Fiqh of Islamic Finance

Fiqh of Islamic Finance

2013 Spring Session (March 31 to June 2 2013)

Class taught by Shaikh Jamaal Zarabozo

Recommended Textbook:

Understanding Islamic Finance by Muhammad Ayub

Basic Outline of the Quarter: Sukook

Real Estate Investment Trusts (REIT)

Investing/Buying Gold and Silver

Credit Cards/Debit Cards

Required or Recommended Reading:

Various articles may be e-mailed throughout the course, Allah willing

2013-03-31 Class Notes

Real Estate Investment Trusts (REITs)

Invests in real estate directly either through property or mortgages.

Originally developed in the USA in 1960s. A corporation or trust that uses the assets of many investors to generate income (known as equity REITs) or in loans to owners (known as mortgage REITs).

A number of such REITs exist in the USA.

There are a number of rules that have to be met for it to be a REIT.

1. Has to be structured as a corporation, trust or association.

2. Must be managed by directors or trustees.

3. Must have transferable shares.

4. It must not be a financial institution or insurance company.

5. It must be joined by at least 100 people.

6. It must have 95% of its income derived from dividends, interests and property income.

7. It must pay dividends of at least 90% of its income.

8. It must have <50% help by 5 or more individuals.

9. Have >75% of its assets investments from real estate.

10. >75% of its income from rent or mortgage interest.

Trying to control it so that you can invest it in Halal things.

REITs have some good properties. Firstly it has diversity of investments. Secondly, it has a good rate of return -- about 6-7%. It is very liquid, you can share the assets with others (unlike the buying of real assets).

Lets say we have a company called “Capital REIT” and it says you that “we own such and such and we are renting out such and such”, however here is the problem, that who are they renting to. Is it being rented to a casino or a liquor store? So one has to be careful here just like when we discussed the issue of stocks.

In April 2006, Malaysia came out with the first ‘Islamic REIT’ and they had six by the end of the year.

The …. came up with the standards for the Shariah compliance of the REIT. For the Malaysia, it even allowed limited foreign investment to come in for such REITs. It allowed for about 20% of non-Islamic activities related to the REIT (which includes Riba, entertainment, tobacco, hotels and resorts, etc.).

The Singapore has Sabani?? Shariah Compliant REIT and in Saudi Arabia REIT also showed up in 2008. In the Singapore REIT case, the non-Islamic activity must be less than 5% of the annual growth revenue.

There are two models for this REIT, one is Wakalah based and the other is the Mudharaba model. In the Wakalah model there is a fee based wakeel who maintains the properties of the REIT.

The Wakeel has a lot of responsibilities -- acquiring new properties, maintaining existing ones, promoting existing ones, etc. So they have a management expense ratio -- the fraction of the total. There can be a limit. The management company does not bear the risk of investment -- it’s not involved in taking the risk.

2013-04-07 Class Notes

When people have disposable money, they either want to protect it or grow it. They want to invest it. There is a lot of money involved, the sums are very large, and in general people in the US are trying to invest their money. There are many books on the topic of personal investing.

Primer on Personal Investing

1) The first thing that people think about when investing their money, they go to stocks. Theoretically speaking there is no problem with the concept of stocks. You invest money and get a share of the ownership of the company. However practically speaking there are many problems with investing in stocks.

The first problem with stocks is the kind of business they are involved in, you cannot invest in companies that deal with haraam such as alcohol, gambling, interest, etc. Another problem is that even if the companies are in halaal activities, they borrow money on interest or have a share of their income based on interest. Some Muslim scholars try to work around this issue by specifying a minimum threshold for the type of activity, interest income etc. They produce a criteria for companies to be listed in so called shariah compliant index funds, but as we studied last quarter, the criteria are not truly shariah compliant. And we ruled out those Islamic funds.

2) Next we discussed bonds, but by nature they are ribawi. They are low risk and have low rate of return. In response to the un-Islamic bonds, some Muslim scholars came up with sukook. Theoretically speaking, is it possible in theory to have a way of a Muslim investing in something where he gets a fixed rate of return. The answer is yes and it is an Ijara type contract. So here one can say that put x amount of money in and the return can be like 6% for you due to this Ijara contract. With the sukuk they promise you the return of your original money and this is what makes it problematic. So basically if you invest $100k and then they promise the return of certain percent and yet they return your $100k after all this return which makes it like the ribawi contract. The Taqi Usmani said that over 85% of the sukuk are non-Islamic, which is a very strong statement showing us what is going on out there in the name of sukuk.

Stocks and bonds are the main instruments for personal investing, stocks are riskier but its returns are greater.

Footnote: If you work in the company, you are not a co-owner, and not directly responsible for the companies activities. However you should avoid working in companies that are dealing in haraam, you should work in a company that deals primarily with halaal and specifically your work is also halaal. You do not want to work in a bank’s IT department, since the main activity of the bank is riba and you should avoid it.

Mutual funds are another financial instrument. There are money market funds which invest money into bonds and other financial derivatives, you should stay away from them. Equity based mutual funds primarily deal with stocks.

3) Another sector is so called financial gambling, which includes options and derivatives, etc. These are some options to make a large amount of money, but you could easily get into a lot of debt. You could try to hedge your bets, but as we saw in the financial collapse, these were due to riskier bets by financial companies.

However due to immense influence of Wall Street Lobbyists on the government, there has been no regulation on the gambling. The house is always going to make money, you cannot bet against the house and expect to win. They are designed in such a way that ‘the house’ is always making the money.

Some scholars try to find ways in order to invest money in stocks, but investing money in bonds or “financial gambling” is haraam.

4) Another source of investment is the real estate, which includes developed land, undeveloped land, commercial property etc. By default (assuming being bought at cash) it is halaal. However, real estate is not liquid and once you put your money into it then you are stuck in it. If having ready money is important to you then this is not the best choice. The return is slow and small, while one has to go through the headache of maintaining the property. On the ‘halal-ness’ side of it, the property cannot be used for haram purposes, e.g. you cannot rent your commercial property to haram business.

5) One alternative to real estate is REITs which are real estate investment trusts. We discussed it in the first class for this quarter.

6) Buying and selling Gold and Silver is another alternative for personal investment.

7) There are other precious metals such as platinum too. Platinum is known as white gold. Are the rulings for gold+silver and platinum the same in the shariah? There are specific verses and quran about buying gold and silver.

8) Commodities is another alternative for personal investment. It is known as salam. There are restrictions to salam, such as back-back trades etc

9) Some people invest in foreign exchange, which makes many on the arbitrage between currency conversions. There are specific rulings for cash, it has to be hand to hand transactions.

10) Fine arts, vintage cars, antiques, out of print books, etc. Here again issue is one cannot deal with haram items, i.e. no Shariah violations. A piece of art worth $2.5 million, is it valuable from Shariah perspective. Does it fall under Israaf? For example, Shariah value of wine is zero, similarly from the perspective of Israaf the Shariah value of the painting may be zero.

11) Venture capital (Mudharabah, Musharakah). One can do this from the Shariah point of view and these may require some hard work and effort on part of the person involved in it.

12) Private party lenders. Here the one with the idea of business goes to a person with money where the lender uses the business as a collateral. From an Islamic perspective this may be problematic.

2013-04-14 Class Notes

Handout sent by Sh Jamaal The Gold Dinar and Silver Dirham: Islam and the future of money by Imran Hosein, published by Masjid Jamiah, Trinidad and Tobago. (Edit: This handout has many references to conspiracy theories, so beware and read at your own risk)

What is money?

It is a medium of exchange, it is a unit of account, it is a store of value, and it offers a standard of deferred payment.

What is bartering and is it halaal?

It is exchanging goods for goods, and it should be halaal. We don’t rely on bartering because it is inefficient, since it is difficult to match supply and demand. So bartering is permissible but it is not efficient. Whereas money as an exchange medium is easier to exchange.

Money should be divisible, it should be easy to exchange, easy to carry and it can be preserved. Money should have limited supply, otherwise it would not have any value.

What is money backed up by? Does it need to be backed up by something? What about from the Shariah perspective does it need to be backed up by something? These are some leading questions asked by the Shaikh for us to think about the next topic.

Gold Standard

Money is backed by gold, where $1 is equivalent to some amount of gold. The actual gold standard that existed from 18th century to World War II, was not there for a long period of time. After World War II, all of the world currencies were backed by the US dollar and the US dollar was backed by gold.

The value of the gold was higher compared to the money paid to buy it. This was the tool to make people give gold away in exchange of the dollar as paper currency. The US citizens were forbidden from buying gold bullions??? while the US currency was backed by gold. (Edit: What about jewelry or other usages of gold?)

Fiat Money

In 1971, the US currency was taken off the gold standard by President Nixon. Right now there is nothing backing up the US dollar. This is called the ‘Fiat money’.

The US Government has the monopoly on the printing of money and this is done on instructions of the Federal Reserve (which is part private and part public institute) even though it does not control the printing of money. It is not under the authority of USA however it answers to the US Congress. Every bank has to buy stocks in Federal Reserve and when Federal Reserve makes profits then it pays dividends to the banks. The Federal Reserve really controls the flow of the money in society.

Monetary policy of the Federal Reserve

Not all of the US currency is generated by printing money, it is controlled by the policies such as the monetary and the fiscal policy. These policies controls the flow of money. The monetary policy controls the supply of the money via an open market operations.

The Federal Reserve in Washington DC monitors the flow of money in terms of the price of the US bonds. Banks are first purchasers of bonds. When the Fed wants to increase the supply of the bonds, they start auctioning the bonds.

Banks sell 100 million bonds and the Fed deposits 100 million in their accounts. Fed buys the bonds in order to increase the number of dollars in circulation, they effectively increase the holding of the US currency in the accounts of the banks in exchange for the bonds held by the banks. This effectively creates a higher multiple of the 100 million dollars of dollars in circulation, because the banks do not have to maintain 100% reserves, typical reserves are around 25%, they create $400 million dollars. The banks are now free to issue loans to companies and institutions.

The $100 million can inject up to $400 million into the economy through the money multiplier (1/0.25 = 4). The reason being that the bank is not required to hold onto that 100 million dollars. There is such a thing as reserve ratio (25%) so of the amount of money they have to hold onto 25%. So of the 100 million they have to keep $25 million. The bank is now free to issue loans to companies. So for instance the bank loan $75 million to Cisco. Of that $75 million loan to cisco, as an accounting entry they have to keep 25%, $18.75 million. The remaining 56.25$ million is left over to re-lend again as an accounting entry.

If no one is buying the bonds the federal reserve will lower the price, and eventually someone will buy. The lower the price the greater the yield.

The Fed can increase or decrease the reserve ratio required by the banks, which allows the banks to increase or decrease the amount of money in circulation.

This shows that the US currency is simply a manipulation of the policies and there is really nothing backing up the US currency other than the promise of the US government.

By relying on the fiat money, the governments are able to control the supply of money and increase or decrease the value of the money. (Edit: Some of the Euro countries lost this power to do so when they signed up to become part of the Euro)

Isn’t this ability to influence the economy a good thing, speaking as an economist? It is good as long as there is no corruption.

The financial collapse of the US economy was caused due to corrupt or underhanded financial transactions. Depression or recession could be a result of psychological factors in addition to economic factors, and this factor could be a multiplier effect. The economy is very volatile because of these multiplier effects.

If an Islamic state is required to be on a gold standard, then they will have very limited mechanisms to control the economy. They still have bayt-ul maal (wealth of the state or the treasury). They could hold on to it and cut down on their spending, which is manipulating the fiscal policy. So they won’t have any true influence on monetary policy, because they will not be able to create money without it being backed up by the gold standard. With the gold standard you lose effective monetary policy but it can be a good thing.

Footnote: In West the standard was the Silver standard all the way upto the eighteenth century. Then they shifted to the gold standard and it did not stay for too long.

This discussion leads to an important fiqh question. The prophet (pbuh) said that you have to sell gold in a hand to hand transaction (spot transaction) for an equal amount (no increase). And now since the currency is divorced from the gold standard, then should the fiqh of money be the same as the fiqh of gold?

What is the illa behind the spot or hand to hand transaction? Is this applicable to all commodities, can they be applied to other things such as apples, cars, camels etc.

Dates are ribawi items when it was discussed in the hadith of Bilal when he exchanged inferior dates for superior dates, the Prophet said that it is essence of riba.

Narrated Abu Sa`id al-Khudri:

Once Bilal brought Barni (i.e. a kind of dates) to the Prophet () and the Prophet () asked him, "From where have you brought these?" Bilal replied, "I had some inferior type of dates and exchanged two Sas of it for one Sa of Barni dates in order to give it to the Prophet; to eat." Thereupon the Prophet () said, "Beware! Beware! This is definitely Riba (usury)! This is definitely Riba (Usury)! Don't do so, but if you want to buy (a superior kind of dates) sell the inferior dates for money and then buy the superior kind of dates with that money."

حَدَّثَنَا إِسْحَاقُ، حَدَّثَنَا يَحْيَى بْنُ صَالِحٍ، حَدَّثَنَا مُعَاوِيَةُ ـ هُوَ ابْنُ سَلاَّمٍ ـ عَنْ يَحْيَى، قَالَ سَمِعْتُ عُقْبَةَ بْنَ عَبْدِ الْغَافِرِ، أَنَّهُ سَمِعَ أَبَا سَعِيدٍ الْخُدْرِيَّ ـ رضى الله عنه ـ قَالَ جَاءَ بِلاَلٌ إِلَى النَّبِيِّ صلى الله عليه وسلم بِتَمْرٍ بَرْنِيٍّ فَقَالَ لَهُ النَّبِيُّ صلى الله عليه وسلم ‏"‏ مِنْ أَيْنَ هَذَا ‏"‏‏.‏ قَالَ بِلاَلٌ كَانَ عِنْدَنَا تَمْرٌ رَدِيٌّ، فَبِعْتُ مِنْهُ صَاعَيْنِ بِصَاعٍ، لِنُطْعِمَ النَّبِيَّ صلى الله عليه وسلم فَقَالَ النَّبِيُّ صلى الله عليه وسلم عِنْدَ ذَلِكَ ‏"‏ أَوَّهْ أَوَّهْ عَيْنُ الرِّبَا عَيْنُ الرِّبَا، لاَ تَفْعَلْ، وَلَكِنْ إِذَا أَرَدْتَ أَنْ تَشْتَرِيَ فَبِعِ التَّمْرَ بِبَيْعٍ آخَرَ ثُمَّ اشْتَرِهِ ‏"‏‏.‏

Is exchanging apples for apples haraam? Most scholars say that this rule for spot transaction does not apply to all items. Shafies say that it applies to items that are sold by weight, but we buy and sell meat but it is not considered ribawi.

Footnote: There was a time in Saudi Arabia where loose change was in short supply and some exchanged one riyal for .50 riyal in change.  Ibn Uthaymeen said this was okay because one unit was in paper and the other unit was in coins. (Edit: This sounds very strange)

What should be the shariah ruling or the basis for shariah ruling for money that is not backed by gold?

There are several opinions about money.

One opinion is that this money should be treated as an I.O.U. Another opinion is that this money is to be treated like a commodity (i.e. it is not exactly as gold and silver). The third opinion is that it should be treated as Fuloos (in Arabic it means money since in the past the gold coin was dinar and silver was dirham and the coin of copper was called Fuloos for very small value items).

We have to answer the following questions, in order to understand the basis for shariah rulings about money:

Question #1: Should we treat fiat money just like gold?

Does fiat money play the same role as currency backed by gold?

Question #2: Should we treat gold like gold and silver?

Does gold still play the same role as during the time of the Prophet? If not, should the ahkaam of gold remain the same as during the time of the Prophet?

Edit: Paul Krugman of The New York Times has an Op-Ed about bitcoins and money that may be informative to the students.

“... bitcoins are in a sense the ultimate fiat currency, with a value conjured out of thin air. Gold’s value comes in part because it has non-monetary uses, such as filling teeth and making jewelry; paper currencies have value because they’re backed by the power of the state, which defines them as legal tender and accepts them as payment for taxes. Bitcoins, however, derive their value, if any, purely from self-fulfilling prophecy, the belief that other people will accept them as payment. ...

“Goldbugs and bitbugs alike seem to long for a pristine monetary standard, untouched by human frailty. But that’s an impossible dream. Money is, as Paul Samuelson once declared, a ‘social contrivance,’ not something that stands outside society. Even when people relied on gold and silver coins, what made those coins useful wasn’t the precious metals they contained, it was the expectation that other people would accept them as payment. ...

“So do we need a new form of money? I guess you could make that case if the money we actually have were misbehaving. ...”

2013-04-21 Class Notes

History of money in Islam

At the time of the Prophet there was dirham and dinar based on silver and gold respectively. Gold (the Dinar) was from Byzantine empire and Silver (the Dirham) was from the Sassanid dynasty of Persia. They took this currency and stamped “bismillah” on the top of the currency.

In Damascus 76H, that is the first instance of dinars being minted. The dinar weight was about 4.25 grams, and the dirham weighed about 2.97 grams. The coin of England was called Mancus. The King Offa ordered his people to mint the coin in the same manner as the one from Damascus which included the words bismillah. Some say he copied the coins in order to facilitate trade with Andalus. Abbasid traders demanded that they be paid in dinars.

The fall of quality of the Dinar started in Mamluk period, because they used to put copper in minting the dinars. Ibn Taymiyyah said that the introduction of fuloos caused inflationary pressure which caused harm to the Muslim ummah..... and then he quoted the verse from the Quran, in order to make the argument that the government must not interfere with the value of the coin, and pay the amount in full.

So these gold coins were the basis of trade/money throughout the Muslim world.

وَأَوْفُوا الْكَيْلَ إِذَا كِلْتُمْ وَزِنُوا بِالْقِسْطَاسِ الْمُسْتَقِيمِ ۚ ذَٰلِكَ خَيْرٌ وَأَحْسَنُ تَأْوِيلًا

Sahih International (17:35)

And give full measure when you measure, and weigh with an even balance. That is the best [way] and best in result.

Global trade was not negatively affected by this gold standard. Because of its purity the coin was accepted as currency. And the bedouins of the Arabian peninsula still use gold coinage as their medium of exchange.

This has led to a revival -- the modern dinar movement, and e-gold. A group based in Spain called Murabitun that started this e-gold movement in 19??

What is acceptable as money in the Islamic world?

Imam Nawawi said that the ruler had the sole privilege to mint coinage. What about the idea that banks create money using fractional reserves and fiat money?

Ibn Taymiyyah said that the ruler should not profit from minting the coins. In other words it must keep its intrinsic value.

Footnote: There is a saying in Arabic, La zam bil Madhab, Laysam bil Madhab - I might not agree with the conclusions that you derive from my statements.

At the time of the Prophet(SAW), they used gold and silver as money. And when you exchange gold and silver it should be for equal amounts, hand to hand. The basic illa behind it are that gold and silver are used as money. This raises the questions can you extend this hadith to other artifacts that can be used as money. And what happens to the hadith when gold and silver are no longer used as money.

Status of gold and silver

Many scholars say that gold and silver were created for the purpose of Money. This was a statement of Abu Hanifa,Ibn Khaldun, Al-Ghazali, Bakr Al-Saadir (Shi’a). But the majority of the Maaliki scholars, and Ibn Taymiyyah agree that gold and silver can be money or other commodities. They say:

1) The basic ruling is permissibility (Edit: Anything can be used as money).

2) In time of Prophet (SAWS) they used Gold and Silver. And Umar bin Khattab (ra) actually suggested using camel skins for money. The Sahaba (RA) did not agree with this and the argument why: because they feared it would lead to a shortage of camels.

Four Opinions about Paper Money or Fiat Money

So what about fiat money? Those who say money has to be based on Gold and Silver, clearly there’s a problem. Those who say it doesn’t have to be still have to explain where it comes from.

#1 Treat Paper Money as an IOU (Minority opinion)

One minority opinion is that the money should be treated as an IOU. This is an opinion put forward by the Ahmad al Husseini. Is this a transfer of debt? Does this work? Well, not really. Firstly if you lose money, you can’t get it back. Secondly, you can’t then use it for all transactions (e.g. you can’t use it for salam contracts).

#2 Treat Paper Money as a Commodity

Can you treat it as a commodity in and of itself? Does dollar have value by itself? What exactly is purchasing power?

Sh Abdul Rahman Al Saadi (teacher of Sh ibn Uthaymeen) says that paper money has some characteristic like gold and silver, but it is also different. He says paper money is not ribawi. But if you take it to the logical conclusion, then you do not have to pay zakat on paper money.

According to Ibn Taymiyyah and Ibn Qayyim (Hanbali Scholars) the reason you can’t exchange gold for gold is because it is like money. For other Hanbalis, the ‘illa is that the two are exchanged by weight. Since they are not exchanged by weight they are not ribawi. Really, this question of what is the ‘illah of the riba hadith about gold and silver as spot transactions is the key question.

So according to Saadi, paper money is not a commodity, but gold and silver are a commodity. And he says it is okay to exchange different amounts of paper money without the problems of riba.

#3 Treat Paper Money as fuloos (Copper adulterated gold coins)

Scholars differed on how to treat fuloos. This old discussion about fuloos is the same discussion about paper money. These earlier scholars said that fuloos is not a commodity or that it is not ribawi.

The problem for the Hanbalis is that there’s another narration where he (Imam Ahmad) permitted that.

Sh Saadi makes an exception and says: if we consider paper money to be like fuloos, then we treat it like Gold and Silver when it comes to deferred transactions, and like fuloos when it comes to spot transactions.

#4 Treat Paper Money as proxy for Gold and Silver

All of the principles of gold and silver apply to money as well.

Should Gold and Silver [as a commodity] be treated as Gold + Silver [as a currency]?

Since nobody uses gold and silver for currency, so the question is should we treat gold and silver as the way it was treated during the time of the ribawi hadith.

The Faysal Islamic Bank of Sudan in 1975 received this question and issued the following fatwa.

Our opinion is that it is deserving of further study. .... gold and silver has become a commodity even though it is still treated as ribawi

The hadith says “Gold for Gold, Silver for Silver, barley for barley, wheat for wheat, dates for dates, and if it is any other transaction then you can exchange hand in hand.” All of the scholars agree that if it is acceptable to do deferred trade using the first two for the latter four.

Two categories, one category is for gold and silver and the other category is for the other ribawi items. And there are different rules for purchase over time that only applies to the other ribawi items.

Therefore they conclude that they should treat gold as gold, but they realize it needs further discussion.

It looks like the safest opinion is the opinion #4 in the above list. Even given all the circumstances, people still value gold, so in difficult situations one can find a way out of emergencies.

One problem with Fiat money is that hyperinflation. When money starts losing value and govt to buy more stuff then they print more. As a result the prices start to go up and govt keep on printing and then a time can come that a barrel of money is needed to buy even bread.

Conclusion about paper money and gold and silver

Sh Jamaal recommends that we should treat fiat money as a proxy for gold and silver and that the status of gold and silver even though it is no longer a basis for money, should remain the same as it was during the time of the Prophet.

2013-04-28 Class Notes

We discussed last time the rulings about how fiat or paper money should be treated and what should be the status of gold and silver, should it be treated as gold. The conclusions are captured above.

Discussion of the handout about gold dinar and silver dirham by Imran Hosein.

Did this author make a good case of whether or not that gold should be treated as money? Did the author prove that from Islamic perspective that gold and silver are the only form of money and fiat money cannot be used? He made a better case for the first question but he did not answer the second question.

The author states some conspiracy theories about the economic collapse as being forced by a group in order to subjugate others. Reading those conspiracy theories makes it very difficult to read this document, but if you ignore them and focus on the other points.

Moreover if you remove the Islamic topics from this book since a lot of it is stated without evidences for it, then the handout is pretty interesting.

He then discuss how the Nixon administration made US dollar the effective world currency and divorced it from the gold standard, known as the Nixon Shock

He then discusses the IMF and the World Bank, which were created as a means of improving the economic conditions of the lesser developed countries. But the track record of the World Bank shows that they did not achieve their goals.

The current world economic system concentrates wealth in the hand of the few, those who have money are able to accumulate more wealth easily.

John Perkins is a more balanced author than the author we are discussing, his book, Confessions of an Economic Hit Man, is a very interesting book that is worth reading.

“In the final analysis, the world economy relies on the fact that the US dollars are the world’s dominant currency and the Mint has the right to make currency. Thus we make loans to Ecuador, knowing full well that it won’t repay the debt, because them owing us the money will give us leverage.”

The poor countries are beholden to their debt and when they cannot repay it, they are forced to austerity measures. What austerity really is the complete privatization of all public sector, they are forced to sell their national wealth, resources, state companies, etc.

Example: some of these countries have national airlines, so when the govt can’t support the national airlines -- so then they sell it for cheap. This is the kind of leverage that they can present.

The US can just continue to print. If another currency were to come into power or play, that is the only thing that could cause issues right now.

There is no doubt that the system that there is corruption in the system, which makes rich even richer but poor even poorer. The hadith that the author mentions about a day when all that is left of Islam is the name, what is left of masajid is structures and the Ulema will be the worst the corruption will come from them and return to them. This hadith is in Bayhaqi and it is a very weak hadith (Daeef Jidan).

There is another book by Ahmad Kameel, “The Gold Dinar”, that is similar to the gold dirham and silver dinar movement from Malaysia. The current economic system definitely has some weakness and let us hope that an Islamic currency would bring relief to the masses who are suffering and not just help the top 1%.

However whether the Islamic Monetary system should be based on gold standard is yet to be determined, is debated by many Islamic scholars. It could be fiat money but with more restrictions on the banks, such as 100% reserve ratios and eliminate the creation of money by banks.

These books are unfortunately not representative and don’t really reflect the diversity of Muslim opinion on the topic. Texts like this are overly dogmatic, when it is still ijtihaad.


The countries that are the largest consumers of gold are India, China and then the US (3rd in the list).

People look at gold as a hedge against inflation, for example, George Soros, for instance, at one stage in 2010 held more than $600 million in bullion. Gold is also very corrupt. In April 2010, JP Morgan Chase and HSBC were accused of manipulating the Gold and Silver markets. e-gold -- third party storage service, pleaded guilty to money laundering charges in July 2008. In 2009, the Canadian Royal Mint had some unreconciled issues with the bullion and the account. In 2007, Morgan Stanley was sued for $4.4 million. There are many shams with companies that deal in gold transactions.

Coins are much more difficult to counterfeit than bullion. If you want to invest in gold, you have to avoid Exchange Traded Fund ETF -- these are not actual gold commodity, they simply follow the price of gold, they are gold derivatives.

London bullion market LBMA -- every bar is certified. But if it goes out and then comes back, then it has to be recertified.

In general what is better hedge against inflation, gold or stocks? Generally, stocks grow rapidly as compared to the real price of gold, so stocks are better hedge against inflation.

Gold Money and Bullion Vault

When you buy gold you can buy bars and in some countries these can be bought on the local banks. They have something called the good delivery bars. The problem with bars is the larger the bar the greater is the risk of the forgery. Many countries have gold coins, like Kangaroo coin of Australia and Maple-leaf coin of Canada. Then there are gold certificates.

A question was posed by an economist, What is better an ounce of gold or an ounce of stock? If you bought stock of IBM in 1950 and ounce of gold in 1950, the stock of IBM has performed better than gold.

So gold is not a very good investment alternative, but it is useful for diversifying your investment portfolio.

There are two reliable companies: and -- another option is the London Bullion market.

You can also purchase gold coins -- Krugerrand, Kangaroo, etc.

You can also purchased gold certificates. But when it comes to certificates, it is important to distinguish whether it is allocated or not allocated.

Gold accounts -- when you have your account denominated in gold. But some of them also have fractional reserve.

Discussions about the restrictions about hand-hand requirement for purchasing gold. We discussed how gold is sold and delivered to you.

..... notes missing ...... discussions about how gold is purchased, delivered, stored, etc

2013-05-05 Class Notes

Last time we discussed about nature of money in Islam, and whether money should be treated as gold and silver, and how to treat gold and silver since it no longer treated as money.

Intrinsic value of money

Does money have value because there is an intrinsic value for it or is it because of its purchasing power?

Ibn Taymiyyah said dinars or dirhams have no legal or intrinsic value, rather it is because people seek after it. It has value because of its acceptance as medium of exchange. Thus a true medium, one with no concrete or purpose other than exchange is acceptable regardless of how it is configured.

Imam Ahmad said if people chose to use leather as currency, then I would have to voice questions about its exchange in future for silver.

Thus there is no clear sign that there has to be an intrinsic value.

Anything that is money can be treated as money, so fiat money by its definition as medium of exchange can be treated as money, without any intrinsic value to the coins or paper on which it is issued.

Commentary on Banking and Fiat Money

We discussed how banks create money. A student in his masters thesis wrote, govt can influence fiat money which intrinsically is based on riba, and since they create money based on nothing, he says that this is riba. Is this an example of riba? Can you explain how he came to this conclusion?

This is strange, since there is no clear transaction that is ribawi. Yes the banks are creating money based on reserve ratios, but this is not riba.

Azimuddin Subani’s view about riba. He proposes a linguistic and ... argument against riba. He says there is a loose cognate relationship between riba and rabb. And thus it is based on theological argument. He says that riba uses the power law and it is unlike any other growth, and he says that there are theological issues to riba and since riba tries to grow exponentially and increase.  

This is also strange.

Tayseer Al Qula wrote about theological argument against riba based on time based metaphysical arguments.

We know what is riba, it is clearly defined, there is no need to bring these extra theological or metaphysical arguments against riba.

These arguments are from Muslim students who are trying to prove how evil riba is, but they are going overboard with their arguments.

Trading gold

There are some conditions on trading gold and silver commodities as compared to other commodities.

Restriction #1 Transaction has to conclude in one gathering or majlis.

If the two parties leave the gathering without the exchange taking place, then the contract is considered invalid.

This restriction is based on the hadith that it has to be hand to hand and of equal value.

Let us say that you agree with a party that you will buy 100 coins for $1000 and you shake hands to conclude the agreement. The essence of the deal is done. The exchange has to take place.

In the Maliki school, this exchange has to happen immediately. However the other scholars say that the exchange can be delayed as long as they are in the same majlis.

Now let us say that you negotiate to buy a Toyota car and you agree on the price. Next you discuss to buy some stones. And you agree on all of the items including gold coins, car and stones and you buy it for $50,000. And then you start discussing welfare of each other. And when you leave the gathering you have to exchange the money for the goods. Any time you leave the party, then the contract is invalid.

According to Imam Malik, you cannot even try to move to another topic, you have to exchange the goods immediately before discussing the welfare or start discussing any other topic.

This happened in the time of Umar. Someone said “just wait til my shopkeeper gets back from the forest.” Umar said: You should wait until he comes back or the contract is void.

This is based on the hadith that says you should not sell except “haa’ wa haa’” (i.e. tit for tat). This concept of the majlis is well-known. But the Malikis take a more literal interpretation. They say it is a special case. And there is no excuse for delay.

Another hadith from IU that the exchange can be delayed

Nisa’i hadith 4586.

"I used to sell camels at Al-Baqi and I would sell Dinars in exchange for Dirhams. I came to the Prophet in the house of Hafsah and said: 'O Messenger of Allah, I want to ask you: I sell camels in Al-Baqi and I sell Dinars in exchange for Dirhams. He said: 'There is nothing wrong with it if you take the price on that day, unless you depart when there is still unfinished business between you both (buyer and seller)."' (Hasan)

أَخْبَرَنِي أَحْمَدُ بْنُ يَحْيَى، عَنْ أَبِي نُعَيْمٍ، قَالَ حَدَّثَنَا حَمَّادُ بْنُ سَلَمَةَ، عَنْ سِمَاكِ بْنِ حَرْبٍ، عَنْ سَعِيدِ بْنِ جُبَيْرٍ، عَنِ ابْنِ عُمَرَ، قَالَ كُنْتُ أَبِيعُ الإِبِلَ بِالْبَقِيعِ فَأَبِيعُ بِالدَّنَانِيرِ وَآخُذُ الدَّرَاهِمَ فَأَتَيْتُ النَّبِيَّ صلى الله عليه وسلم فِي بَيْتِ حَفْصَةَ فَقُلْتُ يَا رَسُولَ اللَّهِ إِنِّي أُرِيدُ أَنْ أَسْأَلَكَ إِنِّي أَبِيعُ الإِبِلَ بِالْبَقِيعِ فَأَبِيعُ بِالدَّنَانِيرِ وَآخُذُ الدَّرَاهِمَ قَالَ ‏ "‏ لاَ بَأْسَ أَنْ تَأْخُذَهَا بِسِعْرِ يَوْمِهَا مَا لَمْ تَفْتَرِقَا وَبَيْنَكُمَا شَىْءٌ ‏"‏ ‏.‏

[Note translation is problematic -- he would sell camels for dinars and then accept dirhams]. This hadith definitely gives the idea that the exchange has to be instantaneous. This hadith goes against Malik’s view.

Albani ranks it as weak, but other scholars think it is hassan.

Majlis can go on for a long time, there is no problem with that. You could be walking together and it is still considered one majlis.

Restriction #2: There is no khiyar al-majlis or khiyar al-shart for buying or selling gold and silver

There is no khiyar al-majlis when buying or selling gold and silver. It is binding immediately. There is also no khiyar al shart -- no “warranty” or return policy when transactions involving gold and silver. There are some minor exceptions in other madhabs.

What if you only exchange partially? E.g. I only had half the money to pay for things; do I get the whole thing cancelled? Hanafis, Shafi’is, Hanbalis and some Malikis say the portion that is paid is valid.

However, some of the Malikis have a different view.

Fatwa time! Questions posed to the students

Question #1: What is the sharia ruling for a promise to buy or sell gold and silver at sometime in the future?

It is not acceptable because it becomes a door for sale of a debt for a debt.

Question #2: If we are going to be dealing with gold & silver, there are two ways: purchase & possess when low and then sell & deliver. Promise to purchase and promise to sell.

You make a promise, but at the time at which the the promise is due you make an agreement. If it’s a gentleman’s agreement is OK.

If there is delay, then the contract is invalid, since it is riba.

But if the contract is binding and there will not be a new contract at some future point, then this is not acceptable.

(Edit: Basically we are trying to ascertain that there is no riba related to delay of possession and deferred payment over a period of time which can open the door to hiding riba.....)

Swiss Banks sell borrowed gold, they purchase gold at new higher price and return it to the investor????. The banks are looking to sell borrowed gold at a higher price and purchase it at a lower price to the person from whom they borrowed the gold. Basically arbitrage of gold.

Since gold is usufruct, they can make money from borrowing gold and making money off of it.

Question #3: Is it allowed to buy platinum using deferred payments?

Remember platinum is treated differently than gold and silver. According to most of the scholars it is permissible to buy platinum using deferred payments since the restrictions of gold and silver do not apply to it.

Footnote: You don’t have to pay zakaat on diamonds since it has no Shariah value???? However if you buy diamonds in order to get out of paying zakaat, then remember your actions will be judged by the intentions, and Allah swt is all aware of what you do.

Question #4: What is the shariah ruling about precious stones mounted in gold? Do you follow the same restrictions that are applicable for buying gold and silver?

2013-05-12 Class Notes

Discussion about Riba al Fadl - Exchanging gold for gold

Ibn Umar and Ibn Abbas did allow for riba al fadl  (Trading one type of gold for another type of gold) to begin with, but they changed their views on this once the evidence against it was presented to them.

This applies to different purities of gold too. What if it is gold jewelry, does the craftsmanship come into it?

How is the price of the gold jewelry determined? Should you take into consideration the purity, the craftsmanship, etc. No. The majority of scholars say that there is ijma that if you are trading gold for gold, the amounts must be the same.

Edit: We are trying to close the door on any form of riba by ruling out any additional increase in price for trading gold for gold.

The value of the gold is the only attribute that is considered when you are exchanging gold for gold. So basically, you have to sell your old gold jewelry and then use the money to buy new jewelry instead of exchanging gold for gold and adding additional costs.

Ibn Taymiyyah and Ibn Qayyim say it is permissible to trade jewelry as a spot transaction over time with a different price, as long as it was not meant to be taken as money.

We have the hadith about the spot transactions for gold. And this additional hadith discussed below.

Narrated by Fudaal b Ubaid, on the day of Khaybar I bought a gold necklace for 12 dinars, then I pulled it apart and found it was worth more than 12 dinars of gold. Then the Prophet (SAWS) said then it should not be sold until it is pulled apart.

Scholars have said: if the item can not be taken apart without damaging it, then it must be sold as silver and then with that money you can buy the other jewelry.

These hadith basically prohibit the exchange of gold for gold. It is another way for prohibiting gold for an increased or decreased amount of gold, which is riba al fadl.

Abdullah b Umar said a jeweller came and said I take gold and sell it for more than its weight. And he kept asking, and then Ibn Umar said you have to exchange gold for gold and silver for silver, he said this is what we’ve been obliged to do.

Bayah al Arayya بيع  العرايا

This is a kind of sale that the Prophet permitted. In this transaction, a farmer is able to sell dates that are still on the tree or fresh dates for dried dates. It allows exchange of one type of dates for another type of dates and it seems to contradict the hadith about spot transactions (dhahab bi dhahab).

What evidence do ibn Taymiyyah and ibn Qayyim present for their opinion about trading jewelry? They say it isn’t money, so it shouldn’t be treated like that.

Ibn Taymiyyah and Ibn Qayyim say that there is a strong need then it overrides the general rule about dhahab bi dhahab, in much the same way that people must be paid for their work (craftsmanship). They say that since Bayah al Arayya was permitted, they use it as the reason for allowing it.

Ibn Taymiyyah and Ibn Qayyim also say that when you have gold & silver as money, then you have to pay zakat, but not if it’s jewelry. Hence there is a different fiqh ruling.

Ibn Taymiyyah and Ibn Qayyim say that if something is prohibited as a means to preventing other evil (i.e. riba al fadl is prohibited because of riba al-nasee’ah) then they argue that it can overridden by need.

They also say that someone steals and destroys the jewelry is now liable for that property and he will be liable for the value, not the weight.

Analysis of the arguments presented by Ibn Taymiyyah and Ibn Qayyim

Maybe in their time it was difficult to exchange gold jewelry for silver. Also the bayah al Arayya was there for helping out poor farmers. We cannot use analogy for exemption in one case to other.

We have means to purchase gold jewelry using money, so we should avoid gold for gold exchange in order to avoid riba al fadl.

The argument about zakat on jewelry, there are other opinions about it. You have to pay zakat on it, if you are not wearing it anymore, according to some other opinions.

Sell your old jewelry and then use the money to buy new jewelry to be on the safe side.

Buying gold with a check

There is a difference of opinion about how checks are to be considered as a means of payment. Some contemporary scholars say that a check is the same thing as money. Sami Al Hamoud and Siddiq Al-Thareer. Ibn Othaimeen say that the check is not considered a transfer of the money or getting the money. Third opinion: if it is like a cashier’s check or something of that nature -- Abdullah Al-Naeemi and Salih Al-Marzouqi.

Urf as evidence for using check as a proxy for cash

This issue was discussed in the Muslim World League and also the OIC. The first opinion they argue that the business ‘urf is to accept checks to be equivalent to money. They also argue that it is well-known that it is a serious crime if you write a check and you don’t have money in the bank. They argue that getting the money goes back to ‘urf/custom. Therefore whatever convention people agree upon will be considered sufficient.

You are not likely to carry thousands of dollars with you to buy gold. And basically having bags full of cash could have some unintended consequences for you, and it could be easier for somebody to steal it from you, etc.

They are saying that check is the same as cash and you are using it to buy gold. So the rules of riba al fadl do not apply.

Opinion: Check is not a proxy for cash

They say that check is only a sign that you have money deposited in your account. And it is not cash. You cannot hand it over to somebody as proxy for cash. It takes some time to be cleared, etc.

They draw on the hadith about Umar b Khattab about the person who said my shopkeeper is going to get the money.

Opinion: Cashier’s check is a proxy for cash

It removes the hurdle that a check is not necessarily guaranteed to clear. But it does take some time to clear.

Conclusion is that those who do not consider cash to be a proxy for cash would not allow buying gold with check.

Buying gold and silver with credit card

How would you analyze credit card from the fiqh perspective? It could be considered an agent that pays on your behalf, which is a waqala. Could it also be a kafala? Are they a guarantor on your behalf. Are they also originating a loan on your behalf?

So basically the situation for buying gold with credit card is extremely fraught with many issues. It fails to clear the hurdles of dhahab bi dhahab.

Buying gold and silver with debit card

The money did not exchange hand, you received the gold, but the merchant did not get hold of the money, all they received was a plastic card from you. It takes time for the money to be deposited into the buyer’s account, even though it is debited from your account immediately.

It is difficult to use cash for such large transactions, and we have to find the closest means to transfer cash from buyer to seller. We have to determine the urf and the maslaha and other reasons for allowing the most instantaneous transfer of cash.

Buying gold and silver online

Here the problem is that spot transaction does not hold for either buyer or seller. There are delays in payment and delays in shipment. Is there any way that we could overcome these delays?

Buying gold and silver online and storing it on your behalf

On the other hand, if you buy gold and ask them to store it for you, then as soon as you buy, the gold is in your possession. You don’t have to take physical possession, it is simply a transfer of ownership.

Whereas if you buy gold and they are shipping it to you, then you are liable for any damage or theft that occurs in transit, since the ownership is transferred to you. They seller is responsible for negligence but you are responsible for any other non-negligence related issues.

Conclusions about gold transactions

Buying gold with credit is wrong. Make sure it is a spot transaction. Do not exchange gold jewelry for gold jewelry. You should sell your old jewelry and then buy new jewelry.

We have to consider urf for maslaha reasons to handle the delays in payment and shipment issues.

Next time we will discuss foreign or currency exchange.

2013-05-19 Class Notes

Currency Exchange (Similar in nature to gold-silver transactions)

We have to deal with exchanging money now and then. We know that for all gold transactions, they have to be hand to hand (spot transactions) and it should be for the exact amount.

Would you settle for a cash transaction that involves exchanging money for a lesser amount of money? It occurs due to financial charges or other fees related to the transaction etc.

The rules for transactions involving gold and silver, it has to be a spot transaction but of unequal value. This ruling would also apply for currency exchange, it has to be a hand-hand transaction, but of unequal value.

The banks have to abide by the rules, however those not within the realm of the banks, they are free to charge whatever amount for exchanging currency.

However what about service charges for currency exchange, are they permissible? You could consider this extra charge as the part of the exchange rate, it is a way around it, but it is permissible.

You should take legal possession of the currency, it has to be a spot transaction.

The currency exchange contract should not contain any conditions such as khiyar al shart which is an option to return it sometime in the future, since it defeats the hand-hand nature of the contract.

At an airport, when you exchange dollars for foreign exchange, they promise that they would buy the foreign exchange when you return at the same rate. However we know that any kind of futures contract is forbidden, is this addendum to the contract permissible? This is just a future, one sided promise, it is not binding.

Fatwa issued by Kuwaiti Finance House about future foreign exchange transactions

Q: What is the shariah ruling about foreign exchange transactions that occur at a later time? .... missed the details about the question on how they would agree to buy the foreign exchange in the future ....

The fatwa says, that this is a promise to sale. It is not binding. If both parties go through with the contract as described in the question, then there is no harm. But if one of the party puts up an upfront deposit, then the contract is not valid, since it involves debt......

As long as it is a simple non-binding promise, it is halaal.

Conclusion: It’s borderline, but on balance probably OK.

Can you pay the foreign exchange with a check? Is this allowed?

Nowadays the check transaction has become instantaneous due to the new check readers. But the important point is that this has to be spot transaction.

What about buying foreign exchange using a credit card?

It is definitely not a hand-hand transaction.

Can you ask somebody to buy foreign exchange on your behalf? Somebody buys the foreign exchange on my behalf, I take hold of the foreign exchange and then pay him later on.

Most scholars have difficulty allowing credit card based transaction for buying foreign exchange due to the debt issues involved.

Suppose two people owe each other money in different currencies. Is it permissible for them to settle it in different currencies?

Yes, as long as they agree on the rate beforehand.

Is it permissible to have two rates for currency exchange, one for cash to cash transactions, and one for sending money overseas?


Fatwa from Kuwaiti Finance House about legal possession of currency exchange

Q: I buy and sell goods from overseas. And I .....   They agree on the amount for the currency exchange. They do not take possession of the money but  it shows up in my bank account .....

When it comes to possess foreign exchange, you can physically possess it or legally possess it. In the above example, they legally possess it, since it is marked in their bank accounts. So this does not violate the requirements of hand-hand transaction.

According to the most conservative Saudi scholar, it is permissible for banks to charge a fixed amount of fee for transferring money from one account to another account in a foreign country????

If it is rate based on the amount then it is not permissible.  

Would a tiered fixed rate based on range of amounts be permissible, such as one rate for amounts less than 10,000 and another for amount greater than 10,000 etc. Yes it is permissible

Issues about delayed legal possession

What is the legal ruling for foreign exchange transaction between banks which are closed on two separate dates. Saudi Bank delivers it on Sunday but it is delivered to our banks in the US on Monday since their banks are closed on Sundays.

The two parties are trying to close the gap between possession of exchange as quickly as possible, but the delays associated are beyond their control.

If there are no alternatives to take legal possession and there are delays that are beyond their control, then it should be permissible

Kuwaiti Finance House says that the delay associated between the closing of the banks is permissible.

Can you purchase foreign exchange over the internet?


Questions about gharar and speculative currency exchange.

If there is a need for exchanging currency, then you have to do it. But if you are basing a business in order to speculate, then it is questionable.

If you purchase foreign currency and hold it for a longer period of time and then make money of it, there is nothing wrong with it????? But day trading or making money off the fluctuations during the day, there are questions about it??????

2013-05-26 Class Notes

We are discussing various halaal investment opportunities. In a capitalistic western society, many opportunities are not halaal or recommended. One halaal way is to buy gold. Another could be to buy fine antiques such as art and then sell it later.

Leading question to which there is no answer, this question has not been answered by Muslim scholars.

Let’s say that you are buying art that is not representation of the human form. We are discussing buying art that is expensive due to its rarity. Lets say you paid one million dollars for the art. You are hoping that it would become more valuable over time and pass it off to your inheritors etc. What is wrong with such an investment scheme?

There is no question that it is israaf (extravagance) .... missed discussion.....

If from the shariah perspective, if it doesn't have value, then it does not make sense to invest money into it since it is haram in the first place. So does art have shariah value?

A picture by itself can have shariah value. Since we all have some pieces of art in our homes. So we all agree that art does have some value and we can pay money for it.

But does shariah allow us to spend millions of dollars to buy a piece of art?

Let’s say the person is filthy rich and he pays 140 million dollars to buy a piece of art, is this okay? This is relative to the person’s wealth. But 140 million dollars could provide a lot of value to the society. Here this large amount of money is tied up and not in circulation.

Discussion of Israaf

What is israaf? إسراف

Spend beyond one’s wealth, spend in ways that are wasteful, spend money on items that are haraam.

Technical Definition: Israaf means to go beyond the intended point or the limit, or to make a mistake, ...., ignorance, a paucity,  a evil.

Shariah Definition: To go beyond the proper limits. The shariah definition is the same as the technical definition. We will define the limit later on.

تبذير -- Al-Tabtheer

Other words that are related are tabtheer means to spend money that is wasted, such as sinful actions, or spending it in ways that is not deserving. It is close to the meaning of israaf, but most scholars say that it goes beyond the meaning of israaf.

السفه -- Al-Saffah

Same root as sufaha. This word means that a person who is not intelligent. It means to spend money on things that are not rationally good, it means stupid expenditures. Israaf could be a type of safaaha.

الترف -- Al-Taraf

Root word is ta ra fa. Quran verse: Whe we intend to destroy a city, the people who live in opulence or luxury we enjoined good but defiantly disobey.

التقطير -- Al-Taqteer

This is the opposite of israaf. Here you do not spend as much as you should spend?

Verses of the Quran that mention Israaf

Allah swt describes the believers as the one who are not extravagant nor niggardly, they have proper place between it.

Israaf and its related terms has been mentioned 16 times in the Quran. Sixteen of those verses are from the Makkan stage. Muslims became wealthy after hijrah. But in the Makkan verses, it is different type of israaf, here it talks about people who commit sins and disobey Allah swt. Most famous is the verse Surah Araaf verse 31  Allah swt does not love those who are extravagant.

يا بني آدم خذوا زينتكم عند كل مسجد وكلوا واشربوا ولا تسرفوا إنه لا يحب المسرفين

Sahih International

O children of Adam, take your adornment at every masjid, and eat and drink, but be not excessive. Indeed, He likes not those who commit excess.

Allah swt talks about Pharaoh in Surah Yunus verse 83, he went beyond the proper limits.

فَمَا آمَنَ لِمُوسَىٰ إِلَّا ذُرِّيَّةٌ مِّن قَوْمِهِ عَلَىٰ خَوْفٍ مِّن فِرْعَوْنَ وَمَلَئِهِمْ أَن يَفْتِنَهُمْ ۚ وَإِنَّ فِرْعَوْنَ لَعَالٍ فِي الْأَرْضِ وَإِنَّهُ لَمِنَ الْمُسْرِفِينَ

Sahih International

But no one believed Moses, except [some] youths among his people, for fear of Pharaoh and his establishment that they would persecute them. And indeed, Pharaoh was haughty within the land, and indeed, he was of the transgressors.

Surah Furqan verse 67:  Believers are neither extravagant or niggardly ...

والذين إذا أنفقوا لم يسرفوا ولم يقتروا وكان بين ذلك قواما

Sahih International

And [they are] those who, when they spend, do so not excessively or sparingly but are ever, between that, [justly] moderate

Surah Ali Imran verse 147:

وَمَا كَانَ قَوْلَهُمْ إِلَّا أَن قَالُوا رَبَّنَا اغْفِرْ لَنَا ذُنُوبَنَا وَإِسْرَافَنَا فِي أَمْرِنَا وَثَبِّتْ أَقْدَامَنَا وَانصُرْنَا عَلَى الْقَوْمِ الْكَافِرِينَ

Sahih International

And their words were not but that they said, "Our Lord, forgive us our sins and the excess [committed] in our affairs and plant firmly our feet and give us victory over the disbelieving people."

Surah Zumar verse 53

قُلْ يَا عِبَادِيَ الَّذِينَ أَسْرَفُوا عَلَىٰ أَنفُسِهِمْ لَا تَقْنَطُوا مِن رَّحْمَةِ اللَّهِ ۚ إِنَّ اللَّهَ يَغْفِرُ الذُّنُوبَ جَمِيعًا ۚ إِنَّهُ هُوَ الْغَفُورُ الرَّحِيمُ

Sahih International

Say, "O My servants who have transgressed against themselves [by sinning], do not despair of the mercy of Allah . Indeed, Allah forgives all sins. Indeed, it is He who is the Forgiving, the Merciful."

Those who wrong themselves, they have gone beyond the proper limits. Don't transgress the limits

Surah Al Anam:141

وَهُوَ الَّذِي أَنشَأَ جَنَّاتٍ مَّعْرُوشَاتٍ وَغَيْرَ مَعْرُوشَاتٍ وَالنَّخْلَ وَالزَّرْعَ مُخْتَلِفًا أُكُلُهُ وَالزَّيْتُونَ وَالرُّمَّانَ مُتَشَابِهًا وَغَيْرَ مُتَشَابِهٍ ۚ كُلُوا مِن ثَمَرِهِ إِذَا أَثْمَرَ وَآتُوا حَقَّهُ يَوْمَ حَصَادِهِ ۖ وَلَا تُسْرِفُوا ۚ إِنَّهُ لَا يُحِبُّ الْمُسْرِفِينَ

Sahih International

And He it is who causes gardens to grow, [both] trellised and untrellised, and palm trees and crops of different [kinds of] food and olives and pomegranates, similar and dissimilar. Eat of [each of] its fruit when it yields and give its due [zakah] on the day of its harvest. And be not excessive. Indeed, He does not like those who commit excess.

Allah swt is talking about the harvest and asking us to give its right on the day of harvest. Here we are asked to pay zakaat on the harvest. What is the meaning of “Do not make israaf, Allah does not love those who make israaf?”

From the shariah perspective, you can make israaf on almost anything. Scholars say that there could be israaf even in the paying of charity. If you give too much charity of the harvest in such a way that you starve your family, then it is a kind of israaf.

Surah Al Araf verse 31

يَا بَنِي آدَمَ خُذُوا زِينَتَكُمْ عِندَ كُلِّ مَسْجِدٍ وَكُلُوا وَاشْرَبُوا وَلَا تُسْرِفُوا ۚ إِنَّهُ لَا يُحِبُّ الْمُسْرِفِينَ

Sahih International

O children of Adam, take your adornment at every masjid, and eat and drink, but be not excessive. Indeed, He likes not those who commit excess.

What does this verse mean?

Ibn Abbas (ra) said -- you may eat whatever you want and dress however you wish, so long as you avoid two qualities: extravagance and arrogance.

Allah swt says in the next verse (7:32)

قُلْ مَنْ حَرَّمَ زِينَةَ اللَّهِ الَّتِي أَخْرَجَ لِعِبَادِهِ وَالطَّيِّبَاتِ مِنَ الرِّزْقِ ۚ قُلْ هِيَ لِلَّذِينَ آمَنُوا فِي الْحَيَاةِ الدُّنْيَا خَالِصَةً يَوْمَ الْقِيَامَةِ ۗ كَذَٰلِكَ نُفَصِّلُ الْآيَاتِ لِقَوْمٍ يَعْلَمُونَ

Sahih International

Say, "Who has forbidden the adornment of Allah which He has produced for His servants and the good [lawful] things of provision?" Say, "They are for those who believe during the worldly life [but] exclusively for them on the Day of Resurrection." Thus do We detail the verses for a people who know.

Scholars have pointed out that looking for balance is very important for a Muslim. You have to spend money on you family, but you should avoid opulence.

Surah Isra 17:27

إن المبذرين كانوا إخوان الشياطين وكان الشيطان لربه كفورا

Sahih International

Indeed, the wasteful are brothers of the devils, and ever has Satan been to his Lord ungrateful.

Allah swt says that those who live in opulence are the brethren of the shayateen.

We have to answer the following question: “What is the balance and how are are supposed to recognize the balance?”

How much you are going to spend and what you spend your money on is going to depend on time and place. Many of us have moved to US from many third world countries.

Living in the US is different than living in Bihar for example. In Bihar one may make less money and due to that one has to stay close to the needs as compared to US. In Bihar one has to spend based on what is needed and what are the limits set by the Urf. In US one may have to spend 100 times more in rent for a decent house and will not be considered israf in US, however in Bihar such high rent would have been israf since decent houses are available for much less money.

But if you are spending beyond your means and going in debt in order to show off, then it is an extravagance.

So the above example of differences of rent in San Jose versus Bihar is not israaf, paying higher rent in San Jose compared to rent in Bihar.

Another example of something that is not israaf, is when you spend more for better quality. In the long run the item for a better quality is cheaper, because it could last long and you are getting value for your money.

But if you are buying an item because of brand name, you pay extra for it, however you know that the items are made by the same manufacturer, and are of the same quality, but one pays extra so one can say that I have such and such brand, then this could be a type of israaf. If one brand name has more value then it does make sense to pay extra but if two products are exactly identical and one pays extra for one so the person can say or brag that such and such brand is in his ownership then it can be israaf.


Wealth is a great fitna, it could be a source of good or it could lead people to evil. If the person pays his zakat, he treats his workers well, he is not stingy with them and does not cheat them, but if he is not close to the people and does not know their hardship, then it does not make him sinful if he is not paying more.

We know that zakat is not progressive, it does not rise with the level of wealth. In an Islamic state, the rulers could approach him to pay more and help out the poor. But if he does not pay more, then it does not make him sinful. It would be difficult to prove that he is sinful.

There is such a thing as show of strength. Could you spend money in order to show your capabilities?

Why are we asked to fasten our pace during the sai of the umrah or hajj? In order to show the kuffar that the Muslims had strength. But can we apply this showing of strength it to spending the wealth?

For example, Muslim countries building tallest building on the world to show off?  There are other ways to show the strength to the world, by being more generous.

Footnote: A friend of Sh Jamaal grew up without wearing shoes in the Southern part of Saudi and now he is building tall buildings in Riyadh. This is a sign of the day of judgement, that bare footed bedouins would compete to build tall buildings.

Can we buy expensive antique art for investment purposes?

We now have an idea about israaf, let us return to spending large amount of money to buy art for investment.

Fatwa question about buying an antique dagger for $15,000. The answer was that there is no harm in purchasing historic relics, because Allah swt has asked us to think about the people who came before us. But there are conditions on it, you cannot attribute special powers to it and it does not represent an icon for any religion such as a cross etc.

Discussion about buying manuscripts of antique books, such as paying thousands of dollars for pages of the mushaf. If this is done for educational purposes such as museums, then it is okay.

We all agree that buying expensive pieces of art to beautify your houses is israaf. But what about buying it for investment purposes?

Majority of the students do not like this idea of buying a very expensive art work as an investment vehicle.

But let us say that we have five hundred million dollars in your account and an opportunity to invest money in art comes up.

You could try to look up for ways to invest your capital into halaal means such as venture capital etc and you are being charitable and you are looking for more means, and if the painting is halaal, could you then invest in it?

So this question is bound to come up in the future. The collective opinion of the class is that this type of investment is a type of israaf?????

2013-06-02 Class Notes

Edit: This is the last class for this quarter.

Next quarter we will discuss electronic commerce, credit cards. And after that we will discuss fiqh of economic finance.

Venture Capital

Edit: According to Wikipedia, Venture capital (VC) is financial capital provided to early-stage, high-potential, high risk, growth startup companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as biotechnology, IT,software, etc. The typical venture capital investment occurs after the seed funding round as growth funding round (also referred to as Series A round) in the interest of generating a return through an eventual realization event, such as an IPO or trade sale of the company. Venture capital is a subset of private equity. Therefore, all venture capital is private equity, but not all private equity is venture capital.

In the shariah we need to find out what is comparable to Venture Capital and find out the important principles within the Shariah.

Finding comparable models for Venture Capital in the Shariah

In shariah we have different kinds of models, particularly in the category of Al Musharaka which deals with partnerships.

Al-Inaan (العنان) - Unequal equity

There are two parties involved in this partnership, both parties provide capital and labor. The distribution is going to be according to whatever they agree on. It has to be identified that each one is going to have a certain percentage of the profits. When either partner does something on behalf of the company, either company is equally liable.

Al-Mufaawadah (المفاوضة)  Equal equity

The two parties invest equal equity, but it has to be 50/50.

Al-Abdaan (الأبدان) Labor but no equity

Here the two parties are supplying labor. They do not need any equity. And they can agree on how to share the profits. Here it is mostly providing services such as law services, etc. This is not employment agreements, but both parties are partners and provide services

Al-Wujooh (الوجوه) labor + debt -- two parties bring both labor and debt

They are borrowing money into the business. Not their own capital but it is money that they are borrowing. This is similar to borrowing money from Venture Capitalists. Both parties know that it is not their money and the capital has to be returned.

Mudaarabah (المضاربة)

An alternative to mushaarakah is Mudaarabah (المضاربة)

One partner puts in the capital and one party puts in the labor. Also known as muqaaradah. This is also known as silent partnership.

Mudaarabah definitions from the four madhabs

Al-Sarakhsi (Hanafi madhab) says mudaarabah is derived from darb fi al ard (hitting the ground)

إن ربك يعلم أنك تقوم أدنى من ثلثي الليل ونصفه وثلثه وطائفة من الذين معك والله يقدر الليل والنهار علم أن لن تحصوه فتاب عليكم فاقرءوا ما تيسر من القرآن علم أن سيكون منكم مرضى وآخرون يضربون في الأرض يبتغون من فضل الله وآخرون يقاتلون في سبيل الله فاقرءوا ما تيسر منه وأقيموا الصلاة وآتوا الزكاة وأقرضوا الله قرضا حسنا وما تقدموا لأنفسكم من خير تجدوه عند الله هو خيرا وأعظم أجرا واستغفروا الله إن الله غفور رحيم

Sahih International

Indeed, your Lord knows, [O Muhammad], that you stand [in prayer] almost two thirds of the night or half of it or a third of it, and [so do] a group of those with you. And Allah determines [the extent of] the night and the day. He has known that you [Muslims] will not be able to do it and has turned to you in forgiveness, so recite what is easy [for you] of the Qur'an. He has known that there will be among you those who are ill and others traveling throughout the land seeking [something] of the bounty of Allah and others fighting for the cause of Allah . So recite what is easy from it and establish prayer and give zakah and loan Allah a goodly loan. And whatever good you put forward for yourselves - you will find it with Allah . It is better and greater in reward. And seek forgiveness of Allah . Indeed, Allah is Forgiving and Merciful.

He is the investor’s partner in profit, capital and in business decision making.

Al Khaleel from Maliki Madhab says that qaraad (which is another word for mudaarabah) is the appointing of an agent by giving the agent some cash in return of business.

Al-Nawawi (Shafi) says that Mudaarabah takes place when a man has been handed money to trade with and any profits will be shared between the two parties.

Ibn Qudaaman (Hanbali) -- A person give someone money to trade with and any profit will be shared between the two parties based on the agreed upon ratio.

Are there any similarities in these definitions?

Khaleel is writing from the perspective of the business owners. Sarakhsi is writing from the perspective of the agent. Nawawi has a neutral perspective. These differences reflect the differences in the various madhabs.

Is Mudaarabah about somebody investing money and expecting profit, or is it about hiring somebody to bring in business or is it neutral. These differences will be reflect in their rulings.

When you hire somebody, then their wages have to be known. If you are hiring an agent (viewing venture capitalist as an agent), shouldn’t his salary be known?

If Mudaarabah is simply hiring someone without specifying wages, then it is a kind of rukhsa.

Three of the four madhabs see it as an exceptional contract; they say that mudaarabah is not a mushaarakah, rather it is a license, or a rukhsa. And you cannot put an analogy on a rukhsa.

That is why in some of the definitions, they emphasize the trade part. It is not a model for business in general.

Legality of the Mudaarabah as a business model

Is mudaarabah even halal based on these definitions?

Sarakhsi defends mudaarabah by quoting the Surah Muzammil verse 20 from the Qur’an.

Ibn Hazm says that we have no evidence from the Qur’an and the Sunnah that mudaarabah is permissible. But he says that there is ijmaa on the concept of mudaarabah, but no clear evidence that it its permissible.

Hadith in Ibn Maajah: three transactions have God’s blessings: delayed sale, mudaarabah and mixing wheat with barley for personal use. Albaani says it is extremely week (da’eef jiddan).

lt was narrated from Salih bin Suhaib that his father said:

"The Messenger of Allah (saws) said: 'There are three things in which there is blessing: A sale with deferred payment; Muqaradhah (profit sharing); and mixing wheat with barley for one's house, but not for sale."' (Da'if)

حَدَّثَنَا الْحَسَنُ بْنُ عَلِيٍّ الْخَلاَّلُ، حَدَّثَنَا بِشْرُ بْنُ ثَابِتٍ الْبَزَّارُ، حَدَّثَنَا نَصْرُ بْنُ الْقَاسِمِ، عَنْ عَبْدِ الرَّحْمَنِ بْنِ دَاوُدَ، عَنْ صَالِحِ بْنِ صُهَيْبٍ، عَنْ أَبِيهِ، قَالَ قَالَ رَسُولُ اللَّهِ ـ صلى الله عليه وسلم ـ ‏ "‏ ثَلاَثٌ فِيهِنَّ الْبَرَكَةُ الْبَيْعُ إِلَى أَجَلٍ وَالْمُقَارَضَةُ وَإِخْلاَطُ الْبُرِّ بِالشَّعِيرِ لِلْبَيْتِ لاَ لِلْبَيْعِ ‏"‏ ‏.‏

The Prophet (SAWS) gave Hakeem ibn Hazzam some money for udhiya, so he bought a sheep, sold the original sheep for 2 dinars, bought another sheep with 1 dinar. He gave the Prophet (SAWS) the sheep and kept the dinar. And the Prophet (SAWS) made du’a for him.

This hadith has been declared weak by Al-Albaani, but there is another hadith with another chain that is identical and it has been declared sahih by Al Albaani.

It was narrated from 'Urwah Al-Bariqi that :

the Prophet (saws) gave him a Dinar to buy him a sheep, and he bought two sheep for him, then he sold one of them for a Dinar, and bought a Dinar and a sheep to the Prophet (saws). The Messenger of Allah (saws) prayed for blessing for him. (Sahih)

حَدَّثَنَا أَبُو بَكْرِ بْنُ أَبِي شَيْبَةَ، حَدَّثَنَا سُفْيَانُ بْنُ عُيَيْنَةَ، عَنْ شَبِيبِ بْنِ غَرْقَدَةَ، عَنْ عُرْوَةَ الْبَارِقِيِّ، أَنَّ النَّبِيَّ صلى الله عليه وسلم أَعْطَاهُ دِينَارًا يَشْتَرِي لَهُ شَاةً فَاشْتَرَى لَهُ شَاتَيْنِ فَبَاعَ إِحْدَاهُمَا بِدِينَارٍ فَأَتَى النَّبِيَّ صلى الله عليه وسلم بِدِينَارٍ وَشَاةٍ فَدَعَا لَهُ رَسُولُ اللَّهِ صلى الله عليه وسلم بِالْبَرَكَةِ ‏.‏ قَالَ فَكَانَ لَوِ اشْتَرَى التُّرَابَ لَرَبِحَ فِيهِ ‏.‏

Mudaarabah requires the two parties to agree upon sharing of the profits and losses before entering into a contract. If you do not have this pre-agreement, then it is not considered to be a mudaarabah.

Similarly with a story of Umar ibn al-Khattab and his sons.

However, there’s no doubt that this was the predominant means of investment even before the time of the Prophet, especially for women, orphans and the elderly, since they could not go out to conduct business, they would have agents acting on their behalf.

The business agreement between Khadija and the Prophet (saws) would be considered a type of mudaarabah partnership but it would not be considered hujjah or authority, since it occurred before the prophethood.

There is a minority opinion that Mudaarabah is a type of Mushaarakah -- nothing says that mushaarakah is must involve contributing labor. Therefore it’s acceptable to use.

Five essential pillars of mudaarabah

1. Capital.

2. The work/job that is going to be done.

3. The profit and how it will be dealt with.

4. The form of expression (sigha)

5. The contracting parties.

In the books of fiqh you’ll see a discussion of disagreements between laborers and investors. What should happen if there is dispute between the laborers and the investors? If there’s clear proof, then clearly they would use that.

Suppose you are a judge in a dispute between laborers and investors, they make contradictory statements about money but there is no evidence for either, whom would you believe, who is considered more trustworthy?

The investor would not have given the money to the laborer if he was not trustworthy, so in general the laborer would be considered trustworthy.

Pillar #1: The Capital

Has to be specific and known; has to be delivered in full to the laborer; and it has to be money. Suppose you give garments to the laborer and ask him to trade it and use the funds for the partnership, this is problematic, because you are not going to buy the garment and return to the investor. This is the reason why capital has to be cash, it helps to determine the value of the investment, otherwise it would be an invalid mudaarabah contract.

Pillar #2: The Work

The three schools say it must be restricted to trade, cannot be manufacturing etc. But if you understand mudaarabah to be a type of mushaarakah.

Pillar #3: Profit

Must be exclusively for the parties involved. Must be in proportions and not in fixed amounts.

Pillar #4: Sigha

When we talk about silent partnership, the scholars are really strict on the concept of silence. The investor is not allowed to put his labor into the project. If he does contribute his time, then that time would be considered a donation on his part.

The sigha will determine how much power the worker is going to have. Before the agreement is made, the investor has limited power, he can specify or restrict the labor such do this type of business or restrict yourself to this area etc, but once the contract is done, then the laborer is in charge and the investor is now considered to be a silent partner.

One common expressions in mudaarabah is “act according to your opinion.” That is a sign to the laborer that he has freedom. You can also have limited

Footnote: The laborer has to be trustworthy and he knows something about what he is doing, and if you find out that he is cheating, then he is held responsible.

Pillar #5: Contracting parties

Suppose I am a laborer and the investor has invested 100K, now can I increase the equity by acquiring more debt? Can a laborer put the partnership in debt over and above the equity put in by the investor? No you cannot put your partnership in debt. What should you do, if you needed more money to run the business?

As a laborer, am I entitled to receive salary for the period of the mudaarabah contract?

At the end of the mudaarabah, you share the profit. But if there are not profits at the end of the contract, then if there are not profits to share, the laborer does not get wages, is this practical? Would you be able to attract laborers?

At the end of the contract, the investor gets his share of the capital before anything else, what is the solution for solving wages problem?

Footnote: Islamic banks do mudaarabah contracts all of the time, how do they structure their contracts?

The Shafi madhab is very strict, they say that mudaarabah contract have to be partnerships only for trade.

The laborer not getting wages is the default in mudaarabah contracts. There is a concept of normal wage, normal profits, etc. In a business contract, you are supposed to get back normal profits in order for you to survive. So can an agent have normal wage while working?

All of the fiqh schools agree that the agent cannot have a wage. But if you look into details, it says that if the agent has to move from his city to another city, according to Imam Malik, he is allowed to cover his food and maintenance expenses, but if he has a family in this other city then he is not allowed to cover his expenses. It looks like the illa is that he is able to cover his food and his expenses, this is similar to normal wages.

According to today’s Urf can you survive without wages, can you expect a laborer to work for you for four or five years without getting a wage?

Recursive mudaarabah: The laborer becomes a middleman, gets capital from his investor, and he makes investments in that. They also do a commingling of capital accounts. They have mudaarabah accounts. Members of the public are the investors, and the bank uses it again. They combine accounts.