing that we go to war for :-) …. will soon be water...?

But once you say these are not the only items, then we need to find Illah behind Prophet (saw) mentioning these items. Can we add Oil to this? Is it possible to add oil and electricity as another item in the table? How would we add to this table? On what basis can we add to the table?

Rice, sugar - Can you add it on the basis of necessary staple food items.

Milk has a short shelf life, it is perishable item.

We have to discover an illa (an effective cause) to add item to the table. Can we say that there are two types of effective cause, one for gold/silver and another for wheat/barley/dates/salt?

Scholars differ on what is the illa and the approach.

Hanafi approach for adding items to the table

Key behind of all of these things (what puts them in this table) is that these are commodities that are exchanged either by volume or weight. For example, apples and oranges in the times of Hanafis were sold by number and not by weight.

Therefore anything that is fungible and is sold by volume or weight will fall under the law of riba al fadl.

Fungible means homogeneous. Are cows fungible? No they are not (one cow is not the same as the other). You inspect a cow before you buy it, but you don’t care for individual dates.

Non fungible items do not fall under riba al-fadl, e.g. animals, houses

Are manufactured items fungible? Does it have to be brand new for brand new?

Can I sell you one sheep for two? Can I sell you sheep and get paid over time? Yes to all.

If something is perishable, you cannot trade over a period of time. A non-perishable item can be traded over a period of time.

This criteria of the Hanafis is easy to use, majority can understand it and apply. Commodities have to be fungible and sold by volume or weight.

You cannot borrow a non-fungible and return it after a period of time. For example you cannot borrow a cow, slaughter it and return it. However you can borrow dates or salt and return it.

What about copper and zinc?  They are not treated as gold and silver.
Copper coins are called flus (arabic word).

Does this illa make sense?
It is simple.

Homework: Think of some way of critiquing or supporting the Hanafi view.

Next class is on Saturday and not Sunday.

Note: Somebody deleted today’s notes by mistake. Please be careful when you cut and paste. I am glad I had kept a backup. That was scary.



2011-07-30 Class Notes

Today is the last day of the quarter and the last day that we will be discussing riba al faadl.

Clarifying from Last class: When you exchange money, the money is not tied to the dollar and can be exchanged at any rate that is agreed by both parties.  i.e. how many Euros will you give me for this currency.  In reality, it won’t be like this as there will be a service charge but overall it can be seen as exchanging money for money.

Is it permissible to lend somebody barley and get barley in return?
Lending is different from a business transaction. Anything you lend has to be fungible, you can borrow gold, similarly you can borrow barley.

In Arabic there is a word for lending something fungible and something that is not fungible.

If I let you borrow my expensive car, I expect the same to be returned. But when I let you borrow $100, I do not expect the same $100 bill in return. It has to be US Dollars, but doesn’t have to be the same exact bill, since cash is fungible. A car is not fungible.

Q: The person is asking if the following scenario is a zero-sum game. The scenario is a telephone interview and it asks for your opinion about some transaction. Now the information is sold to others and you do not receive any compensation for it? Is this zero-sum game?
A: First is information saleable? Yes. The interviewee can always reject to be interviewed. And that is the answer to the question.

Q: What about sweepstakes?
A: If there is a free sweepstakes, you don't have to enter into a business transaction to enter into the sweepstakes. In non-business transaction, the shariah is much more flexible and you can participate in free sweepstakes.

Riba al Faadl
What is the key component beyond transactions where non-spot transactions are not allowed, it has to be fungible and based on spot exchanges.

What is the illa from the Hanafis?
Anything that can be sold by weight or volume.  They base this on the idea that in riba al faadl, the exchange is not equal and this can occur in anything that is sold by weight or volume and it can be prevented in anything that is sold by weight or volume.

What is sold by weight or volume can change over time.  For example, plaster. How is plaster sold nowadays? It changed from powder which you have to mix with water, to ready mix plaster.

One of the things that the Hanafis speak about are apples.  How are apples sold?  In the “good old” hanafi times, apples were sold by count, not by weight or volume, so back then it would not be considered in the same category as described above.  Now however, they would fall into this category as they are sold by weight now. Apple is perishable, and it does not matter, as long as it is fungible and sold as weight or volume.

This is also one opinion of Ahmad ibn Hanbal and Az-Zuhuri and also the view of the Shi’a (Zaidis and Jafaris).  

Shaikh is now enquiring the students about the critique of this Hanafi view, which was our homework.

So here is the answer from the Shaikh about the critique of the Hanafi view:
According to this view, any money other than gold or silver does not fall into the category of riba al faadl.  Gold and silver are exchanged according to weight.  Dollar bills are not exchanged by dollar or weight.  So for example you can exchange a $1 bill for 75 cents in areas where there is not much change available.  Here we are only talking about riba al fadl and not riba al Nasi’, there the rules are different.
(this exchange has to be hand to hand, and it is a natural barrier that none likes to exchange that which is more with that which is less)

(Edit: So Shaikh has shown us an example, where riba al fadl is permissible according to the Hanafi view, which looks quite damaging.)

For the Malikis and Shaf’is, when it comes to the question of gold and silver, what is the illa behind exchanging these things, for them it is the intrinsic value of the metal. What does this mean?

The piece of paper (used in paper currency) does not have any intrinsic value.  The intrinsic value is carried in the metal of gold and silver (it has a metallic value).  

Why does Shaikh say that the Hanafi view is not that damaging, even though it looks like it?

Why is there no negative interest rate?
Because nobody is going to do it. It means the the lender is gong to return less over time.

Similarly exchanging currency, nobody is going to do it, that is the reason why the scholars say that nobody will exchange $1 bill for 75 cents.

For all of them have to be hand-to-hand, or spot transactions.

Ibn Tayymiyyah and Ibn Qayyim consider the illa for gold and silver to be the measure of value, in other words, they consider it to be money.

Footnote: In prison, cigarettes are considered to be money, in some islands, clams are considered to be money, etc.

So anything that plays the role of money have to follow the rules of riba al fadl. They are ribawi items.

Imam Malik and Maliki school they talk about the intrinsic value of the medium of exchange.
There’s a statement from Imam Malik saying that he has a different view.  This was about exchanging copper coins (flus) for dinars.  He did not like the idea of not doing it hand-to-hand.  He said that if people agreed to make money for hides and skin, I dislike that they should then be exchanged for gold or silver over time.  This is not the well-known opinion from Imam Malik.  The well-known opinion again is that it is the intrinsic value of gold and silver that requires a spot transaction.

In hyperinflation, you might have to fit the Hanafi view, because you have to use wheel barrows to shop for everyday items. :-) (Edit: See the hyperinflation in Germany before World War II or in Russia during their Revolution.)

For other items to the Malikis the illa is that they are sources of nutrition and they are storable and non-perishable. So these are now the Ribawi items, and other items which are of same characteristics are going to have the same rules.

What brought them to this conclusion?
They say that prohibition of this kind of riba is for people not to cheat and deceive each other. They apply to rice, wheat, corn, eggs and so forth. In the case of the shafiees, they take the other four foods and divide it into 3 categories and

1) staple food, like wheat and barley
2) eaten for enjoyment , like dates
3) amelioration food for serving the body

So any food which falls into these categories will be Ribawi food. For example, iron can be exchanged without following the rules for ribawi items.

Shafiee says that if the word is derived from the general meaning then the ruling is from the general meaning.

For example: ..... taaam is derived from the word for wheat???? and the ruling for wheat applies????


Hanafi madhab: Abu Hanifa and Abu Yusuf say that it is permissible to sell an animal that is used for consumption. So they allow this transaction.

The other three madahab say that it is not permissible to sell meat in exchange for other meat.

Shafiees say, that meat is a ribawi item and its rules are to be applied.

Morroccans dry and cure meat for a long time, it is powerful stuff. It is storable, It is nutritious.

Hadeeth: Saeed ibn Musayyib reported that Prophet saws forbade the sale of an animal in exchange for its meat. This is narrated by Saeed ibn Musayyib.

He is one of the tabieen and this is a mursal report. In fact, the Prophet saws said it is okay to trade animals, one animal for two, as long as it is hand-to-hand. This is sahih hadeeth according to al Albaani.

This proves that live animal is not a ribawi commodity. If you can trade it hand-to-hand with different amounts, this proves that it is not a ribawi commodity. Refer back to the table from the previous classes.

So in case of exchanging meat for a live animal, we know that live animal is non-ribawi, and there is some question about meat, according to some madhab, it is ribawi.

It supports the Hanafi view that you can exchange meat for a live animal. But not how they got to the conclusion.

Animals are not fungibles. That means animals are not just used for consumption, they could be used for transportation, for creating a stable of animals, etc.

If you trade a ribawi item like gold for a non-ribawi item, it is permissible. Refer back to the table.

What about exchanging one watermelon for two watermelons?

Watermelons are ribawi items, you cannot do it according to the Shafiee madhab. And according to hanafi madhab, it has to be the same weight or volume. See the discussion of apples or wheat.

Q: What about exchanging flour for wheat? Does it matter what type of flour, wheat flour?

According to Shafiee it is haraam because of nutritious value. According to Hanafis it is haraam because they are exchanged based on weight

What about selling bread for flour?

Note: Pita bread is sold by weight or by number of items.

There are some parts of the world, where we do exchanges by kind and not money. In the west we do most of our transactions using money.

Ibn Rushd in bidayat al mujtahid says that riba al fadl is related to efficiency of the transaction. Once you turn everything into money, then it becomes easy to value things.

But if you trade six count of bread for flour, is that trade halaal?
By Hanafi, it would be halaal, but according to others it is not. Is this true?  According to our table, we can exchange wheat for barley in our table. So what about bread for flour?

You can exchange dates for barley, so can you exchange bread for flour?

For the Shafiees, bread and flour can they be exchanged? Why or why not?  You can exchange it, but it has to be hand-to-hand. If they are the same item, then it has to be same weight or volume, but if it is different then it does not have to be same weight or volume.

The question is whether you can delay payment.

Since you can exchange ribawi items, hand-to-hand and the same amount.

But in the case of bread for flour is permissible to be exchanged according to all of the madhabs, it does not have to be same weight or volume, because of the change it has taken place due to the preparation of the bread.

For the Shafiees, bread is still a ribawi item, and when you exchange one bread for flour, it has to be a spot transaction. But it can be different weight or volume.

For the Hanafis, you can delay the payment, because bread is not a ribawi item.

For the Shafiees, they do not allow transactions between wheat flour and wheat bread, unless it is same volume or quantity.

Exchanging limestone for dates.
Are these ribawi item?
Dates are ribawi.
Limestone is sold by weight, so therefore according to the Hanafis, it is ribawi.

How about exchanging plaster for dates?
It has to be spot transaction according to the Shafiees.


The dhaheeris or literalists will say that there are only the six items listed in the hadeeth and stop at that.

What about oil?
Oil is sold by volume or weight. According to Hanafis, it could be a ribawi item.

We have different qualities of oil and therefore has to be traded in a spot transaction.

If you have different qualities of oil, then you have to sell it and then use the money to buy the different quality of oil.

So for the Hanafis, oil is already in the table. The Shafiees and Hanbalis have to add a new item to the table.

Sami Suwailam has added oil to the table.


What about trading gold for oil?


These are important items because of commodity exchanges even today.

Shaikh had an interesting comment about Behasti Zaywhar, he seems to know what Indias and Pakistanis follow and read.

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