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Fiqh of Islamic Finance

Fiqh of Islamic Finance

2012 Spring Session (March 25 to May 27 2012)

Class taught by Shaikh Jamaal Zarabozo

Planned topics for this quarter include: insurance, student loans, credit cards, stocks (time permitting).

Recommended Text: Understanding Islamic Finance by Muhammad Ayub.
Time: Sundays 6:45 - 8:00 PM PDT

Course Outline:
Student Loans
Credit and Debit Cards
Stocks (time permitting)

Suggested Reading in Ayub:
Insurance pp. 417 - 431
Loans 159 - 167
Credit and Debit cards 379-383

The Question of Insurance Outside of the “Lands of Islam” by Shaikh Jamaal al-Din M. Zarabozo
Proceedings of the AMJA 2003 Conference in Copenhagen Denmark

Reality of and Ruling on Student Loans in the United States of America by Dr Main Khalid Al-Qudah, Member of the Assembly of Muslims Jurists in America (AMJA) Fatwa Committee

2012-03-25 Class Notes

Overview of the class agenda
We will discuss the topic of insurance. There are types of insurance and just as we found that there are types of rent to own agreements that could be permissible. So we are going to discuss how some insurance can be legal Islamically. We will discuss the topic of student loans. We will discuss paper written by AMJA on the topic of student loans. And then we will discuss the fiqh of credit and debit cards. And the last topic is investment in stocks, but we might not have time for it. We will discuss the main points on this topic and then try to answer the auxiliary topics related to it, such as cashback, etc.

If we have another class next quarter, then we might discuss the other topics raised by the students, but it depends whether there is enough material to discuss for a quarter. Basic principles of investment, will be discussed in more details next quarter. We could discuss sukook, stocks and other investments.

Why insurance?
The question of insurance: The question related to insurance, there are a number and part of the problems is that we are living in non-Muslim societies and specially in USA which has the least welfare for its citizens.

Depending on what state you live, for health insurance, there are different laws. Some laws can put liens in your property if you do not have health insurance and you have bills to pay. A doctor in Tennessee removed a cast on patients arm since he did not have insurance to pay for it (he was sued and convicted). And then there some jokes about insurance in Massachusetts and how the former governor is now disowning it, referring to Mitt Romney.

Insurance has existed for three or four centuries. In its current form, it is a modern phenomenon.

Opinion of earliest Muslim scholar about Insurance
If you try to find who have discussed this, one of the earliest, was a Hanafi scholar from Syria whose name was Ibn Abideen (d. 836 Hijri) , he concluded that it is not halal. Since his time there are number of years regarding insurance. It is now a matter of Ijtihaad and some are saying it is a need, and some are coming out and saying it is permissible. Opinions are spread: everything from haraam to clearly halaal.

What type of insurance are we studying?
The best place to start is to start out with a clear conception of insurance. We will deal with modern commercial insurance as opposed to social, co-operative insurance.

The key to understanding any ruling is to have proper understanding on what the things is. In shariah we have different kind of contracts like murabaha etc. In order to have proper ruling we need to identify what category it belongs to. If we don’t do that that our conclusion can be wrong. Unfortunately among the Muslim scholars they have differed on the nature of insurance itself, this lead to verifying opinion from Haram to Halal because the concept is very different among the ulemas.

Is Insurance “baya?”
The first step is to identify what is insurance closest to? It is closer to “Al-Baya” trade or transactions. What is the most basic definition of baya? It is exchange of wealth or property for wealth or property.

What is insurance? Is it a type of baya? How would you define it?
Definition from Miller and Jentz: A contract in which for a stipulated consideration, one party agrees to compensate a person for loss on a specific subject on a specific peril.

If you intentionally destroy a property, then there is no compensation. How do they compensate you for your loss? It is usually money, it has to be money and not the property that is insured.

How do you classify insurance from the shariah point of view?
You could say that it is Money paid to the insurer and in exchange for money in the future, based on some probability of an event.

Thus can we consider insurance as a loan from shariah point of view?
No, as the loan is brotherly act from Islamic point of view.

Thus it is not loan, can we say this is exchange of money?
No, as exchange of money has to be on the spot transaction and there can be no delay, thus this is an issue.

In Baya, we can have mutually honored transaction and we can also have charitable transactions such as loans, thus we don’t apply the law that it has to be on the spot transactions in baya. (Note: We studied two quarters ago the type of commodities that have to be exchanged in spot.)

Could commercial insurance be considered a kind of mutual support or contract of charitable nature?
Some of muslim writers such as Masoom Bilah, who agree that is permissible they make the argument that this is type of charitable nature. He says that the primary objective is to create mutually honored transaction....  Before him, Mustafa az-Zarka who was a leading proponent of permissible insurance.

Some say that the goal of insurance is to create mutually beneficial transaction?
Every business transaction is supposed to be mutually beneficial, there is benefit for both parties. And it is not by definition charitable, since it is the goal of all transactions.

Goals of both parties are mutually exclusive. Insurance wants to make sure that they don’t want to pay out the money and the insurer wants to make sure he gets the most amount of money from the other party.

When you get insurance it is not necessarily a mutual support, one of the motives of getting insurance is to avoid possibility of future harm and to reduce the risk. There is no problem in this, the question is how is this done ?

In the case of insurance, ulema of Kubra in Saudi Arabia said that this is a mutually onerous contract. They are not out to help you, but it is clearly a contract that you try to negotiate and get the best out of them. So it is not a charitable transaction.

Insurance is not operating a charitable institution - quote from ..... in the text book. In fact insurance companies make large and substantial profits, they are not small profits.

In a book on Insurance by Baker?... the author says, if you can afford the loss, then you are better are not insuring it. One half of the insurance payments go towards the claims, and the rest to the companies bottom line. They take advantage of human weakness and fears of risks.

Frederick Mishkin who is the author most read on this topic related to financial economy, he wrote, insurance companies make profit ..... why do people buy insurance, when they pay more in payments then what they can get in claims from the companies, he says because most people are risk averse. Insurance companies have large advertising budgets in order to take advantage of your weakness.

If you have money put aside to replace the item, then it is definitely cheaper than insuring an item against loss.

All the insurance companies make large profits. Health insurance is probably the least profitable since it is most susceptible to losses.

We are conceptualizing insurance right now and trying to determine whether it is a charitable transaction or it is mutually onerous transaction.

In a PhD dissertation, .... writes that none of the experts that he interviews consider insurance companies to be charitable organizations at all. Another scholar from Sudan says that they are far from charitable organizations.

Is the person who is insuring something, assuming he is not forced by law, is he entering a charitable transaction?
Suppose he gets sick, he is trying to remove the burden at the expense of somebody else. So it is not charitable even on his part. Does he care how the policy holders are doing? No he does not care about it.

Conclusion: Commerical Insurance is not a charitable transaction. Period.
Thus, this argument that it is charitable organization, this is basic argument for scholars to argue that it is permissible. This concept among these people is not correct. So the basis on which some scholars have ruled it permissible is simply incorrect.

Mustafa Zarqa also makes another argument. The fact that the insurance is new contract outside of the old contract, does not prevent it from being permissible. Can you introduce a new business contract in Shariah, the basic principle is that it is allowed. Thus he says that, just because of it being new it does not make haram as long as it doesn’t contradict the established ruling of shariah. Now the question is, does it violate the established ruling of shariah ? We have to avoid Gharar, we have to avoid Riba.

Basic Principle: New contracts are permissible unless they are proven to be Haram

Some of the basic things which needs to be avoided in transaction, One has to avoid gharar (uncertainty, speculative risk), riba (interest), jahaalah (unknown quantity), qimaar (gambling).  Now the question is how does the insurance deal with this key components.

Prophet (saws) prohibited gharar,  It was narrated that Abu Hurairah said: "The Messenger of Allah forbade Gharar transaction and Hasah transactions." (Sahih hadith)

أَخْبَرَنَا عُبَيْدُ اللَّهِ بْنُ سَعِيدٍ، قَالَ حَدَّثَنَا يَحْيَى، عَنْ عُبَيْدِ اللَّهِ، قَالَ أَخْبَرَنِي أَبُو الزِّنَادِ، عَنِ الأَعْرَجِ، عَنْ أَبِي هُرَيْرَةَ، قَالَ نَهَى رَسُولُ اللَّهِ صلى الله عليه وسلم عَنْ بَيْعِ الْحَصَاةِ وَعَنْ بَيْعِ الْغَرَرِ

Gharar is kind of transaction which is highly risky and speculative transaction. It is zero sum game, where one side is going to gain only at the expense of other, it is not a win-win situation, where one party gains and other party not. Is gharar involved in insurance? I get the contract today, and tomorrow I get cancer, in this case I am paying which is smaller in comparison to what insurance going to pay us, in this case both the parties are in the dark. Vice versa is true as well, where I pay for 20 yrs and I never claimed. Thus there is no idea if we are going to get any money on this or not.

Conclusion: Commerical insurance transactions are based on gharar.

How do insurance come up with insurance premiums? They have some mathematical and statistical calculations based on probabilities. Could someone argue that it is science and not gharar? This is from one side where they use the calculation to come up with the number, they have less gharar.

Most of the insurance companies purchase reinsurance in order to protect from paying out large claims. In fact in some natural calamities the insurance companies refuse to insure and the losses are covered by government and taxpayers.

Thus from the point of view of person who is buying the insurance there is no doubt that there is gharar involved. Thus in gharar where it is acceptable, this is true in every case of transaction.

You cannot sell fruits on a tree, until they start to ripe. Because diseases before they ripen can wipe it out, but the risk after it start to ripen is much more manageable and allowed by sharee’ah (as we discussed few quarters ago).

Chapter. The Sale of fruits before their benefit is evident (i.e. they are free from all the dangers being spoilt or blighted)

2193. Zaid bin Thabit (ra) said, "In the lifetime of Allah's Messenger (saws), the people used to trade with fruits. When they cut their date-fruits and the purchasers came to recieve their rights, the seller would say, 'My dates have got rotten, they are blighted with disease, they are afflicted with Qusham (a disease which causes the fruit to fall before ripening).' They would go on complaining of defects in their purchases. Allah's Messenger (saws) said, "Do not sell the fruits before their benefit is evident (i.e. free from all the dangers of being spoiled or blighted), by way of advice for they quarrelled too much." Kharija bin Zaid bin Thabit said that Zaid bin Thabit (ra) used not to sell the fruits of his land till Pleiades appeared and one could distinguish the yellow fruits from the red (ripe) ones. (Saheeh al-Bukhari, the books of sales)

Insurance is aleatory promise on the condition of a fortuitous (random) event. ..... Promise is not within the control of the promisor.

One of the aspects is that it makes it a completely ...

Is there riba involved in insurance? Why and how?
Yes, Since it is money exchange and It is not on the spot and most likely it is not the same amount of money and because of that scholars say it is a ribawi contract.

What is the thing that you are buying?
You are basically trying to buy money.

Those that say insurance is legal, say that you are not buying money but you are paying for security and peace of mind. Let’s assume that it is true.

Even when you have mutually onerous contract, is peace of mind something you can sell in the shariah? Can you quantify peace of mind?

They are not selling peace of mind. If your new car is totalled, then you will get peace of mind would be to get a new car. Is it permissible to sell peace of mind from the shariah perspective?

From shariah perspective, the something what you are selling should be legal, it has to be in existence (I cannot sell a commodity, which I don’t have it) and it has to be deliverable and it has be precise determination.

If insurance fails to live up to the contract, can they say that “we gave him what we bought from us”, which we gave them for last 6 years and why does he want money now.

Conclusion: Thus in shariah point of view “selling peace mind” cannot be done as this is not an object which can be sold. In reality what you get is money in exchange of money.

If you know insurance companies well, you should never have peace of mind when dealing with them. There are companies that go after insurance companies on behalf of hospitals to recover money that is supposed to be paid to them.

..... begin their discussion of insurance companies by saying, that insurance companies are financial intermediaries who .... they deal in money for money.

Insurance companies invest the premiums that they receive from the insured parties. 74% of funds deposited in life insurance companies are in bonds and other financial or ribawi transactions and 21% in stocks and 5% in real estate. Shaikh gave the same breakdown for .... insurance companies.  Is this halal, that someone is investing in haram transaction with your money. Of course no. So this becomes a practical question, somebody is taking your money and investing in haraam in order to pay you in the future.

Does the need and benefit override this prohibited aspect that we have discussed so far?  We will discuss this question in the next class.

2012-04-01 Class Notes

Last time we discussed insurance from the point of view of some of the key aspects of shariah that insurance violates or does not violate. Some of the key issues that we discussed are gharar, jaalah, money for money, riba. So basically all of the things that we should avoid are there in insurance.

Hanafi school ruling on financial issues is based solely on need and necessity
There is another issue with respect to Hanafi school and insurance. In the Hanafi school they have tendency to base their rulings on finance based solely on need and necessity. Even if there is some clear aspect of riba, the Hanafi school has tendency to approve based on need and necessity. Among their contemporary scholars like Mustafa Zarqa, say the needs and benefits outweigh the prohibition.

Hanafi school says insurance is allowed due to need and benefit
The Hanafi school makes similar argument for insurance and they say that this need will outweigh similar problems with modern day commercial insurance. Some authors have gone so far that Rafeeq-al-Misri, Sanhoori, due to need and benefit consider it (insurance) Halal.

Mustafa Zarqa gives some examples, e.g. the dropping of livestock is impurity, but for the bedouins, this would cause some considerable hardship, so it makes sense to declare it as pure.

Answering the Hanafi opinion about making thing permissible due to its perceived benefits
But just because something has some beneficial aspect to it, doesn’t make something Halal. e.g. Every day we receive some reports that say alcohol has some benefits and that you should drink some amount etc. But Allah (SWT) makes it clear in Quran and the harms of alcohol and gambling outweigh the benefits. (2:219)

يَسْأَلُونَكَ عَنِ الْخَمْرِ وَالْمَيْسِرِ ۖ قُلْ فِيهِمَا إِثْمٌ كَبِيرٌ وَمَنَافِعُ لِلنَّاسِ وَإِثْمُهُمَا أَكْبَرُ مِن نَّفْعِهِمَا ۗ وَيَسْأَلُونَكَ مَاذَا يُنفِقُونَ قُلِ الْعَفْوَ ۗ كَذَٰلِكَ يُبَيِّنُ اللَّهُ لَكُمُ الْآيَاتِ لَعَلَّكُمْ تَتَفَكَّرُونَ

Sahih International

They ask you about wine and gambling. Say, "In them is great sin and [yet, some] benefit for people. But their sin is greater than their benefit." And they ask you what they should spend. Say, "The excess [beyond needs]." Thus Allah makes clear to you the verses [of revelation] that you might give thought.

Gambling was also considered beneficial as means of charity during the time of the Prophet
During the time of Prophet (saws) gambling was like lottery now a days, most part of the gambling was given out as the charity, this was part of Urf of Arabs at that time. So Allah (swt) says that there is some benefit in it, just a fact that it has some beneficial this does not make that thing halal. Just looking at insurance and say that this has some kind of insurance and thus it is halal, this is not the proper way to look at it.

What are some of the benefits of commercial insurance>
Let us try to itemize all of the benefits of insurance and then try to answer whether it truly is beneficial as Hanafis make the claim.

Student observations about what are the various benefits of commercial insurance:
1. Minimizing catastrophic financial events.
2. Shared, distributed losses.
3. Peace of Mind.
4. Other party will be compensated.
5. Benefiting from the profits made by insurance companies.
6. Investment in large projects. Humans are risk averse, thus they do not want to invest into large projects thus this is a way out of it.
7. Preventing bankruptcy which is the same as #1

Observations made by some of the Muslim scholars about the benefits of commercial insurance:
Trickle down economics: When rich becomes richer and rich, there are some money which trickles down from the rich and this benefits the poor.

Looking at the benefits, does this mean that we must come to conclusion that it is halal?
No, we should also look at the harms of insurance, as mentioned in the verse of the Quran .......

Shaikh says that there are so many problems such as gharar, riba  that they will indeed cause harm to mankind.

Insurance was not practiced during the time of the prophet and it is not specifically covered in the texts, so we have to study it in detail. If something is forbidden in the text then we do not have to enumerate the harms.

What are some of the harms of Insurance?

1. The rich become richer and poor become poorer, this is pure profit driven, the wonders of insurance company make lot of money, as we have analyzed last week.

2 This makes the money to be concentrated in the hands of the rich or few which is against the shariah. As evidence Allah swt says in Surah Al-Hashr [59:7]

كَيْ لَا يَكُونَ دُولَةً بَيْنَ الْأَغْنِيَاءِ مِنكُمْ ۚ
Saheeh International: “so that it will not be a perpetual distribution among the rich from among you.”
Based on this many ulemas said that it is not allowed to have the wealth in the hands of few but it has to be distributed.

How does insurance lead to maldistribution of wealth?
It leads to concentration of wealth. It is also a regressive tax on the poor since poor have to pay a larger amount of their wealth, the richer the person is the less are their needs for insurance. In some states, the rate of insurance is based on your creditworthiness which means that poor have to pay much more for the same amount of insurance.

The insurance industry is very profitable and the rich are the ones who own it. For lesser developed countries, the reinsurance is done through more developed countries, thus this is transfer of income from the poorer nations to the richer nations.

3. There is correlation about insurance into the medical expense, this is skewed in a more terrible way especially in US.

4. If you have insurance, the people tend not to be careful. Now a days even risky financial business can be insured.

5. Muslim author Sulaiman, who did Ph.D. Dissertation on insurance, he visited Egypt, US and England and interviewed large number of experts in the field of insurance, One of the question he asked “If overall ….” He found it 55% of those he interviewed experts and researchers in the field of insurance, they said the evil of insurance outweigh its good. Another 25% said insurance is evil and does not contain any good, 15% said good and evil are equal, only 5% said that the good outweighs evil.

Thus we are starting with the fact, that it is very problematic contract in the view of the Shariah, it is not just one aspect that it is violating, if it was one questionable aspect then there could have been a situation that it could be overlooked.
However, it is problematic on so many ways like Gharar and Riba, then it needs some outstanding evidence to say that it is both needed and beneficial, if it is only need or only beneficial then it not permissible. It has to be both needed and beneficial. And the burden of proof is on them who say that good outweighs evil. There are some beneficial aspects that comes out from insurance but that is not enough to say it is halal.

Rulings by different groups
Majma al Faqhi of OIC rule that commercial insurance is not halal.
There are many ulemas and majma’ al Faqhi of OIC, Zuhaili, Salah as Sawi and many others across the world and they concluded that commercial insurance is not halal.

Of those who say it is permissible: Mustafa Az-Zarka presented his first opinion in 1961, Rafeeq al-Misri, Muhammad Al-Baahi, ‘Ali Khafeef.

Conclusion: Thus the default ruling is that commercial insurance is haram.

Discussion about Dharura (law of necessity) and whether it can be applied to insurance
Now comes the question that can we resort to it in the case necessity. For example, people living in US, is there any instances that we have resort to insurance. For example, Car, Medical, Rental Insurance (some states may require it), for business Workmen Insurance, etc.

What are some of the principles and conditions with respect to law of necessity?

What is the definition of necessity ضرورة in Islamic shariah?
Necessity is defined as definite threat to life or limb even if it is for oneself and it is above needs, strong threat to one of the necessity of life.

When invoking the law the goal must be according to the principle of Shariah, the goal and purpose should be sanctioned by Shariah.

Is preservation of wealth is the one of the goals of Shariah?  Yes, it is one of the goals.

What does preservation of wealth mean?  You can get insurance to laptop as extended warranty, does this qualify for preservation of wealth? It is not necessary to insure my apple laptop computer and this is not strong need. Thus it is not allowed to do anything to preserve everything about the wealth.

One of the common principle to invoke the principle is that expected and fear of harm is definitive or most probable, if the probability is less or minimal then you cannot invoke the law of necessity. It is much more probable that one will get sick then any other thing. So medical insurance can be considered necessary if no other Halal alternative exists.

What about home insurance? What is the probability of harm when it comes to home insurance?

What are the conditions for applying the law of necessity?
1. The event must have high probability of occurrence (greater than 50%).
2. The law of necessity can be invoked only when you cannot find permissible and legal alternative. For example, if you are starving that you have pork and you have halal pizza which you don’t like, thus you cannot get into pork as there is alternative.
3. Only the minimum necessary of what is forbidden may be resorted to. For car, if you are forced to buy the liability insurance, thus you get the minimal what is required by the law, and not to get the full coverage which is not required by the law.

Footnote: If you have to resort to halal means and if it costs more, you still have to follow it. For example, zabiha versus non-zabiha meat, zabiha meat is expensive. If you are obeying Allah swt, then don’t worry about the extra expense, you won’t even know the way that Allah swt is protecting your health. So you do not take more insurance than required by law, and you feel that there will be high cost to you if you get involved in an accident, don’t worry about it, do what is halal and everything will take care of itself. Everything you do in the name of necessity, try to resort to as less as possible. Remember you are resorting to the law of necessity.

Footnote: Any extended warranty is a rip-off, beside the point that it is not allowed by shariah.

Footnote: Shariah is not out to cause you harm. so not making use the law of necessity and then facing the consequences of the local laws might create you many problems and put you at risk. So you should choose the lesser of the harms. This is not a reasonable question to ask whether we should avoid buying car insurance and risk the harms that might come upon you by violating the laws. You might have to resort to paying interest for bonds in order to be released from jail, now you are resorting to riba.

So in the USA, the gov’t required insurance is like auto insurance and most Ulema consider it permissible due to necessity since harm of not getting it can be quite severe.

What about Life Insurance?
According to two books Sh. Jamaal read, life insurance is the most exploitative form of insurance. So what is the necessity that can be invoked? My children will be in need when I die. So one is fearing poverty for one’s children.  
1. What happens to your children if you die today ? Why don’t you put money in the bank and have the interest. This this not excuse to get the insurance.
2. To take care of debts, again same argument that it is not allowed to haram to take care of debts.

What should you do if you are receiving life insurance benefits from work and you do not have to pay for it?
Basically the wealth that you are receiving even if you have not participated into it by making payments, you cannot consume it since it is from haram sources. The incident of Abu Bakr (ra) where he vomited the food offered by his servant after he found out that the food was from the income of fortune telling. THis was from the time during jahiliyaah and maybe he had received the income late or he had recently become a Muslim. The point is that we cannot consume the wealth if it is from haram sources.

Next time we discuss Health Insurance, mutual insurance, takaful (i.e. Islamic solutions being developed) and some Fatawa regarding insurance.

2012-04-08 Class Notes

The health insurance in the United States is different than most of the parts of the world. When many of our scholars discuss health insurance, they are discussing some kind of social or government health insurance.

Preservation of life is a goal of Shariah

Preservation of life is considered one of the main goals of shariah, and it does not mean just life support, but it means a functional human being. The goal of preserving health and life is emphasized by the shariah.

Does health insurance automatically become a necessity and permissible?

One of the main questions is: does that mean that health insurance could be considered a necessity and therefore permissible?

Can health insurance be considered a necessity, here in the United States?

It can become a big financial burden to an individual. It is far more probable than the auto insurance, harm is much more likely.

Some of the scholars of India (as their situation has a strong parallel for us in USA), like Ubaidullah Rahmani and Qasami An-Nadawi, they say it is the case of necessity. For example, if you are starving and there is pork available, and you chose not to eat it and then you die are you sinful? Scholars say that the person is sinful. Can we make an analogy to health insurance? If someone chose not to opt into health insurance, is he sinful?

What is the risk of not having financial insurance, it is financial or risk to life?  It is more a financial burden than the risk to health itself.

Even if it is permissible, are there some issues that are related to it as well. In the United States at the moment, over 50% of bankruptcies are due to medical issues.

Focusing on the individual Muslims, there are a number of scenarios:

Health insurance provided by the employer

Used to be included as a standard benefit of employment. The company is willing to provide health insurance for you. In this case, then you may accept it. If you do not have to pay for the health insurance and it is provided for you then it might become permissible.

What if employer gives you an alternative such as cash or opt out?
But if you are getting an alternative then there is one more principle in law of necessity, which is that you have to consume or participate in only the minimal. And you should try to minimize our participation. Both the scenarios whether it is provided without any burden to you or whether you have to go and buy it yourself, can be considered necessary.

There is catastrophic or major medical insurance where the deductible is at different levels. So perhaps you can manage to pay $10,000. Would there be any reason for you to get insurance with a deduction of $5,000. Strictly speaking from the view of necessity, it looks like we can look into it and try to minimize our participation given the law of necessity.

Most scholars allow it and are pretty flexible as well.

Q: Should we support universal health care as proposed by Obamacare in year 2012?
A: It is probably better from a Shari’ah point of view, but it doesn’t mean we should vote for them on one issue. Sh mentions that many people voted for Bush because of abortion alone, so they voted for Bush, ignoring the other artifacts. And their understanding of abortion was not the correct Islamic understanding either. And some of them were living in Florida, to emphasize that it was Florida that tipped the scale towards Bush in Bush v Gore in 2000.

Footnote: At some point you should realize that you are not really buying peace of mind, the insurance companies are not really there for you. This was in response to the secondary insurance or umbrella insurance policies sold by them.

Different types of insurance -- probably something to be overlooked by the Shari’a.

Mutual Insurance

The difference between a mutual insurance company, there are no shareholders, there are just members, and any profits that are made are redistributed back to the members. Mutual insurance companies exist in over 74 countries over the world. There are several in the USA, including American Family Insurance, New York life mutual, North Carolina Mutual, Pacific Life, State Farm Insurance, etc.

Wikipedia definition of Mutual Insurance:
A mutual insurance company is an insurance company which has no shareholders but instead is owned entirely by its policyholders. The primary form of financial business set up as a mutual company in the United States has been mutual insurance. Under this idea, what would have been profits are instead rebated to the clients in the form of dividend distributions or reduced future premiums. A mutual, mutual organization, or mutual society is an organization (which is often, but not always, a company or business) based on the principle of mutuality. Unlike a true cooperative, members usually do not contribute to the capital of the company by direct investment, but derive their right to profits and votes through their customer relationship.[dubiousdiscuss] A mutual organization or society is often simply referred to as a mutual. This could be seen as a competitive advantage to such companies — the idea of owning a piece of the company could be more attractive to some potential clients than the idea of being a source of profits for investors. This ownership either extends to all its policyholders or is restricted to certain classes of policyholders. Ownership rights typically include voting rights, for instance in the election of the board of directors. In a mutual insurance company, any distributed surplus funds are paid entirely to policyholders, whereas in a proprietary or stock company (one with shareholders) a proportion of the surplus is paid to shareholders while the balance is held in reserve by the insurer.

Imagine that we did something like this:

What do you think about this scheme of mutual insurance?
Members are running this company. And the members are paying in but are not hoping for anything in return.

Is commercial insurance a zero-sum game?
A zero-sum game is one in which one party wins only when the other party or parties lose. In commercial insurance you pay premiums and the only time you benefit is when you file a claim and the insurance company is forced to pay. This means I win when they lose, And the opposite is true, when the insurance company profits either when you don’t file any claims or the insurance company refuses to pay out claims.

Mutual insurance is not a zero-sum game
Whereas in the case  of mutual insurance, everybody hopes that nothing happens, thus everyone wins, if something happens then everyone loose thus this is not the zero sum game.

Thus how is this looking in halal / haram game ?
There is gharar involved, you might get a lot if something happens to you and if lot happens to others then you might lose a lot, there is uncertainty involved, thus there is gharar involved. Can we counter this argument ? This is a charitable institution and it is to benefit the members as a whole. If this is brotherly transaction then some of the restrictions differ similar to loan which is also a brotherly act. Since the intent is to make profit but help people out and thus the concept of gharar can be relaxed. This is true in donation as well, where there is possibility that you might shell out more money into the trust, but since the intent is brotherly act the restriction of gharar can be relaxed.  This is the basis of takaful. And this is one of the largest business in the world.


The idea of takaful started in Sudan in 1970’s and then it was adopted by indonesia and it is growing there. In 2008, these takaful managed premiums totalling $3 billion. And was expected to react $11 billion in 2010. There are over 250 takaaful companies throughout the Muslim world in Indonesia, Malaysia, Luxembourg, Switzerland, North America, Australia. In the US, there are seven such companies:

- Takaaful USA, established in 1996 -- many of these deal with life insurance. There is organization called, Takaaful USA management services LLC (New Jersey).
- Failaka investments from Chicago.
- Samad group (Dayton, Ohio).
- Bayt Ul Maal Inc (NJ).
- Abar Investments (CT).
- MSI Finance Corporation.

There was a question asked “Are any of these companies Shari’ah compliant?”  Ma’in Al-Qudaa’s opinion: it is an Islamic concept, but the way it works in insurance companies needs to be closely analyzed as it may be implemented in the wrong way. That is why reading the contracts is important. Basically he did not answer the question, But what is said is correct that the contract has to looked into very carefully.

One of the issues is that these takaful companies that re-insure others -- but most of those companies re-insure with non-Islamic insurance companies.

Another concern is the investment. Do you make sure it is Halal?

Yusuf Al-Shebaili’s opinion: The main difference that should make the mutual insurance Halal is the intent of the policyholder to help others. This is kind of gift or donation, but it is kind of helping yourself as well. With respect to obligation of both party here it is possible, if they need more money than you give more money. The obligation of the both party is different. The goal is not profit in and itself but if there is profit is done then it is distributed among members, but not kept with ceo’s. The control of the company lies in the hands of members of co-operative they decide how the money should be invested and how the money should be distributed.

Thus this should be acceptable in shariah perspective then the commercial insurance.

DIfferent types of models used by the takaaful companies

Mutual insurance in theory should work, but in reality the takaaful companies use different models that need to be tweaked in order to make their compliant with the shariah.

1. Mudhaaraba Model - Silent Partnership Model:

This is a silent partnership. Some people put capital and others put labor and they share the profits. One of the problem they run into, those policy members may not know how to run a company. Takaaful companies that exist is interested in the growth part where they invest. because of this they tweak the model and they create a separate entity to take care of investment, thus this entity needs to be paid separately.

Members contribute to the investment funds. And these funds are managed by the people running the company, not the silent partners. Investments result in profits. From the profit they pay 20% to Mudhaarib (silent partners). These profits are shared in whatever agreement. 80% are used towards claims. And surplus left over after paying out claims goes to the members.

One of the drawback of this is, It takes some time for the funds to be built into a working model. How does this looks in the shariah perspective ? All they introduced is that, since the policyholders are not good in investment which is been handled by Mudhaarib, this can be multinational company. The members are the ones who are going to benefit from this and not the any muslims who might be in a need.

Scholars who have studied this model is say that it is the most shariah compliant model. However there are two types of mudhaaraba model and we will study the second variant a bit later.

So this is a workable model and it has been applied in a shariah compliant manner. When there is a major catastrophe, the takaaful will run into problems, which is true for any company.

These companies try to find halaal sources for their investments, shaikh will search and try to find more information about how they invest their funds.

Most of the scholars says this is permissible model.  This model is not the most profitable model. The mudhaarib are looking for investments that are more profitable.

There is risk involved in this investments for the mudhaarib and this risk is allowed.

2. Tweaking the previous Mudhaaraba Model:

Members pay into a pool (investment fund), which result in profits and it goes back into the pool. Claims are paid out of the pool.  And surplus is paid out to the mudhaarib and the members in 20-80 payout.

Is this a proper form of mudhaaraba? No, since the mudhaarib is not getting the share from the profits, mudhaarib should get his percentage from the profit. He is getting what is left over after paying the claims.

2012-04-15 Class Notes

Communal financial practices during Jahiliyaah
We have been discussing the idea of Islamic takaful (insurance). An idea of a communal financial responsibility for one another was known to the Arabs of the jahiliyaah. And the way they practiced it was approved by the Prophet. They had a concept of al ‘Aaqilah in which if an individual member of the tribe killed somebody else by mistake, and if he had to pay blood money, then his whole tribe would participate and help him out. They also had a practice of swearing with the tribe as a whole to forego the blood money if the murder was accidental and they instead allowed sadaqah, so they swore that they would not participate in retribution.

Communal financial practices by masaajid
Some masjids nowadays participate in a form of Sandooq fund which is a kind of Takaful.

Practice of Tabarru3
The idea of cooperation and solidarity was already present in Islam. They also had the practice of tabarru3 تبرّع, which is distinct from charity or donation, and we will see how the Islamic Insurance companies try to make this distinction. Many of the takaful not only have casualty insurance but they also have life insurance.

Takaful Models
There are the three models used by the Islamic Takaful companies:

1. Mudharaabah مضاربة model - Silent partnership
Share profits based on previously agreed upon rates (not necessarily 50-50). Whereas the losses are shared by financial owners and the mudhaarib is the one who puts his labor.

But the person who does the work, does not get paid a salary. Some contemporary scholars think that getting a salary is not an issue, but traditional scholars do not believe this is the case.

They say that this is tabarru’, not sadaqa because you’re not supposed to get money back from sadaqa. If it’s tabarru’ then you may get money back. This is a very fine divisions.

Blue model: Policyholders “donate” to a savings account and to a risk account.  The risk account is used for casualties. There may be a surplus that is given back to the policyholder. There could be expenses from the savings account and risk account that can be deducted as well. Funds left over after paying out for casualties goes back to the risk account and to the policyholders also.

Red model or changes to the blue model as practiced by some takaful companies: The amount from the two accounts could also be invested by the fund manager or we will call him the capitalist. There could be funds from the two accounts as well as the surplus after paying out for casualties from the risk account that could be invested.

There are a number of issues with this model:

a. The policyholders are not going to do their investment. In this model, the question is where does the investor get his money. Does he get it from the risk and savings account investments?

b. Risk of  zero-sum game, since it is a sign of haraam financial transactions.
When will it be the zero-sum game? When the interest of one will be in conflict with the conflict of the other? It will occur when the income of the investor/capitalist gets his profit from the surplus. Then th

For it to be truly Islamic, all of the surplus amount should go back to the risk account and not to the policyholders. Some say that the distinction between charity and Tabarra3 is an artificial difference.

Many people question this idea of getting stuff back from donations. There was a tribe called the Ash’aris (as in Abu Musa Al Ashari (ra)), and the Prophet (SAWS) praised them for their generosity and solidarity: they would collect the food in times of need and redistribute it. As a result, you may get more than you put in. But they gave with the intention of giving, not expecting a return. Thus you could make the argument of getting some return on a donation.

Footnote: Classroom discussion about marxism and socialism. In the 1950s and 1960s a few books came out from Egypt that said that Khadija was the first socialist.

c. The idea of donation being a capital (mudharaabah) at the same time. You are giving a donation and at the same time saying invest it and give me back the profits. It is a dilemma. A donation is a donation. This is mostly practised in

This approach is practised in Malaysia, Singapore,  and Pakistan as well etc.

Wakala وكالة model

This was developed during the 1980s in the Gulf region as a response to the above model. In this case you pay a premium which is divided into three buckets:
1. Management/Administration fee.
2. Risk account.
3. Savings account.

Agents takes the premium as a fixed fee. You are not handing over to someone to make profits. You hire the agent at a fixed rate. Everything else remains the same as discussed in the earlier “blue model”. You pay out casualties from the risk account. There could be surplus after making the payments and you have to decide what to do with it.

Some scholars say that this model is more preferable compared to the Mudharabaah model.

This model is tweaked and they pay out funds to the manager or agent, who is an employee of the takaful company who is making investment decisions. They promise dollars per year in case certain goals are met.

One of the benefits they claim is that it is an Islamic company and all the investments are made in compliance of Islamic principles.

The problems with this model are as follows: What happens to the profits, remember if you have made a donation then you cannot expect to see profits from it etc.

Waqf وقف model (Endowment model)

Waqf can be translated as an endowment model.

Definition: Donation for a charitable goal or for your family or descendants. Can be different types, e.g. for religious purposes, or for families.

There are three kind of waqf:
1. Religious waqf,
2. Philanthropic waqf (proceeds from a farm or land go to the poor),
3. Family waqf (proceeds go to your descendants).

Waqf cannot be sold as such. But the ownership can go from one person to another.

A donor can also benefit from the waqf. So wrt these takaaful arrangements, the beneficiaries of the takaaful waqf are the creator of the waqf and the group whose members contribute for the purposes of mutual help and for covering the losses to anything.

There is a hybrid Waqf. Taqi Usmani after studying different Takaful models has concluded that the Wakaalah and Waqf are the best combination for the takaful system.

There are two parts: one is a donation and that donation that goes into the takaaful fund, and the other one is a mudaarabah fund. The donation part always stays with the waqf. In this takaaful fund you pay for the casualties, but the surplus goes into the risk account. Any excess can go to the members. There’s a portion that is fixed and doesn’t leave the waqf.

Even in the old days, if you made a waqf for the mosque, you’d frequently pay for the imaam, water etc. And then when people donate to the mosque, it goes into the waqf fund and continues to pay for the needs. Been approved by many scholars and growing in popularity.

Note: the purpose of the savings account is to increase the amount of investment.

Textbook, p. 425: There is a model that contains a wakaalah + waqf model. All of these takaful company generally do re-takaful. They need it since system is not stable, so one has to find a bigger company to hold on to.

What are the differences between the conventional and takaaful models of insurance?

1. Insurance companies are for-profit, whereas the takaaful are more for co-operations & assistance.
2. Conventional insurance companies are a zero-sum game -- conflict of interest between insurers and the insured.
3. Donation vs premium -- is this a real distinction?
4. If it is really a takaful and you are putting a lot of money into it and then you have to go to a doctor, and the doctor’s bill is $200. If it’s a real takaful and you have $200, you would not in a takaful situation ask for it to be paid. That’s the real spirit of the takaful. If the idea is really mutual cooperation, then make it a donation. You might have the right.
5. The profits of an insurance policy go to shareholders vs takaful it goes to policyholders.

Open questions

1. Re-takaful companies ( re-insurance for the takaful companies)
2. All of these things are working in capitalist economies and competing against non-Islamic entities. Even as big as it is; the Muslim population doesn’t know about them very well. If they get to all the people, they will like what they have to offer.

2012-04-22 Class Notes

Today we will finish our discussion of takaful and then move on to a next topic. When you search for takaful on Google, the first entry was for Geico. There is an Ernst and Young Takaful World Report that is a presentation emailed to all the students. This is just for students to read something interesting on the Takaful and how it is doing in the world.

At the beginning of the quarter, shaikh had given a list of takaful companies. Some of them have declared bankruptcy and most of them no longer have web sites. He did find one that still existed, Zayan Takaful and showed their flyer. They cover coastal homes. And they claim upto 150% return on your donations, which is very strange.

The next big question we have, where is the lslamic window of other companies?
AIG offers a takaful an Islamic window. Risk Specialists introduces a “first in the US an islamic takaful arrangement”.

There is a big movement in the USA to outlaw the Shariah -- but AIG was part of a government bailout. This led to a suit against the USA because the money was used for a religious purpose.

Footnote: Frank Gaffney is the person behind many of these suits and is very anti-Islamic. He claims that this part of a “stealth jihad.” A constitutional law expert said that he questioned whether it would come to trial. A lot of people came to the USA to escape religious persecution. The original pilgrims who came here fled, so they tried to make a government free of and supporting any establishment of religion.

It doesn’t mean they can’t do anything that might somehow benefit a religious group. So AIG is open to both Muslims and non-Muslims. Deutsche Welle had a report on Fast Food companies on France providing Halal meat. Some of the French claimed that they were being discriminated against because they wanted to specifically eat non-Halal meat.

Social security works like this: you pay a certain amount of money every month and then when you turn to 65 or 70 and they start paying it out.

What about worker’s pension program (in CA it is called Calper)? Different corporations over the years had workers compensation programs. What about them?

In all these programs you put in money, you do not know how much you can get back. You may get more than you paid for or far less compared to what you paid for. There is no guarantee of any money back or return. If this is not looked at as business payment, since one is not looking for any return, then it may be fine from Shariah perspective. Again it depends on how one looks at it.

AMJA conclusion for insurance: They made this fatwa as a group. They start by saying, there are different types of insurance, some are permissible, some forbidden and some needs more work to clarify. They even considered providing insurance as Fard Kifayyah. They called commercial insurance invalid due to Gharar, Jahala etc. They considered the basic policy as a form of insurance which is permitted unless required by law or necessity. Working in the field of marketing these contract is not permissible except in cases of necessity. If someone enters this field, his intention should be to leave the field as soon as possible.

Social insurance is legitimate and therefore permissible to work in and Islamic insurance is permissible.

Hatem al Haj (from AMJA): His answers on some questions

Q: Car Insurance is permitted for me because I need it from the government, right? Health insurance is not required, but it would be very costly.

Hatem’s reply: The subject is controversial, but it has aspects of gharar and usury. The easiest solution is to create an Islamic non-profit cooperative -- this is despite appreciation of Islamic approaches. The following types are permissible:

- All mandatory insurances for basic needs of living, e.g. cars and houses. (it looks like it should be necessity or close to necessity). Some homeowners association require home insurance.
- Health insurance, because without it the funds required will be excessive.
- Where the lack of insurance would cause great hardship. E.g. comprehensive insurance on a $30,000 and not have enough money to pay for its replacement. Sh’s comment: Isn’t this true for almost all insurance? This logic seems very strange. Sh’s comment also he likes Hatem Al-Haj and the comments are just related to the issue at hand.
- Extended warranty: If part of the purchase, this is an advantageous part of the product. He can buy with the product, but he may not buy one afterwards.
- The exemptions for needs are limited to just their needs.

Classroom discussion about bundling insurance along with products. Basically warranties have garaar, you are not buying a product because of warranty. You don’t need to have warranties when you purchase a product, it is a separate item and it is like an insurance policy.

A student mentioned that I would buy a product if a product comes with one year warranty or three year warranty. And shaikh replied you should not try to make it your basis for buying a product. If you don’t have to purchase this warranty, but it out of their own business kindness, by law they are not required to sell it, then you can make use of it. Even though the price of the product might be influenced by this offering, in reality you are not paying extra for it.

What about certified pre-owned cars and they provide extra warranty, since those cars are more expensive than comparable other used cars?
Here you buy the car because the cars are inspected and you are paying more for better quality cars. This is the reason why they are able to provide this warranty. So you should be able to buy it, because you are purchasing a better quality car.

Case study and Fatwa from Salih al Munnajid: Somebody asked a question, IN the state of Minnesota, home insurance is compulsory to buy for home owners. And then his house was damaged in storm and received money from the insurance company. So what is the choice here?

Answer is if you are forced to buy out Haraam insurance, then it may be fine, and you can give the extra money (as claims for the fire damage) that you get back in charity.

Could you take the funds that are equivalent to the amount you have paid them out in insurance premium payments and give the extra money as charity? Or would you take the extra money and use it for future premium payments? If you are required by the housing association to fix the house and they force you to fix the house. Then what would you do?

The point is that you have to be careful in your interactions with insurance companies. Do not try to take advantage of it.

Homework Question:
Let us say you are going to lease a car. Can you answer is the idea of leasing a car halaal? Yes. You are freely choosing to lease the car, nobody is forcing you to do so.

Now suppose they ask you purchase comprehensive insurance, in order to lease the car. Does the permissibility of leasing a car, make that insurance halal to you or does the requirement of insurance, make the lease contract haraam to you? Which issue trumps the other issue? Answer the question for next class. It is the case of freely choosing lease and it is not out of necessity.

2012-04-29 Class Notes

Case study of Hadith related to our topic of discussion
We will start with a hadith today. This is regarding the Camels and fetus of the pregnant camel (Sh. Jamaal believes it may apply to other animals as well):

1) Hadith of the Prophet (SAWS): The dhakaah (ذكاة) of the fetus is the slaughtering of the mother camel.

ذَكَاةُ الْجَنِينِ ذَكَاةُ أُمِّهِ ‏

2) Another Hadith: It is not allowed to buy or sell an unborn fetus. However based on a general principle in Usul al Fiqh, you can buy or sell a pregnant camel.

ToDo: Copy the text of the hadith here...... Br Abu Maahi (searching)

Classroom Discussion
Are these two hadith related?
Is it halaal to eat maytah (carion) that is not slaughtered? No.
Are there any exception to eating maytah? Yes, the seafood.

These two points are being discussed for some reason. The reason is that there is a legal maxim or qaedah that you can find in every madhab which is derived from the above two hadith, since there are two different rulings about the fetus of pregnant camels.

Qaedah: (At Tabiu Tabaa)
Something secondary may be overlooked if the primary thing (or ruling) is permissible.

Examples of At Tabiu Tabaa
An example of the above principle is the Sajdah of Tilawah of the Quran, Sajdah Tilawah being said while riding on the camel.
Is this Sajdah of Tilawah is part of the Salat while Quran was being recited). So there is no question that during Salat one can do on the camel. However, the regular Sajdah Tilawah cannot be done while riding the camel. One has to dismount and make that Sajdah of Tilawah.

When you break the fast of the month of Ramadan, how many witnesses do you need for the end of the month of Ramadan? You need two witnesses to mark the end of the month of fasting, but one witness to begin the month of fasting. However if just one person saw the moon to begin the month of Ramadan, then one person can be witness to the end of the month of Ramadan. This is why Ibn Taymiyyah says that small amount of Gharar can be overlooked if it is part of a larger permissible thing.

This is because of the impossibility of separating the two which would cause hardship on something that would otherwise be permissible. On this point, you can find many examples that would demonstrate this qa’idah. If you did the act separately, it would not be acceptable, but as part of something else, it becomes acceptable.

Example: Testimony of women in legal cases for a woman to testify that a man divorced his wife is insufficient. But if the one woman testified that she breastfed the man and the woman, you separate them. Footnote: Shaikh mentioned the case of couple who were married for 20 years and later found that they were breastfed by the same foster mother, so he cautioned us to make sure that you keep track of the breast feedings.

It is not permissible to sell the fruits on the tree that have not yet ripened, yet you are allowed to sell parcel of land, that could have fruit laden trees. So here the permissible is the act of selling land, and the disallowed is the selling of the fruit on the tree that has not yet ripen, since it is gharaar.

Gharaar is haraam, eating maytah is haraam, but the examples that they give are not usually of this kind.

Next quarter, we will discuss buying stocks in a company, the company is basically involved in halaal activities, but there is some minor activity that is dealing with riba or some other haraam activity, which is the case for a lot of companies today.

All of the people who discuss this principle, it is clear that the two things that you are discussing that are related.

This principle is used in issues related to Insurance by Yusuf Al-Shubaily. He puts it under the different categories under which insurance is permissible, such as when you are forced to buy insurance by the government.

His first item in the list is insurance offered by the employer for the employee. THe real purpose is the salary that is paid in exchange for the work, but the insurance is something extra provided by the employer.

The second item that he mentions is the warranty that is given on cars and the appliances that one buys. The problem with Shubaily’s opinion is that he even considers it permissible if warranty is bought separately. And this secondary ruling is what shaikh objects to. However, if the warranty is with the purchase of the product, then it is fine.

The third item on his list is the insurance on the rental car, even if the rental price is increased due to the insurance. According to the shaikh, if you ask the rental companies that your personal automobile insurance is the minimum required by the law, then what is the justification for buying comprehensive insurance. The problem is that he is making the comprehensive insurance permissible, even though it is not tied into the rental agreement.

Edit: You might use a different principle to justify buying this comprehensive insurance for rental cars, but you cannot use the principle that we are discussing. This is in response to a student who pointed out that somebody might have minimal auto insurance and if his own car is totaled, he is okay with the loss, but if he rents a car, he is afraid that he might not be able to cover the loss of a rental car. This could be due to principle of necessity.

The last item Shubaily has on his list, is the shipping insurance.

AMJA also uses this principle. Sh. Salah as Sawi was asked, that we should buy minimum insurance when we buy the car, but when we lease a car, then comprehensive is compulsory. His answer is: Basic insurance is whatever is the one you need to buy or lease the car. So there is no harm in buying a comprehensive insurance if this is the minimum for leasing the car. So he is applying the same principle. If you need to buy comprehensive insurance for lease then it is overlooked since the goal is lease a car and not buy the insurance. Then the interest on late payments for such a contract is then overlooked, e.g. in renting a house may have some issues related to late payments. This principle is to make things easier for people, otherwise it will be impossible to run life affairs.

The problem with Qaedahs (legal maxims) that one can find couple of examples in the books, but for new situations one has to figure out how to apply and one needs to be very cautious in applying and not fall into abusing it.

Here is an interesting example. If you buy a house, then one does not know what is underneath the foundations. So this is a form of Jahala which Shariah will overlook. One cannot just go and figure out easily what is beneath the foundations.   

Footnote: The Qaedah has to apply across the board to all disciplines e.g. Ibadah, Finance, Social aspects etc. If it applies just to one discipline then it is called Dhabit.

AAA membership is also a type of insurance. You might come up with some scenario of necessity, where you live in a dangerous neighborhood and need this type of insurance.

Last Wednesday, student debt overtook personal credit card debt, it reached one trillion dollars. Next topic we will discuss is student loans. As part of this topic, shaikh will cover the topic of personal loans. For example, can an individual charge himself insurance.

For next week think about the following:
1. Riba between father and child
2. Riba between husband and wife
3. Riba between a Company and its subsidiaries
4. Riba between gov’t and its citizens
5. Riba paid to yourself

2012-05-06 Class Notes

Questions from last week:
Person paying himself riba
In order for there to be riba. there must be some exchange between his account and somebody else’s account, so money moves from his account to account of some third party, then it is haraam. But if it is just his account and he says that I am going to withdraw $1000 and later deposit $1500, then this is okay, it is not haraam. As long as the money circulates in the same account, then it is fine. However, if another individual (with another personal) then it is a problem even if one is related to the other legally speaking.

Companies and subsidiaries charging riba
What about subsidiaries? If they are wholly owned subsidiary and are fully included on the same books (and for example, if it is used as part of an incentive) then it is acceptable. But if they are separate entities or not wholly owned then it is not acceptable.

Father charging son riba
Would it be permissible for the father to charge riba if he loans money to his child. There is a hadith that says that you and your wealth belong to your father. But no scholar understands the hadith in this way. The meaning is that if the father needs money, the son should help.

Hence the father cannot charge riba to the son or vice versa.

Husband charging wife riba (and vice versa)
There might be a particular case when it is allowed, for example where the wife asks for money and husband says pay me back twice, and the wife when she does not spend it and when she receive more money (from him) she returns it back to him, this is particular case of husband encouraging his wife to not spend the money or trying to cut expenses. In almost all cases it is Haram.

Between a government and its citizenry
If a citizen lends money to the government and the government pays them back with Riba. Is that allowed?

When the gov’t sells you bond, it gives you interest on it. Anytime you are in financial transaction with third party and you get money in excess, then it is riba.

What about the case of bayt-ul-maal al muslimeen (the wealth of the Muslim Ummah controlled by the Gov’t)? The problem is that there is money being transferred between two accounts controlled by two different entities, so it is haraam.

Are there situations where the government charges you interest? When the government lends you money? For example, consider the contract that gov’t gives you an interest free loan provided certain conditions are met. If these conditions are not met then the interest kicks in.

Student Loans:
Handout sent by Sh Jamaal: Reality of and Ruling on Student Loans in the United States of America by Dr Main Khalid Al-Qudah, Member of the Assembly of Muslims Jurists in America (AMJA) Fatwa Committee

Draft decision from the above report
The Assembly of Muslim Jurists of America, in its 6th annual conference held in Montreal,Canada, Oct. 2009, and after studying the papers submitted by Amja's members and discussing them in detail, has reached the following decisions on Student Loans:

1- University education is one of the most important needs of the time for Muslims living in the United States, and it could be considered one of the necessities on the basis that necessity refers to something the lack of which entails harm on the Muslim and there is no other alternative to it.

2- Muslim students must expend their strenuous efforts in finding lawful sources to fund their studies, such as grants, financial aid, scholarships, and labor programs of the university.

3- If the student can decrease his study load and work part time to financially support oneself, or take a subsidized loan, he shall do so.

4- If the student cannot do that and needs a subsidized loan, he will be allowed to take the loan on condition that he takes only the amount needed and tries his best to settle his debts in the repayment period to avoid paying the interests.

5- When the subsidized loan (which is interest-free) is not enough, and there is no other way except borrowing in interest, it will be permissible for him to borrow in interest only an amount that obviates his necessity. That is because necessity must be answered proportionately. Borrowing should take place after he has already enrolled in his study, since things which were not tolerable at the beginning can be tolerated later.

This document presents a draft resolution on this topic as preparation for the conference.  This is more of a final report from Dr. Main Khalid Al-Qudah which presents the final resolution from AMJA.

Naseeha from the shaikh - Start preparing for your children’s education, no matter how small, make an effort to avoid riba
Consider the following case:  A father knows he wants to send his children to College, but does nothing for 18 years. Then when they get to 18, you say “Education is a necessity” and you take a student loan. Is this really the best way to do things? The most that scholars can give you in this case is: “maybe taking riba only is OK.”

When you get an education that is based on riba, and your money that you will earn in the future is based on education that is financed by riba, so your earnings will be tainted. Again this is advice from Shaikh.

Footnote: First two years of your college is same no matter where you study, as long as it accredited. You could pay much less for it, if you choose a school that is close to you and save some more on residential costs.

The way of thinking in the west is that they will plan to use interest based financing for their college education even if they have money. So if you plan in advance, then you can minimize it as much as possible. We all agree that riba is haraam. So we should plan and prepare and try to minimize it as much as possible.

If you get an AA degree in DeAnza college, then you are guaranteed admission at UC Berkeley. So you have saved on two years of education.

The question of fitna in colleges is for both boys and girls and not just relegated for girls. There are online schools, but you have to be very careful.

Back to the paper from AMJA discussing student loans.

Before you get a student loan, you have to exhaust all other options, which would include scholarships, grants, work aid programs, family personal loans, etc. Then he discusses student loans.

There are two types of loans, loans subsidized by the federal government. However most of the student loans are securitized and sold by the banks. Who benefits from a well educated society, it is the corporations who benefit a lot, even though the society also benefits. The corporation reaps the benefits, and they are actively trying to get governments to cut grants and pass the cost to the individual.

The gov’t subsidized loans means that the Federal Gov’t pays interest on these loans. A student has six months after graduation to pay the loan without interest. The problem with this contract is that it is still a ribawi contract. And you still have to accumulate funds in order to pay it off before the interest free period expires, this is an unreasonable expectation.

Are credit card contract ribawi? Yes they are. So they give you one month to pay off interest, and you agree that it is still ribawi contract.  Similarly the subsidized govt financed student loans are also a ribawi contract, even if they give you six month after graduation to pay off the loan.

Footnote: There are truly ribawi free contracts for some car loans, where there are no penalties and you have fixed amount of time to repay the car loan. But not all zero percent APR are truly 0% loans.

Unfortunately we are richest country in the world, but we are the worst in social causes, such as student loans, health care. Even poor nations have truly interest free student loans. One student mentioned that Pakistan has qard e hasana which is interest free loans for higher education.

Second type of student loan is an unsubsidized loans and students are expected to pay interest, but they are exempted from interest while they are studying in school.

Author then discusses that education is a necessity. If you don’t agree with it, then you might reject his argument. So in that case you would have to exhaust all other forms of education.

You must seek all other forms of financing and you should start preparing well in advance. And you should ask yourself is the education financed by riba truly worth it?

Footnote: There is a difference between being educated and going through the system of education. They are not the same. Education is important, but then going through education system does not mean one is well educated.

2012-05-13 Class Notes

We are discussing the AMJA paper on Student Loans that was emailed to all students. This is a typical kind of paper that one finds with Majma al Faqih. AMJA in this case only had one author to prepare this paper. This paper was sent to the conference attendees before the conference and then is discussed at the conference. The findings of the paper are discussed and attendees ask question about the author’s findings.

Footnote: is place for people to ask questions, now they are four months behind in responding to their questions.

AMJA has all of the papers on their website and here is the link for the paper that we are discussing

Government subsidized loans is one where the govt pays interest on behalf of the students. He says that it is still ribawi contract and that the govt is the one taking the interest and paying the interest. Sh says that it is not true, since the loans are securitized and sold off to others. So govt is paying interest to the parties holding the securitized loans.

The author says Riba enters the loan in another way which is the obligation to pay interest six months after graduation. And we stated that the loan is difficult to pay off after six months.

He says, “What is prohibited in itself becomes permissible under necessity, whereas what is prohibited by virtue of others turns permissible by a need or considerable benefit.”

We mentioned earlier that simply accepting riba or the eventuality due to need is not a valid reasoning. You have to take precautions and make preparations for your education. After you have exhausted all of your steps, we would still not come to the same conclusion as he comes to.

Government unsubsidized loans
Author says that depriving students of education in the civilization which is on top of the science and cultural specialization and he says that the religion that began its revelation by inviting people to read, would not deprive people of the ability to learn. He says that answering the question in negative is a person who does not understand the maqaasid of shariah.

Sh. Jamaal says that this is a strong statement to make about this topic. You should not exaggerate and state things in hyperbole, because you open yourself to criticism.

The author then cautions and states that the Shariah commandments and prohibitions are not function to the human logic and human emotions. These commandments and prohibitions are dependent upon the understanding of the texts of Islam.

Footnote: ISNA has started a student loan program. There are waqf that provide student loans. Here the author is assuming that all such means have been exhausted.

He then compares the action of borrowing and paying  interest versus lending money and taking interest. Some say that one is haraam due to its nature and the former is haraam due to .... This is the opinion of European Council on Interest. Their statements says ... according to a number of quranic verses revolves around taking usury and not giving interest. .... it also has been mentioned that taking usurious interest is permissible .....

Sh reminds us that some scholars say that borrowing money on interest is forbidden even in the case of necessity.

The Sh. .... who responds to this paper says, that person who takes and gives interest is cursed by the Prophet (saaw).  

Allah swt says riba is haraam and in that verse Allah swt does not distinguish between the two parties. And the hadith that we mentioned above, all parties irrespective of their roles in interest are equally in sin.

The Sh. .... who responds to his paper, quotes the hadith which states "Do not sell one dinar for two dinars or one dirham for two dirhams; I fear you fall into Riba.”

You see this tendency in certain organizations, when you find differences of opinion, you try to pick and choose the one that benefits you. And this is done with the sincerest of intention. If you look hard and long enough in the books of fiqh, you might be able to find something. So they take that in order to make it easy for others. And when they do that, the authors should clearly state they are following a minority opinion, they should state the majority opinion clearly. In reality the masses are being duped if the author cherry picks differences of opinions to match their views. It should be up to the educated muslim whether they follow the opinion based on taqwa or some opinion that is not based on it. This is the reason why many muslim scholars are criticized for it. You can see many Muslims who followed a view and bought a house on some financing schemes based on some fatwa, and then later they find out that this view of the scholar is not based on proper reasoning and they are angry at them based on shariah reasons. Scholars have to be honest with their audience, they should be transparency and present the majority opinion and let the readers make their choice. This is primarily for scholars who write in English. The writings in Arabic are numerous, but English speaking readers do not have it available to them.

The best way for fatwa to be given is for someone who knows about the circumstance (within a reasonable limit) of the individual requesting the fatwa. A mufti should know the circumstance within good reason of the person who is asking.

The sh. who responded to the paper, then refutes another important point about necessity. There is a qaedah (principle) that need can take the same ruling as necessity for something in permitting the haram. He does a nice refutation of how this concept is greatly abused. There was a fatwa given, Sh. Faisal Maulvi it says Riba is indeed one of greatest sins both in giving or taking..... So he concludes that one cannot invoke argument in taking the Riba. There can be no necessity for taking Riba and benefiting by it. There may be the necessity invoked in paying the Riba. So for education one will be allowed to pay Riba if one has done his best to find other ways for paying for education. On pg 26 the author mentions that this is “...Usuli rule and not Fiqhi rule.” What he means that it is principle in Usool al Fiqh that establishes the permissibility for something which is haraam otherwise. So these cannot be dealt with on case-by-case basis. This has to be established from a general principle society wise, and it does not become an exception for some one individual.

For example, the ease of not removing socks while making wudu, here the principle is to allow you to make wudu by wiping on top of your socks. This principle of not removing socks is not for a specific case or group of people, it is applicable to the entire society in general. The author of the paper was trying to make exceptions of paying interest for the special need of education. Whereas Sh Faisal Maulvi shows that the basic principle should be made in a general case rather than specific case by case basis. As we have failed to do so, then we have to say that paying interest for student loans is not permissible.

Pg. 27: Need does not allow one to do what is otherwise haraam. The necessity is what allows one to do what is otherwise haraam. The author does not accept the necessity argument for education.

Final Draft Decision (pg. 39): Author considers education to be a need but necessity only under certain conditions.
Sh. argues that in point #5, the author is mistaken in his use of the principle related to “tolerable”.

Crux of AMJA resolution (not in the paper): If all else has not worked, and if for completion of education only path is interest based loan, then one may take just what is needed without intention to be an aggressor.

The final resolution of AMJA can be found here

Decisions Regarding Contemporary Economic Challenges

Firstly: Student Loans

The default is the forbiddance of interest-based loans regardless of whether these loans are for students or otherwise due to it falling under the clear interest that the scholars unanimously agreed, past and present, on its impermissibility. It is incumbent that all efforts are spent in finding permissible alternatives before leaping to the justification of urgency or need.

In the world of Western Universities, academic scholarships are granted for the outstanding (students) and unable (to afford), alongside work-study opportunities that allow for combining between studying and earning, by which one can avoid falling into these loans. Also, there may be subsidized loans that the nation pays its interest if the student is able to repay all he owes within six months of his graduation. In addition, there are grants provided by some companions and institutions in exchange for employment contracts with it after graduation. It is incumbent that one spends his efforts in (trying) all this.

If all of these are inexistent, and the interest-based loans are the only way to facilitate the beginning or continuation of a university education, or the only way to secure the Muslim communities need for what cannot be done without of professions and expertise, then this is considered an urgent necessity that removes the sin even though the ruling of impermissibility remains. This is upon the condition that the one forced to this isn’t an aggressor nor transgressor, and this is by giving the urgent need its proper estimate, and by continuing to search for a permissible alternative and breaking free of these interest-based loans when one is first able to do so in order to minimize the interest amount paid as much as possible. We emphasize the need to return to the people of Fatwa (i.e. qualified to passed a juristic opinion on Islamic Law) to estimate these needs and urgencies. It isn’t correct that for just anyone to assume the responsibility to do this, or to measure his need on the need of others.

2012-05-20 Class Notes

Shaikh Jamaal’s opinion about Student Loans

1. The basic ruling is that interest bearing loans are haraam whether the loan is from the government or from private people -- and regardless of the purpose of the loan, whether the funds are used for education or other beneficial things.

2. If parents plan to send their children to college, then they should plan ahead to avoid riba situations, since the steps to fulfill a waajib are also waajib.

3. The individual must find the means for education that is going to meet their budget needs.

4. There is a need for the Muslim community as a whole for advanced education. It is not matter of going to the school for the dunya. So there is a burden on the shoulders of the student for the Muslim community, then for that he has to get the loan. If this is the only justification for having such a ribawi-loan then for such purposes. This ruling should not be giving “fasiqeen” (those who openly disobey Allah (swt)) any window of opportunity that they can take Riba based loans. This had been always a great concern for the Scholars of Islam. This is why the early scholars stick so much to the beard, since it was an overt sign of the disobedience of Allah (swt).

Conclusion for USA: The final AMJA resolution needs to be tweaked. There has to be some necessity based burden on the student  to take the loan and this is to be done only after all other means of halaal funding have been exhausted. It is not a matter of just getting a better salary or a better degree or other dunya based reason.

The Australian Student Loan Case
The Commonwealth Government pays for a student’s course or education and they do not have to pay it back until it reaches a minimum amount, at which point it is extracted from them through the tax system. What you pay back is indexed to reflect changes in the Consumer Price Index (a measure of inflation).

Depending upon your financial situation, you may never have to repay it. But is there some riba involved in the repayment? Is it possible that based on economic conditions, you might repay less than you have borrowed?

Is the Australian scheme halaal given the AMJA fatwa for muslim students? It is better than American model for student loans. So if the AMJA fatwa is halaal for the US Students, then by mafhoom al mukhalafah, the Australian model might be halaal for the Australian students.

Review of Riba al Fadl
However, this question of pegging the debt into inflation (or something else for that matter), the AMJA, OIC and even classical scholars have not accepted this. They say that when you exchange gold coins for gold coins, it has to be the same amount without any increase. Al Qassani in hanafi school, in Hanbali school ibn Qudamma has written about it. Do not forget that in Shareeah the lending money is considered a brotherly act. For the gold it has to be a spot transaction & it has to be exchanged in exactly the same amount of coins. and if you give the person gold as a loan, then it is Riba Al Fadl, since he pays overtime. It is considered a brotherly act, so if the person borrowing the coin pays less, and if the lender is willing to accept the less repayment, it is considered an act of charity towards his brother.

OIC ruling on indexed and repayment of loans in other currencies
If the currency depreciates, can anything be done about it. The OIC is willing to accept the following: The creditor and debtor might agree on the date of settlement, but not before, to payment on the debt in another currency, provided that it is at the exchange rate found at that date. The two parties at the time of contract agree to the settlement of the deferred cost in a variety of currencies or a specific amount of gold.

If you lend me money now, and at the time of the loan, you tie it to an amount of gold, this condition is not acceptable. Edit: Shaikh is trying to figure out the meaning of the above ruling, which is from the textbook.

The OIC says that you cannot index to a cost of living, or some index, or some amount of gold. You cannot give somebody dollars and then pin it to an amount of gold. Since dollars is not tied to value of gold, you cannot say that the loan amount is tied to a specific value of gold, implying the debtor has to return some amount of gold instead of dollars. But if you loan somebody x number of gold, then of course the loan repayment should be x number of gold.

Inflation or deflation can occur. All of the madhabs talk about this situation, where you borrowed money, you have to repay the exact amount back. The real cause for inflation is due to interest, it is a driving factor which is accepted by all economists. If you remove interest from an economic system, you will have less inflation.

Inflation can also be caused by the government. if the government goes to war, the financing of the war efforts and hence can drive inflation high. In a gold based economy, any newly discovered gold will be new money into the economy, which can inflate prices. New wealth is brought into the economy by the mean of jihad (a nation acquiring the wealth of another nation), which can cause inflation. The hyper-inflation is caused by loss of trust in the government and this is what causes a situation to come where one has to spend a large amount of currency filled in wheelbarrows to buy bread, as it happened before World War II in Germany.

A person who gives a brotherly loan is willing to accept this loss due to inflation.

Now we move to the next topic: There are 4 terms on the board in regards to the loans

Al Qard القرض
Al Qard is loan of a fungible specially for money,( i.e. loan of fungible goods) -- e.g. of dollars. The difference between Qard and Aariyah is whether it is fungible or not. You can not put a time limit on it, and the creditor can demand it back at any time.

السلف Al Salaf
To loan money for no profit or interest (it is also fungible). Sometimes used for loans that are given for a fixed amount of time.

الدين Al Dayn
Any kind of debt -- e.g. you buy something over time. It is much more general compared to other forms of loans. It includes Qard, or any kind of transaction where you are under some kind of contract to pay for things in the future.

العارية Al-’Aariyah

It is basically you give the usufruct to someone else as a gift or in other words without charging them for it. E.g. you loan someone a car without asking for them for money for it. The idea is that they will return the same piece of property.

From the Shariah point of view the lending and borrowing money is very serious. Many scholars point out that you should try your best in falling into debt. Prophet (saaw) would ask for Salat ul Janazah if the man had any Dayn. If they said yes, then Prophet (SAWS) would ask if he had left any wealth. For example, once a person was brought for Janazah and he had 3 dinar worth of loan and he had not left any wealth to pay it off. So If they could not pay the debts, he would say صلّوا على صاحبكم -- pray upon your friend and this is what Prophet (saaw) said for this same individual.

حَدَّثَنَا يَحْيَى بْنُ بُكَيْرٍ، حَدَّثَنَا اللَّيْثُ، عَنْ عُقَيْلٍ، عَنِ ابْنِ شِهَابٍ، عَنْ أَبِي سَلَمَةَ، عَنْ أَبِي هُرَيْرَةَ ـ رضى الله عنه ـ أَنَّ رَسُولَ اللَّهِ صلى الله عليه وسلم كَانَ يُؤْتَى بِالرَّجُلِ الْمُتَوَفَّى عَلَيْهِ الدَّيْنُ، فَيَسْأَلُ ‏"‏ هَلْ تَرَكَ لِدَيْنِهِ فَضْلاً ‏"‏‏.‏ فَإِنْ حُدِّثَ أَنَّهُ تَرَكَ وَفَاءً صَلَّى، وَإِلاَّ قَالَ لِلْمُسْلِمِينَ ‏"‏ صَلُّوا عَلَى صَاحِبِكُمْ ‏"‏‏.‏ فَلَمَّا فَتَحَ اللَّهُ عَلَيْهِ الْفُتُوحَ قَالَ ‏"‏ أَنَا أَوْلَى بِالْمُؤْمِنِينَ مِنْ أَنْفُسِهِمْ، فَمَنْ تُوُفِّيَ مِنَ الْمُؤْمِنِينَ فَتَرَكَ دَيْنًا فَعَلَىَّ قَضَاؤُهُ، وَمَنْ تَرَكَ مَالاً فَلِوَرَثَتِهِ ‏"‏‏.‏

Narrated Abu Huraira: Whenever a dead man in debt was brought to Allah's Apostle he would ask, "Has he left anything to repay his debt?" If he was informed that he had left something to repay his debts, he would offer his funeral prayer, otherwise he would tell the Muslims to offer their friend's funeral prayer. When Allah made the Prophet wealthy through conquests, he said, "I am more rightful than other believers to be the guardian of the believers, so if a Muslim dies while in debt, I am responsible for the repayment of his debt, and whoever leaves wealth (after his death) it will belong to his heirs."

He (SAWS) would often seek refuge and ask for Allah to protect him from debt, e.g. اللهمّ إنّي أعوذ بك من المأثم و المغرم . If someone is in debt and then can’t repay it then this is a form of lying . ( The messenger (SAWS) said  A person in debt When he speaks he lies and when he promises he breaks his promise - text of hadith needs correction)

The giving of the loan is established by Kitab, Sunnah and Ijma. There are basic pillars of what is the loan about. Just like any other contract, it has to have offer and acceptance. This has to be very clear and it should be clear from the time of get go that if it is loan or it is a gift. If someone does not make it clear that it is a loan, then the party which gets it has the right to say that “I do not owe you anything.”

The one who is giving the loan must be one who has the legal capacity to give a donation -- أهل التبرّع. Loaning money, you are not benefiting from the money. On the other hand, the one who is receiving it must be someone who is legally qualified to spend money.

The next one has to do with the object of the loan. It must be valued for loan, must be identified and must be fungible. There is some difference of opinion among scholars that it has to be fungible or not, but fungible is a good working definition. The other condition is that one who is giving the loan must be in possession of the item being loaned. Another Rukn or Shart is that the default case is that loan must be paid back at the same locale at which it was received.

إنّ السلف يجرى مجرى الصدقة

The Prophet (SAWS) said: Loaning money is equivalent to half of giving in charity. It is considered Mustahab and it is considered a means of getting close to Allah (swt). The giving of loan may at a given situation, may be Wajib, Mandub or Haram. Many time when you lend people money they are in need. This help is important both for help of Allah (swt) in this dunya or in the hereafter.  

If someone is in a state of need it may be obligatory for you to give him a loan. If you know that the borrower will use it for something haram and then it is haram to give him the loan. It may not be a need if it is a businessman and wants to grow his business, in which case it is mubah.

When you loan money, the scholars point out that for the poor it is haram to make it look like that he has more money than he has. In modern times it is the credit ratings issue, so it is haram to make your credit ratings look high.

Surah Baqarah 2:282 -- the longest verse in the Qur’an is devoted to this topic.

يَا أَيُّهَا الَّذِينَ آمَنُوا إِذَا تَدَايَنتُم بِدَيْنٍ إِلَىٰ أَجَلٍ مُّسَمًّى فَاكْتُبُوهُ ۚ وَلْيَكْتُب بَّيْنَكُمْ كَاتِبٌ بِالْعَدْلِ ۚ وَلَا يَأْبَ كَاتِبٌ أَن يَكْتُبَ كَمَا عَلَّمَهُ اللَّهُ ۚ فَلْيَكْتُبْ وَلْيُمْلِلِ الَّذِي عَلَيْهِ الْحَقُّ وَلْيَتَّقِ اللَّهَ رَبَّهُ وَلَا يَبْخَسْ مِنْهُ شَيْئًا ۚ فَإِن كَانَ الَّذِي عَلَيْهِ الْحَقُّ سَفِيهًا أَوْ ضَعِيفًا أَوْ لَا يَسْتَطِيعُ أَن يُمِلَّ هُوَ فَلْيُمْلِلْ وَلِيُّهُ بِالْعَدْلِ ۚ وَاسْتَشْهِدُوا شَهِيدَيْنِ مِن رِّجَالِكُمْ ۖ فَإِن لَّمْ يَكُونَا رَجُلَيْنِ فَرَجُلٌ وَامْرَأَتَانِ مِمَّن تَرْضَوْنَ مِنَ الشُّهَدَاءِ أَن تَضِلَّ إِحْدَاهُمَا فَتُذَكِّرَ إِحْدَاهُمَا الْأُخْرَىٰ ۚ وَلَا يَأْبَ الشُّهَدَاءُ إِذَا مَا دُعُوا ۚ وَلَا تَسْأَمُوا أَن تَكْتُبُوهُ صَغِيرًا أَوْ كَبِيرًا إِلَىٰ أَجَلِهِ ۚ ذَٰلِكُمْ أَقْسَطُ عِندَ اللَّهِ وَأَقْوَمُ لِلشَّهَادَةِ وَأَدْنَىٰ أَلَّا تَرْتَابُوا ۖ إِلَّا أَن تَكُونَ تِجَارَةً حَاضِرَةً تُدِيرُونَهَا بَيْنَكُمْ فَلَيْسَ عَلَيْكُمْ جُنَاحٌ أَلَّا تَكْتُبُوهَا ۗ وَأَشْهِدُوا إِذَا تَبَايَعْتُمْ ۚ وَلَا يُضَارَّ كَاتِبٌ وَلَا شَهِيدٌ ۚ وَإِن تَفْعَلُوا فَإِنَّهُ فُسُوقٌ بِكُمْ ۗ وَاتَّقُوا اللَّهَ ۖ وَيُعَلِّمُكُمُ اللَّهُ ۗ وَاللَّهُ بِكُلِّ شَيْءٍ عَلِيمٌ

Sahih International
O you who have believed, when you contract a debt for a specified term, write it down. And let a scribe write [it] between you in justice. Let no scribe refuse to write as Allah has taught him. So let him write and let the one who has the obligation dictate. And let him fear Allah , his Lord, and not leave anything out of it. But if the one who has the obligation is of limited understanding or weak or unable to dictate himself, then let his guardian dictate in justice. And bring to witness two witnesses from among your men. And if there are not two men [available], then a man and two women from those whom you accept as witnesses - so that if one of the women errs, then the other can remind her. And let not the witnesses refuse when they are called upon. And do not be [too] weary to write it, whether it is small or large, for its [specified] term. That is more just in the sight of Allah and stronger as evidence and more likely to prevent doubt between you, except when it is an immediate transaction which you conduct among yourselves. For [then] there is no blame upon you if you do not write it. And take witnesses when you conclude a contract. Let no scribe be harmed or any witness. For if you do so, indeed, it is [grave] disobedience in you. And fear Allah . And Allah teaches you. And Allah is Knowing of all things.

Dayn actually covers business contracts, it says to record it and/or write it down. All of the ‘ulema agree that this is not obligation but it is recommendation. This doesn’t have to be recorded -- Allah says there is no blame on you if you do not write it. With respect the one who is receiving the loan and amongst those is that he has to have the intention to repay the loan. And if the one who has a loan and has the means to repay -- the Prophet (SAWS) said: “the delay of payment by the one who has the means is a kind of wrongdoing.” Also said “the one who delays payment it is permissible for him to be punished and for a person to say: he has the money to pay me back but he’s not paying me back” and he can be imprisoned.

Q: Does debt take precedence over the Hajj?

A: A man came to the Prophet (SAWS) and said I have to do Hajj and I have a debt. And the Prophet (SAWS) said “pay your debt.” This is considered weak. But it is considered a zaad -- a provision -- it is considered part of the essentials of the household.

Is the amount that you have deposited in a bank account, a loan or a trust or amanah? Because if it is an amanah, then they cannot touch it, and if it is a loan, then they are free to use the funds. And if you open an account, for which there is a gift such as an iPad or iPod for opening an account, the fine print of this gift says, that for their tax purposes, this gift is an interest payment made to you.  We will discuss this topic of bank deposits and its ramifications next time.

2012-05-27 Class Notes

Clarification from the last week’s class about the rate of inflation for repayment of student debts in Australia. The OIC fatwa discusses the following points:

1. Creditor and debtor may agree on date of settlement and the rate of settlement. Remember you can only agree on the amount of money that is borrowed, but you can agree during the time of settlement of the debt that you will repay in pounds when you have borrowed in dollars and on the day of the settlement, x number of pounds equals the amount of dollars that you have borrowed.

2. If you buy a car you can agree to the form of payment, which can be in any currency or commodity.  Even if you live in the US, you can sell your car for 1000 euros.

3. A debt contracted in specific currency should not be recorded in gold or other currency. So if you are in debt for $100, you cannot also say that the debt is for $100 value of gold in the future. This cannot be agreed upon in the contract.

Can a debtor perform hajj?
On the issue of Hajj when one has installment to pay for a long time: The hadith is when a sahabi that he came to Prophet (saaw) and asked i need to perform Hajj and i am in debt so Prophet (saaw) told him to pay debt. So paying of debt takes precedence over Hajj. The question that comes that debt is due over time so if one has means then what about performing Hajj. Then there are fatawa that if the creditor can pay then one can perform Hajj or Umrah.

Ibn Taymiyyah said that ...... if the lender is absent and ..... if some one else takes him to Hajj and if it does not harm your ability to pay off the debt, then there is no harm in performing hajj.

What it is basically saying that if your ability to perform Hajj is not going to affect your ability to pay the debt then one can go for Hajj. The saudi lajna has said if the creditors cannot wait then one has to pay debt first. However, if the creditor can wait or does not care then one can go for Hajj.

If you are in debt to some one and he has not set a time for you to pay off the debt, and they see that you are willing to spend $10,000 to perform Hajj, then the lender might not be pleased by your actions.

When you borrow money and you have intention to pay it back, then Allah swt will help you. There is a hadith, in which the Prophet said that whoever takes a loan intending to pay it off, then Allah All Mighty will help him.

If you have the means to pay off your debt, then why should you take the chance of dieing as a debtor when you could have paid of your loans.

Maybe what the scholars are envisioning in this case is that the lender is your brother and he is willing to wait for your loans to be paid off.

We should be careful of making an analogy between hajj and taking vacation or visiting family overseas while you are in debt. Since the hadith is specifically for hajj. The general principle is that if you can remove debt from your life, you should do so.

A creditor is doing a brotherly act and he should try to give the debtor a respite and he should be willing to give him some leeway or respite.

Allah swt if you can forgo the loan if the borrower is in dire straits, then it is a good act.

وَإِن كَانَ ذُو عُسْرَةٍ فَنَظِرَةٌ إِلَىٰ مَيْسَرَةٍ ۚ وَأَن تَصَدَّقُوا خَيْرٌ لَّكُمْ ۖ إِن كُنتُمْ تَعْلَمُونَ

Sahih International (2:280)
And if someone is in hardship, then [let there be] postponement until [a time of] ease. But if you give [from your right as] charity, then it is better for you, if you only knew.

If the borrower is in dire straits and is unable to pay off his debt, the money owed is the right of the creditor. There are limits to charity. Because if it was very difficult to get your money back, then it would become difficult in the future for somebody to lend the money.

There could be steps taken that would force the debtor to sell some of his property, in order to repay his loan. The creditor has his rights and the debtor has obligations.

According to the majority of the madhabs, (specially in hanbali, shafi and hanafi schools) there is no time set for when the individual to return the money, as such that the creditor has right to demand any time for repayment of the loan. However, according to the Maliki one has to settle for the time and then the creditor cannot go to the debtor and say that I want the money back. Now a days the latter is more practical but for informal cases the first opinion is better. However, one should not shift between different schools between the creditor and debtor for one particular transaction. Sh. Jamaal says that from Shariah perspective both opinions do not have explicit text for them and they both appear to be on equal footing.

Benefits to the creditor is a from of riba

A weak hadith but may be authentic statement from a Sahabi: Any loan that has some benefit tied to it then it is Riba.

Whenever you loan money then you cannot put condition of any benefit. For example, one cannot say, “I will loan you this amount of money if you allow me to borrow you car”. This borrowing of car is Riba. From Ibn Abbas (ra) “if you give someone some money and he offers you some gift or a ride, then do not accept it until it is customary between the two of you”. So one should not benefit from the loan.

This is the why scholars say that the loans should be replaced in the same place where it was borrowed. Because an individual might benefit from repayment of the loan in a different location, the creditor gets the benefit of the wealth in a different place, since there is some value for moving the money.

A gift from the debtor before the time of paying the debt.
There is no harm to the creditor, but it is better to avoid it. If it is known that the debtor is not giving it because of the loan, but because of close family ties, then there is no harm for the creditor. If the debtor is known for his generosity and maybe the reason for his indebtedness, then there is no harm for the creditor to accept the gift from the debtor, but it is based to avoid it.

A creditor should try to benefit from the loan. A student asked a question that he helped out a distant relative in the US by lending them money, then you cannot try to benefit from the repayment in another country, because of the cost or expense of moving the money.

If a debtor gives a gift to the creditor when the loan is due and he is trying to buy some more time. Here it is haraam for the creditor to accept this gift.

Giving a gift at the time of repayment of the debt

If you give a gift at the time while you are in debt, you are hoping for a delay. This is as close to riba as you can get. But now you are paying off your debt, the debtor is not benefiting from giving the gift, since he is about to pay off his loan at that time.

Hadith: “Best among the people are the best in repayment.”

In general this can be acceptable, unless it is considered to be an expectation. Shariah boards have used it in an interesting way. ....... instead of always giving a certain amount of gift at the time of the repayment of the loan, they use different amounts of gift amounts randomly in order to avoid a certain fixed expectations on behalf of the creditor.

Hypothetical case: A debtor tells the creditor, I will pay back 80% of the loan now instead of the settlement date, if you are willing to forgo the rest of the loan. Is this riba? No it is not riba, since the creditor is not getting his full amount back.

This practice of early settlement of the loan at reduced terms is known as da’wu ta’ajjal.

In the textbook, Mohammed Ayub quotes a hadith about the early repayment of loans and it says that this is a form of riba. However this is weak hadith.

Some scholars said that this is opposite of riba, since it is decrease.

Another hadith which relates to the issue of remitting of loan says “....da’wu ta’aajjalu”. However, Sh. Jamaal does not know about the authenticity of this hadith.

As long as the reduced repayment of the loan amount is not listed in the contract, then it is not haraam. Since the creditor is willing it forgo some of the loan. However if the debtor is trying to conceal or cheat the creditor, then it is a different matter.

A person approaches to buy a car for $1,000 but the buyer wants to pay $1500 over a year. You cannot have the amount dependent upon the number of years to pay installments. So it has to be a fixed amount and not dependent upon the time required to pay off the installments. You cannot say in the same contract that you will get the rebate if you repay in six months versus one year.

Da’wu ta’aajjalu is allowed as long it is not enforced in the contract. Shaukani has a booklet on the issue of contract of muajjal.

Zakaat on debt

There are 5 different opinions:

1) Neither the creditor nor the debtor pays zakat on debt: In order for zakat the money has to be in complete ownership and growable (i.e. it can be invested for profit based transaction). The debtor is never in complete ownership since he owes this money and the creditor does not have this money within his reach. There is opinion from Ayesha (ra) that there should be no zakat on debt.

2) Whoever has possession of it pays zakat if after paying he still is above nisab for zakat.

3) While the amount was on loan, the creditor does not pay any zakat on it. When it is returned, zakat is paid on all the time the loan was out.

4) No zakat until creditor receives it back and then he has to pay money on it one year after it is returned.

5) Creditor has to pay zakat even if it has not been paid back to the creditor by the debtor.

Ulema talk about two kinds of debt: One is weak and the other is strong. The weak is one where one does not expect that it will be paid back (e.g. if debtor is very poor). So for this case there is no zakat. If you get it back then there is zakat one time only. For the strong debt the zakat should be paid back yearly, which in the time of sahabah meant that the debtor is in position of paying back the debt but the creditor is not pressing to get it back.

The statement of Ayesha (ra) above seems to be the most appropriate to this issue. The strongest opinion these days is that debt is what is demanded from you at this very moment. For example, the debt can be $300k, but if installments are set and one owes only $10000 right now and paying this $10000 still keeps you above nisab then zakat is to be paid.