Fiqh of Finance

Fiqh of Islamic Finance: Credit Cards

2013 Summer Session (August 11 to October 14 2013)

Sundays 5:00 - 6:15 PM PDT

Class taught by Shaikh Jamaal Zarabozo

Recommended Textbook:


Basic Outline of the Quarter: Sukook

Credit Cards/Debit Cards

Required or Recommended Reading:

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

2013-08-11 Class Notes

Definition of Credit Card

Shaykh Jamaal’s friend Abu Saud presented 22 definitions of credit card in a book about credit cards but did not present his own definition. This is in the book which is Al Bataqa al Thamaniyyah and this book was written for the Ulema to know how the credit card works and there is no fiqh analysis in it.  

In order for a definition to be classified as a good definition, it should pass Occam’s Razor, it should be complete and there should not be any superfluous information.

A cardholder has promised to pay for the items in the future, which creates a revolving line of credit for the card holder.

There are different types of credit cards. Understanding these types also helps us in defining credit cards and the various fiqh ramifications of credit cards.

A charge card requires you to pay off the credit at the end of the billing cycle. There is no third party involved.

A secured credit card, you have funds deposited with the credit card company but you are required to pay in the minimum and the interest adds up on the unpaid balance at the end of the billing cycle. Only if you fail to pay the card, then the funds deposited are used to pay the monthly dues for the revolving credit.

When you use the credit card then you

Brief History of Credit Cards

Dating back to 1920s, various merchants in the US had various schemes for line of credits. In 1932, the air travel card was very famous, which was almost a discount card. Diners Club was introduced in 1950 and it could be used not just for airplane tickets but also for other merchants.

Then in 1958 the American Express came out. These were between the charge cards and debit cards. Then a first modern day credit card came out in september 1958. Then came out the bank of america card which then evolved into the visa system.  

In a pure Islamic state, should banks offer credit cards?

We will discuss the above question in terms of benefits and harms to the consumer, merchant, bank, and society.

So alternative is the Debit or Charge card. So in an Islamic State one can have something between a secure credit card and a charge card.

You should avoid debt and use it as a last resort if you do not have any alternatives, is what should be taught to consumers in the West.

There is another question here: Is there a real need for the Credit Card? This question is being asked in relation to the situation in USA. Are there any situations where merchants would not accept cash or other forms of payments? Could they invoke this as a law of necessity in order to get a credit card?

Some of the students are mentioning that the pre-paid Debit card can do many things that one uses the credit card for. One can also have good credit history by having free (interest free) checking account, buying stuff larger than $2k among many other ways.

Questions we will inshaAllah discuss this quarter

The credit card contract (the Aqd) has interest involved in it, does this interest make the entire contract invalid. Could somebody apply for credit card but use it as a debit card, paying off the balance in full at the end of each monthly cycle.

There could also be issues wherein the credit card contract is valid but the interest is not valid.

Then there are issues related to various fees that are associated with credit cards.

Can you take advantage of the perks of using credit cards such as points, travel etc.

Analysis of Credit Card Transaction

The key to analyzing some transaction is to identify what category does it fall into. We will try to identify where does credit card fall into?

Issual of Credit Cards

The bank issues the card and it is administered by VISA or MasterCard. With American Express there is no third party.

Steps of a transaction

1. Handover credit card to a merchant

2. Merchant sends credit card information to a payment processor called payment gateway

3. Payment processor contacts banks to verify that amount is within limits and approves the transaction.

4. Transaction is recorded immediately in the credit card holders account.

5. Merchant receives money after the period of 24 hours to 72 hours. Keep in mind the bank generally borrows money to pay for these transactions. So the credit card holder gets the item without paying at that point.

6. The VISA charges 1 cents for the service and American Express charges a certain percentage.

There are 4 parties involved. The cardholder, the card issuing bank, the merchant and the transaction network. Sometimes you also have the affinity partners and these are groups which support the credit card companies and you also have insurance companies involved.

Question: From the fiqh perspective what is going on here? Is the third party lending the money to you or are they the guarantor on your behalf? You are saying I am taking this merchandize and here is the number of Joe and call him and get the money from Joe. Is it Wakalah, Kafalah or some combination of them?

2013-08-18 Class Notes

We will analyze what is going on when you use credit card from a fiqh perspective. The key to identify the permissibility or not (Islamically) of a transaction is to identify what kind of transaction it is and to identify its type.

Identifying the key parties of a credit card transaction

1. Cardholder

2. Bank

3. Merchant.

Key activities performed by the parties involved in a credit card transaction

1. The cardholder gives the card to the merchant either the cardholder swipes the card or the merchant swipes the card and this is to ‘seek the authorization’.

2 and 3. Once the merchant sees the authorization, then the merchant hands over the goods to the cardholder.

Footnote: Lets say that the product is not ready yet. In such a case the cardholder is seeking debt and the product is being bought on debt. Here the transaction involves debt for debt. We will visit this scenario later.

4. Let’s go to the Home depot and buy an item available on the shelf. The cardholder gets the item. We go through the first two steps as above

5. And then the after 24 hours to 72 hours, the merchant gets the money from the bank.

6 and 7. And then the bank seeks the money from the cardholder by sending him the bill. Footnote: The bank loves it if the money gets delayed by the cardholder so they can earn interest on money.

Most of the fiqh books do not deal with the intricacies involved in the above steps for paying with a credit card. In fiqh the party that is loaning cannot give any advantage to the loaning party. So one cannot give the loan and do the sale with the same person at the same time. [??? double check this paragraph please]

A paraphrased Hadith: A loan with benefit to the loaning party is not permitted.

This is the evidence for the above ruling that the party issuing a loan should not benefit in any way. For example, you cannot give a loan to somebody and ask them to give you a ride to the masjid on every Friday.

The banks are loaning you money in order to charge you interest.

Visa charges the bank of America and what do they charge is transaction fee or service fee and it looks good from fiqh perspective.  

Relationship between cardholder and bank

Let us assume that this is a non-secured credit card agreement between the bank and the cardholder (i.e. there is no money held by the bank in order to issue the credit card)

Possibility #1: It is a loan between the two parties (قرض)

From the shariah perspective, a loan is a brotherly act. One party gives possession of money to another party and the party receiving money is indebted to return the money over time.

Possibility #2: It is an agent relationship- (الوكالة)

It is an agent acting on your behalf and thus the bank is your agent, and he can charge you for the work that he is doing. It should be something known and define

Possibility #3: It is a transfer of debt - Hawala (الحوالة)

It is a transfer of debt from one party to another. You are asking one party to pay on your behalf.

Possibility #4: It is a guarantor of debt - Kafalah or Daman (الكفالة أو الضمان)

It is a guarantor relationship, somebody is guaranteeing that they will pay the amount on your behalf.

Which of the above types of transactions or possibilities are involved between the cardholder and the bank?

When exactly do you enter into debt with the bank as a credit card holder? The possible answers could be when you enter into a contract with the bank, when you make a purchase, when the monthly bill shows up? When exactly does this occur?

Majma’ ul faqih have had conferences to discuss the various possibilities

1. One opinion is that it is just a loan by itself between the cardholder and the bank

This is the opinion of ..... They view it as a cardholder requesting the bank to pay on their behalf and they promise to pay the bank back for the amount borrowed. They say that it is a loan. The cardholder is obligated to pay back the amount.

This view has been critiqued by a number of scholars for a variety of reasons. A qard should be a two party contract. Here we have three parties involved in the transaction.

It is a requirement of qard that the person take possession of it (qabd -- قبض) -- and use it the way he wants. In this case, there’s no possession of the money, so it doesn’t apply.

If it’s qardh it’s a brotherly action, and obviously the banks aren’t doing it as a brotherly action, their expectation is to charge you interest. So this shows that the first opinion is weak.

2. It is a paid agency - Bank appears as your agent to pay the merchant and you promise to pay the bank

This is the conclusion of Wahba Al Zuhaili.  

The basic issue is that the subject matter for the agency who acts on your behalf should be known in advance. Here the problem is that this role has not been clearly defined. When you hire the agency, you have to define the contract with them.

Classroom discussion about when exactly have you entered into a paid agency contract with the bank? Is it when you signed the credit card contract or is it when you use the credit card every time.

Other classroom discussion about whether bank has the right to refuse the credit card transaction without any valid reason? We are discussing it because it goes to the heart of whether it is truly a paid agency.

If they are indefinitely bound to enter into wakalah contract on your behalf, then this is problematic because the subject matter for the agency has not been clearly defined between you and the bank. You cannot say that it is for up to $3000 per month of transactions, rather it has to be that they are authorized to buy a car on your behalf or office supplies on your behalf etc

Some of the Muslim scholars who critique this view say, that the agent cannot be forced to pay on behalf of the person entering into a contract with the agency, whereas the bank is required to pay on your behalf.

If we say that it is wakalah, then they can charge you fees anytime you use the credit card. This is the way some Islamic Credit Cards charge you fees but cannot charge interest.

3. Some scholars consider it to be Hawala - Bank is your hawala agent

Scholars who have this opinion include Rafeeq al Masri, Wahb al Zuhaili, and Abdullah ibn Maneea. They are saying that when you buy something then you tell the merchant that I am not paying you but such and such bank is paying you.

The problem is that this is not how the credit card works. Here the debt has to exist beforehand for the Hawala to work. For Hawala the bank cannot charge either.

For the credit card transaction, once transaction has been authorized, can the merchant go after the cardholder to get the money for some reasons, such as the collapse of the bank and the merchant needs to get hold of the money?

In case of hawala transaction, the merchant has the right to go to the original party to get the money incase the hawala agent fails to pay the money.

Hawala is also a brotherly act and they cannot charge you any fees for entering into a contract with you. So this does not work because the debt has not been established for the card holder.

4. It is kafalah - Bank guarantees the debt

Many scholars are of the opinion that the credit card transaction is a kafalah.

There are three parties involved in this transaction. It is a guarantor relationship between the person (cardholder) entering into debt with another party (merchant). So the bank acts as a guarantor for the cardholder. And promises that if the cardholder doesn’t pay that they will pay.

The difference between Hawalah and Kafalah: In hawalah the debt already exists. Whereas in kafalah the debt did not previously exist. In kafalah the bank can charge a fee, whereas in Hawala they cannot charge a fee.

Sometimes you have to pay a yearly fees to the bank or there are other fees involved, sometimes you receive rewards from banks etc. In order to determine the validity of these issues, you have to know what type of contract (hawala or kafalah) is between the cardholder and the bank.

So the conclusion is that the relationship between bank and cardholder is that it is either wakalah or kafalah. The other opinions (qardh and paid agency) are weak. So this would be the basis for all further discussions about credit cards. Also we will discuss some of the innovative Islamic credit cards.

2013-08-25 Class Notes

Last time we covered the fiqh analysis of credit cards.

There are more than one ways to view the relation between the credit card holder and the issuing bank. One is the view of Kafalah (and some madhab call it Damaan). The second view is Wakalah, because the bank has the right to reject any transaction it wants.

Clarification from last time about why Wakalah as fiqh basis is problematic

The agency or wakalah between you and the bank has to be agreed upon before hand, it cannot be left open ended, where every time you use the credit card, the wakalah is established.

During the class last week, we had mentioned that the agency should have the right to refusal, however the credit card companies already have this right to refusal.

Edit: The problem is not with wakalah but how we view the relationship between cardholder and the bank and why it cannot be viewed as a wakaalah relationship.

Analysis of Kafaalah as basis for relationship between cardholder and the bank

Ibn Taymiyyah seems to be the consistently agreed upon that it is either Kafaalah or Wakaalah. What attracts people to the kafaalah representation is that it is a three-party relationship. It starts out as Wakaalah, but then it gets converted to a Qard transaction.

With respect to it being Kafaalah there are a number of reasons that it might not be appropriate:

1. The debt must exist at the time, and the amount of the debt can not be unknown.

Even though the amount of debt is bound by a credit limit, it is still considered gharar or risk. For example, a box that could consider an amount from $0 to $10,000 and you might be able to get it as a reward, so even though there is bound on the amount, the gharar that is involved in not knowing exactly what is the amount is not removed.

2. The creditor can always go back to the first party if the original person gets you to pay.

3. Kafaalah is considered a voluntary, brotherly act on the part of the guarantor. Which means that they can’t charge for that service. (Edit: This is another clarification from last week’s class.) If they charge a service for the act of kafaalah, then it is considered to be riba. For example, the annual fee for kafaalah.

Wakaalah as fiqh model between cardholder and the bank

So does it fit the Wakaalah model?

A wakeel can charge for his services.

The best conclusion we can reach is that it is a wakaalah arrangement between the cardholder and the bank. We can use this as a basis for determining the validity of charging annual fees. This model has the least weakness from the fiqh basis

We have to determine the validity of getting rewards, charge back and other issues related to credit cards.

Annual fees paid for the card

This is how VISA and banks make money. We are determining the validity of paying annual fees for using the credit cards.

Some scholars say these fees are haram. The scholars with this opinion include Bakr Abu Zaid, Abdullah bin Bay’, Ali Al-Saloos.

The proof that these are haram is that any payment for kafaalah is haram. Since these groups of scholars say that the basis for credit cards is based on kafaalah. And hence their conclusion. .... They say that it is also a means to haraam.

Footnote: In order to understand the opinion of the scholars you have to understand the fiqh basis for the relationship between the cardholder and the bank.

Footnote: Is it not possible that this is a totally new kind of transaction that we cannot fit into previously shariah defined transactions? We can have new forms of transaction but if they are all based for example on gambling, then it does not matter how new fangled the approach to gambling, it is still gambling.

Another group of scholars say that these annual fees are permissible. There are scholars who have written on this topic. It includes Taqi Usmani, Abdullah bin Munay among many. Taqi Usmani is one of those scholars who thinks that annual fees is allowed.

So they analyze it as a wakaalah arrangement, and they say that it is therefore permissible, since charging fees for wakaalah are acceptable.

Majma’ Al Fiqhi said that it is permissible to charge a fixed amount. But some scholars (like Bakr abu Zayd) feel that it is a gateway to to Riba.

So some scholars said as a way of blocking the means to riba we should not support it.

The principle of صد الضرائع -- Ibn Al Qayyim said that this is established in the Shari’ah (e.g. they cite the verses about not insulting other Gods). However, it should not be invoked if it leads to people falling into hardship.

All credit cards have the riba built into it. Every credit card company tells you to give the minimum amount and they make money when the credit card holder pays interest money. Any money that you pay above the principal is basically riba as was done in the time of jahiliyyah. This is exactly what the credit card companies do today.

In this country even the late taxes get the interest on it and the leasing agreements for homes and apartments has interest in it. However, in such contracts the interest is not the main goal but a side condition. However, for the credit card contract the interest is the basic goal from the perspective of the credit card issuing company. The nature of the industry is all about riba.

Can a Muslim look at the riba clause as the optional part of the contract?

It requires a very strong future commitment plus control of one’s circumstances which one cannot guarantee. Is such a contract halal?

Default ruling is that it is haraam.

Discussion of four fatwas related to credit card contracts

Ibn Uthaymeen:

Fatwa from ibn Uthaymeen when he was asked question that there are banks which has “overdraft protection”, i.e. when they go beyond zero balance, a loan is established. Here the question was not about credit cards, it was about the overdraft protection that kicks in when you spend more than the reserves of your account. The bank considers it to be a loan and charges you interest. Is this additional contract permissible?

Ibn Uthaymeen considered it to be haram even if the person feels that he can pay it in time, since circumstances can change.

Majma’ al Fiqhi:

It is not permissible to use a credit card if one of its condition is to pay interest, even if the person intends to pay in the period.

Ma’in Al Qudaa:

What is position of Islam with respect to someone living in America. Ma’in thinks it is Qard. As such it is permissible as long as one pays back the full amount on time. But if one goes beyond the time, then it is not permissible. Based on the description above it is not permissible to enter into this contract as it involves an increase.

However, an exception to this rule exists in America, because agreeing to pay is haram li ghayrihi (حرام لِغيرهِ). Hanafis can only invoke Haraam Lithaatihii (حرام لِذاتِهِ) can be made permissible by Darurah, but lighairihi can be removed only by haajah.

Ma’in al Qudaa says that it is permissible to sign credit card contracts, given that following four conditions are met:

1. One must be in dire need for this card.

2. One must not use it to withdraw cash.

3. One must repay what he owes all at once without being late.

4. One must stop using it once a credit history has been established so that he gets what he needs.

Additional rules:

1. Fixed fees are not an issue.

2. If the cardholder has to pay more from the first day, then it is not permissible.

Salah Al-Sawi

One of the benefits of the visa card is that it covers the driver in the case of an accident. Is it Halal?

It contains an invalidating interest-bearing condition. Therefore it must be used only when needed, and if you are confident you can pay on time.

2013-09-01 Class Notes

We will discuss some of the specific aspects of credit cards by studying some of the fatwas issued by various scholars.

Brief overview of what we have studied so far about Credit Cards

What is the arrangement between the cardholder and the bank and how to understand it from Shariah perspective? We concluded last week that it is Wakalah so bank is acting like an agent. If you hire me as an agent then you can ask me to pay on your behalf and I cannot charge you when I pay on your behalf, however, I can charge you for the services. The problem with the Western credit cards is that the riba is essential to the contract. This is what makes this contract null and void. The default ruling is concerning credit cards is impermissibility. The credit card agreements are considered null and void because they are not permissible from the Shariah perspective.

People who agree with this are ibn Uthaymeen, Majma al Faqih of OIC and ….. . Ibn Uthaymeen said that even if you intend to pay on time it is still not allowed to have the credit cards since the contract is null and void.

Now we will study some of the fatwas in order to understand the specific aspects of the credit cards.

Mundhar Kahf Fatwa: Credit Card contracts are permissible

The first fatwa we will study will be from people who think that it is permissible to have Western credit cards. One such person is Mundhar Kahf and he has been in the field of Islamic Economics (back from when Sheikh Jamaal was doing his undergraduate studies) ……………  in signing the contract in which you agree to pay the riba.

Conventional credit cards are overwhelming share of the market and we …… or we may call it interest optional clause. The credit card people have the right to change the interest rate when they want. They trick people into signing cards with small interest rates and then change it on them to huge interest rates. He says that any contract in which the interest clause is the basic element of contract is forbidden.

Basic Argument: Interest on credit cards is optional because of the "optional interest clause"

He gives an example of the lending contract as forbidden, however he considers the interest clause in credit card to be optional. The cardholder does not have to pay the interest …… such clause cannot be between Muslims and is only allowed between a Muslim and non-Muslims. So this is allowed only if you know that you can pay within the grace period.

Mundhar claims that he has paid of his credit card bills for the last 30 years without paying a single penny in interest.

What do you think of his argument?

From students and discussion: When you go to a restaurant, you order only from the halal items on the menu, you chose to ignore wine or alcohol etc. This is not the same since you could argue that for some reason you were not able to pay in time, then the interest will be charged.

How about the claim that you spent 30 years frequenting a bar but you did not imbibe a single drop of alcohol? This argument cannot be used as hujjah.

There might be unusual circumstances which are beyond your control, you are sick or your account is frozen due to identity theft, automatic bank draft failure etc and now you are stuck with interest.

The credit card company is within their right to charge you interest if you did not pay off the balance in full before the due date. And if somebody else pays interest on your behalf due to error on their part, this is still equivalent to you paying interest. You cannot claim that somebody else paid on your behalf due to their error.

One student comments: “ i have also had several people tell me that even if for some reason, they got stuck sometime, they call them and they waive the interest based on the fact that you always pay on time and you can call and request this”. The problem here is that this is not part of the contract and one cannot rely on this every time.

Conclusion: The argument presented is very weak. The default ruling that credit cards are not halaal is the strongest argument and it prevails over his arguments.

Fatwa based upon Umoom al balwa and Haajah

Are there circumstances where one cannot avoid interest? There is another argument of Haajah or need. However the Haajah is not applicable here since life or quality of life has to be at risk. These arguments will say that default ruling is Haram but due to certain circumstances you may be driven to use them. This is on the condition that no other way is working and even then one has to have very very strong intention to pay every single penny right on time so no interest has to be paid.

What can be a reasonable Hajjah for having a credit card? Renting a car in certain areas however here some people can use debit card to rental car however in certains states one can get stuck without a credit card for the car rental. It may be a need for someone but not a need for someone else. The credit score is another issue, for example some companies look at credit score to hire you. Many scholars have come to the conclusion that due to need under certain circumstances one is allowed to have credit cards if one feels not having one can hurt the person.

One AMJA fatwa about Credit Card contracts

………….  is of opinion that one is allowed to have credit card but still is not allowed to use the ribawi credit card in the Islamic lands. He uses very strong words to discourage having credit cards in Islamic lands, because there is qataai (definitive) evidence that riba is haraam, and that the credit card contracts are faasid and baatil

It is allowed to use outside of the Islamic Lands and here one can invoke Ulum al Balwa. He further states that if there are no Islamic banks in the Western lands and there is need based upon Ulum al Balwa then you can enter into credit card contracts but under the condition that one is going to pay off on time.

Even some of the Islamic credit cards are not that Islamic and we will see this in the future.

Ma’in al Quda' ... fatwa about Credit Card contracts

……… says that not have the credit score can be hurtful in many situations but he puts some conditions:

1) If debit card is working then do not use credit card

2) Do not get cash from the credit card machines

3) One must pay right on time

4) One must stop using the credit card after enough credit score and credit history is established.

Another point is that you are not allowed to use the credit card in a foreign country. We will discuss this later. (Edit: There are issues with currency exchange and additional fees based on purchase amount when you use credit cards in a foreign country, maybe?????)

Fatwas about perks from Credit Card contracts

What about the perks? Is it not benefit of a haram contract? Couple of Fatwas on this from AMJA and AAOIFI.

From AJMA website (Salah al Sawi) mentions the issue is that how lawful it is to use this card since it has riba aspects. So this card can only be used if you know for sure that you can pay on time without incurring any riba. The donation on the part of the lender is acceptable since it is from the lender as brotherly act.

Footnote: There is no gharar or risk in this brotherly act since it is according to them a purely brotherly act. In response to a question about road hazard services from AAA where there is gharar in the contract since you pay into the service but there is a lot of variability on how much services you receive from them.

The AAOIFI says that it is not permissible to grant privileges such as life insurance to the card holder, it is permissible to grant privileges such as discounts on hotels etc.

Basic argument: Why are we allowed to benefit from a haraam contract?

Here we are saying that the contract is Haram but now I am taking benefit from the haram contract. Even in the case of necessity of eating pork one is not allowed to just start enjoying a big meal. One is only allowed to eat enough to survive. So these perks are extra and these benefits will not be there if contract was not signed in the first place.

The bulk of the income for credit card companies comes from the interest and not from the annual service fees charged to credit card holders.

Footnote: On the other hand accepting from say airlines is allowed. Since the nature of the business is different. There they are giving you gifts from their legal profits and legal business. So it is allowed to enjoy the flying miles from an airline.

2013-09-08 Class Notes

A good question from an online student about Haajah and Daroorah

Q: How can one judge whether he has met the level of hardship which will allow him to invoke the principal of haajah, since some level of difficulty is expected? For example in the case of rental cars one could resort to public transportation, although this may be an inconvenience

A: Daroorah is when your life or your limb is at risk. Hajjah is when it is not that life and limb is at risk but the life can become very difficult for you. For example, renting in San Francisco can be very hard when one is not renting because there is interest clause in rental agreement. So here Hajjah can be invoked. Similarly with rental car where public transportation can cause a lot of inconvenience as compared to rental car which may require need for use of credit card is certain parts of USA. When question of Hajjah is being thought about then a person’s ability to sustain difficulty (like old age versus young age), the alternative ways to fulfil the need, persons individual level of faith (for example Abu Bakr (ra) was allowed to give all his wealth in charity due to his level of faith while otherwise one is not allowed to do so).

Rulings are not based on rare circumstances. We have accepted as a norm to use credit card for making all our purchases without thinking about whether there is a real need for us to do so. Another such norm is that a lot of people are using loans to pay their educational expenses, this has become a norm and a lot of people are blindly following it, without asking questions about it.

Q: Can you take a ribawi loan based on Hajjah?

A: The answer is no and one cannot take a ribawi loan for Hajjah and you cannot (according to many classical scholars) get ribawi loan even for Daroorah. However given conditions today due to finance issues related to health system it is hard to stay away from ribawi loan related to life saving Daroorah.

So in principle, if you avoid the interest, then in situations of haajah it may be acceptable. But everyone needs to decide what constitutes haajah.

One should never forget the principle for what the credit card has been accepted.

Cash back from Credit Card companies

We are not fully finished with all the Fatawa yet. However, let me throw a question out there for you on the cash back from the credit cards. What do you think is the ruling on it? Think back on the credit card and ruling on it. One of the students says in class that it is haram because credit card itself is haram and problematic.

On the issue of cash back the above principle cannot be ignored and it is not allowed to take this cash back.

A lot of discussion about the specifics of how the cash is given back to the credit card holder, for now we assume that it is cash. We are focusing on Visa and Discover, excluding the big store cash back schemes.

Discussion about the details of how the contract is specified for the cash back. Some of them specify that a pre-determined amount of money has to be spent by the card holder. If they were giving you a gift, then you have to ask, whether you would accept the gift from a company that is based on riba. A lot of fatwas from Main al Qudha and Mundhar Kahf etc say that you can go ahead and take it. Sh has real concerns about these fatwas. So end conclusion is the cash back has lots of problematic issues with it so it is best that it be avoided.

Main issue is that you are forcing the wakil (credit card company) to pay you money (cash back) as specified in the contract between you and the credit card company. You have no right to demand this in your contract. Once it is specified in the contract, it is no longer a gift.

Working for Credit Card Companies

Would you accept gifts from an industry, which you do not consider appropriate for your employment?

AMJA at their fiqh conference in Bahrain in 2003. AMJA has conferences every year and coming year it is in February in Dallas. In the 2003 conference they discussed working for the credit card companies.

After talking about credit cards; they said “Exemption is made for those with special needs -- under “pervasive affliction” and a “complete lack of alternatives.” -- the origin is that it is prohibited. If you can’t find absolutely any other job, then by necessity it becomes an option.

Question asked by a GCC software engineer about the permissibility of working for credit card companies. Even Munzer Kahf, who was somewhat ok with credit cards since “interest is optional,” said that someone who issues the card it is haram. Therefore working in the field is not permissible.

Question about working for consulting companies that indirectly work with credit industry. The question is about degrees of separation, since no matter what company you work for, there is some dependency upon the credit or financial sector.

First make sure that the nature of the job that you are doing is halal.

Second, you need to look at what the company you are joining does.

Thirdly, how much is your job being used for haram purposes, e.g. haram kind of companies can be benefitting from your services.

It is not that simple now a days, but it is worth keeping in mind and should be encouraged.

Q: what if you are working in IT in human resources for a financial firm?

A: Here it is important to determine what kind of financial firm you are working for.

Cash Withdrawal from Credit Card Accounts

Back to earlier fatwas where we left off last week. One s the issue of the cash withdrawal. Here if interest brings from the point where the cash is taken out then it is for sure haram. Is there is cash withdrawal which does not charge interest giving you opportunity to not pay interest? No such cash withdrawal is known.

Without any question cash withdrawals are impermissible. `

Overseas Credit Card Transactions

Any time you use the credit card in a foreign country, there is a currency exchange happening at every transaction. The exchange of currency has to be spot transaction, not only is it hand to hand but there can be no delayed payment. So would using credit cards overseas be deemed haraam transactions?

If you lend money to somebody, in what currency do they have to pay you back? In the same currency that they borrowed the money from you.

The conclusion is that the way it is done is probably okay. The bank is charging you a service fee for the currency exchange.

HW: Think about the issues related to the Relationship between the merchant and the bank

Mosques using Credit Cards

Can mosques use the credit card for paying their bills? No it is not okay, since there is no hajjah involved here at all.

What about accepting donations on credit cards by the mosques? All the non-profit Islamic Organizations accept credit cards for donations. How about Islamic schools using credit cards? One student comments that such a donation is riba based due to nature of the credit card.  

When you open the door for donations using credit cards, people will assume that there is nothing wrong with credit cards. You cannot expect people or masses to listen to khutbahs about using credit cards are haraam and use it only in the cases of haajah and then turn around and say we are now accepting donations using credit cards.

Solution: Masjids should say that we are accepting payments using debit cards. People will stop and think about why they are conveying this message and also stay away from credit card transactions.

Can one go for Hajj while one has Credit Card debt

The answer is yes since it is like any other loan. In the past due to risk of life Ulema did not allow for going for Hajj while having debt.

Credit Card Debt

Suppose a person has used credit card and now he has accrued debt. Does he have to pay it? Yes. You have made an obligation on yourself.

Some people try to escape their credit card debt by leaving the country in which they have credit card debt. The answer is no, you cannot escape your loans.

2013-09-15 Class Notes

Edit: If you are having trouble with the chat window, you can use any IRC client such as Colloquy on the Mac. You can also use Firefox as your IRC client. The room is #pre_sun_jz for Sh Jamaal’s classes.

Classroom timings are changing due to earlier Asr and Maghrib prayers, Sh Jamaal will send the updated class timings.

Next quarter we will InshaAllah cover all different companies related to the mortgages and Islamic finance. So the electronic commerce is after the next quarter.  The sheikh will decide which option to choose from for next quarter.

Issues related to Credit Card Debt

One question from last week that we were discussing that whether one is allowed to perform Hajj while in debt?

Assuming that you have halaal debt, there are different types of debt, short term debt and long term debt.

If one has to pay back debt then (since one should be paying the debt) one according to scholars (in the past) could not perform Hajj. This is related to the amount of debt you owe at that point in time. However, if you have monthly salary and the person/party you owe debt to is not demanding it now then one can go for Hajj. If you request the party to whom you owe money about a delay in such a way that the debt is not due when you are going for Hajj then it is permissible to go for Hajj.  

Relationship between Merchant and the Bank responsible for the credit card transaction

How to define the exact relationship between the merchant who is accepting credit cards and the bank that is responsible for the transaction. What is the fiqh perspective on this relationship?

We concluded that the bank is the wakeel for the person holding the credit card. The merchant gets the amount of the transaction from the bank, Visa withholds some amount from the transaction, sometimes it is percentage, sometimes it is fixed amount and sometimes it is mixture of both. Lets look at each case separately.

In order to understand the fiqh issues, we have to clearly define what is happening, whether it is halaal or haraam and then try to classify the relationship.

What is the merchant paying for? He is paying for a service provided by Visa. Should it matter whether it is a fixed amount or a percentage of the transaction, or a percentage plus a fixed amount?

In the case of the fixed amount withheld by Visa, it is a service that Visa has provided so it is just a service fee.

In the case of percentage of the total amount of the transaction, Here the bank (acting as a broker) is saying to the merchant that it is because of me that you are getting this extra business because paying is easier now by the card that I have issued. So whatever you are planning to charge the customer then 10% of that is what I will keep. So bank is wakeel of the customer but bank is broker of the merchant. So is this type of double wakalah contract allowed? By the way, this is not two contracts in one since it is not two contracts with the same person/party.

Scenario: One person is acting as a wakeel for two parties, for example two parties who are buying/selling a car. The wakeel is getting commission from both of the parties in the transaction. As long as the wakeel is just for both of the parties, there is no problem with it. If either party is aggrieved they can sue him for  just cause.

We know that the merchant is charged some money for the transaction whether it is fixed or variable. It can be viewed as a commission.

Opinions related to accepting payments via credit cards by merchants

The scholars are divided on this and there are three opinions.

[Edit: This was a general discussion, not part of the opinion] For example from AMJA we have a fatwa which says that yes, accepting payments from your customers via credit cards is acceptable, even if the customers are Muslims or non-Muslims.

Footnote: This is just a one line answer and this should raise alarm because we do not know who the fatwa came from. If it is from a shaykh who is well known then probably one can accept it (even though a well known and big shaykh or a well-educated can make a mistake). However if it is not a well known shaykh then more is needed.

Footnote: Sh. Jamaal mentions that there is another concern because the shuyukh are getting a lot of question these days and the question mailbox is always full. So providing evidences each time can be very time consuming. So sometimes well known and knowledgeable shuyukh give one line answers to bring some efficiency to the process of answering questions.

Opinion #1: One opinion is that it is not allowed for Visa to charge any fees. It is from Bakr Abu Zaid, AbduSattar al Wada among others. They are looking at it as sale of debt for debt so that is why they say it is not allowed. Bank is the guarantor so one cannot take wages for being a guarantor.  

Opinion #2: It is permissible for banks to charge fees irrespective of whether it is fixed or variable. This is the opinion of Nazeeh Hammad, Shariah Lajna of the Kuwaiti finance house, and Taqi Ud Din Usmani. They argue that it is a service charge for the benefit that the merchant is getting.

Opinion #3: It is allowed to charge transaction fee as long as it is fixed. The Bank of Bilaad uses this opinion by Yusuf al Shubayli which allows it. Even though the amount of work between processing a $10 transaction and $10k transaction is negligible, however the risk in latter transaction is much larger. If we accept this argument then it is a good argument.

Sh’s final opinion: These issues are relatively minor compared to the ribawi nature of the relationship between the merchant and the bank.

What should be the nature of the relationship between the merchant and the bank in case of Islamic credit cards? Basically are Islamic credit card issuing banks allowed to charge a transaction fee and could it be fixed or variable? .... maybe this will be discussed later????

Footnote: When you have a debit card and use it for a transaction, the amount is debited immediately. If you have a secured credit card, the amount is not debited, you receive a bill and then pay it, if you do not pay off the monthly balance, they charge you interest.

Ta’zir bil Maal -- Jurisprudential discretion in punishment

Question: Is there any basis for banks to charge for financial penalty. Sh provokingly is asking us, isn’t there a limit to amount of time that the person is allowed to pay off the debt.

When you pay a fine, it is a punishment agreed upon and it is a financial penalty. Is it halal from a shari’ah perspective?

Footnote: In Singapore, the government enforces harsh physical penalty for crimes, which is better caning or financial penalty?

In all four madhabs they consider ta’zir bil maal is considered haram. The only people on the other side are Ibn Taymiyyah, Ibn al Qayyim and Abu Yusuf (student of Abu Hanifa) who say that ta’zir bil maal is halaal.

All scholars are in agreement that if it is permissible (most say it is not permissible), then the only party that can enforce it is the government. So companies and individuals cannot enforce financial penalty.

Homework: What led the scholars to the conclusion that the tazir bil Maal is haraam?

Next week’s class will start at 5:00 PM Pacific.

2013-09-22 Class Notes

How do credit card issuing banks make money off of each transaction?

Merchant has an agreement with VISA, he has to buy or rent equipment in order to handle credit card transactions.

When a merchant charges $10 to the buyer’s credit card. The bank that issued the credit card will pay the merchant $9.80 and the 20 cents will be shared on a pre-determined negotiated rate between the bank and VISA.

The only issue with credit cards is with the interest or this percentage of the money owed to merchant that is being a problem here. Otherwise are all other aspects of the contracts between merchant and the bank are permissible? We will expand on it either today or in coming lectures.

So an Islamic credit card could charge the merchant fees and annual fees in lieu of charging interest. This will be perfect Islamically. But many Islamic credit card banks don’t find this lucrative enough.

Question: is it permissible/possible to have financial penalties for late payment of loans?

Prelude to the discussion: Every Islamic center has problem with overcrowded parking lots and a lack of regard for parking laws. However when the cars are towed away at the expense of the car owners, then they are more amenable to obey the parking laws. So a financial punishment changed their behavior.

Is this concept of a financial punishment acceptable in the Shariah?

How do I make sure you pay me if I go into a halal house rental agreement?

There are many hadd punishments in the Shariah such as for adultery, stealing etc. However there are many infractions where there are no specified hadd punishments, the judge is at liberty to determine the punishment, this is known as tazeer.

The majority of the four schools say that it is not permissible to have financial punishment for the infractions.

Imam Shafiee said that punishments can only be bodily punishments but no financial punishment.

What is more moral punishment? A large time spent in the penitentiary or some type of physical punishment such as flogging. Most of the prisons are not built for rehabilitation, they are built for recidivism. However most of the modern society feels that the physical punishments are archaic and have no place in the society. Shaykh Jamaal has worked in prisons and knows that this feeling of Western societies is not correct. The prisons (the way they stand) are really cruel and unusual in punishment.

Abu Yusuf, a student and companion of Abu Hanifa said that tazeer or financial punishment is permissible for financial infractions.

Imam Shafiee has two set of opinions, the old opinions were from his time in Iraq and his new views in Egypt came to be knowns ‘jadeedi’ opinions. In the new opinions he considered it permissible.

Ibn Qayyim and ibn Taymiyyah’s opinion about financial punishment

Perhaps the most famous scholar who said that it is permissible to have financial punishment and who wrote about it are ibn Qayyim and ibn Taymiyyah. They both said that it is permissible.

Ibn Qayyim says that there are three types of financial punishments:

1) Destroying their wealth -- they would burn down a house in which alcohol was produced (like an alcohol brewery).

2) You can change the wealth; e.g. if someone has a statue, you can damage his property and devalue it.

3) A financial penalty

Evidence for financial punishment not being permissible

Let’s think about the evidence regarding why financial penalty is not permissible?

The first fear is the government may commit Dhulum (injustice).

Most of the evidence for their opinion is vague and not specific.

Surah Baqarah verse 188

وَلَا تَأْكُلُوا أَمْوَالَكُم بَيْنَكُم بِالْبَاطِلِ وَتُدْلُوا بِهَا إِلَى الْحُكَّامِ لِتَأْكُلُوا فَرِيقًا مِّنْ أَمْوَالِ النَّاسِ بِالْإِثْمِ وَأَنتُمْ تَعْلَمُونَ

Sahih International

And do not consume one another's wealth unjustly or send it [in bribery] to the rulers in order that [they might aid] you [to] consume a portion of the wealth of the people in sin, while you know [it is unlawful].

Discussion about whether this is istitnaa (استثناء المنقطع) in this verse or not. The conclusion is that it is ???

As a criticism of the istitnaa argument, shaikh quoted the verse which said that iblis did not prostrate, was iblis from the angels?????

(Note on phone so can't type much)

Another evidence is the Hadith of the Prophet where he said in khutbatul widaa when he said on this day sacred are your property and your lives.

أَخْبَرَنَا إِبْرَاهِيمُ بْنُ الْحَسَنِ، قَالَ حَدَّثَنَا حَجَّاجٌ، قَالَ قَالَ ابْنُ جُرَيْجٍ أَخْبَرَنِي أَبُو الزُّبَيْرِ، أَنَّهُ سَمِعَ جَابِرًا، يَقُولُ قَالَ رَسُولُ اللَّهِ صلى الله عليه وسلم ‏ "‏ إِنْ بِعْتَ مِنْ أَخِيكَ ثَمَرًا فَأَصَابَتْهُ جَائِحَةٌ فَلاَ يَحِلُّ لَكَ أَنْ تَأْخُذَ مِنْهُ شَيْئًا بِمَ تَأْخُذُ مَالَ أَخِيكَ بِغَيْرِ حَقٍّ ‏"‏ ‏.‏

Jabir said:

"The Messenger of Allah said: "If you sell fruits to your brother then the crop fails, it is not permissible for you it takes anything from him. Why would you take the wealth of your brother unlawfully?"' (Sahih)

The criticism is that the evidence so far is general and not specific.

(Sunan an-Nasa'i 4527)

They also argue that there is ijmaa that you cannot make financial punishment. Note whenever somebody states ijmaa you have to be extra careful, because when you try to find out the ijmaa, many times you do not find it.

Their biggest argument is that this opens the door to governments abusing their rights. However this is a weak argument since then nobody should be granted such rights.

Another argument among jurists says that you harm the poor more than the rich, since the financial burden for the poor is much higher than the rich.

Evidence for those who say that it is permissible to levy financial punishment

Bahz ibn Hakeem on the authority of his grandfather narrated a hadith about financial penalty for not paying zakat.

حَدَّثَنَا مُوسَى بْنُ إِسْمَاعِيلَ، حَدَّثَنَا حَمَّادٌ، أَخْبَرَنَا بَهْزُ بْنُ حَكِيمٍ، ح وَحَدَّثَنَا مُحَمَّدُ بْنُ الْعَلاَءِ، أَخْبَرَنَا أَبُو أُسَامَةَ، عَنْ بَهْزِ بْنِ حَكِيمٍ، عَنْ أَبِيهِ، عَنْ جَدِّهِ، أَنَّ رَسُولَ اللَّهِ صلى الله عليه وسلم قَالَ ‏"‏ فِي كُلِّ سَائِمَةِ إِبِلٍ فِي أَرْبَعِينَ بِنْتُ لَبُونٍ وَلاَ يُفَرَّقُ إِبِلٌ عَنْ حِسَابِهَا مَنْ أَعْطَاهَا مُؤْتَجِرًا ‏"‏ ‏.‏ قَالَ ابْنُ الْعَلاَءِ ‏"‏ مُؤْتَجِرًا بِهَا ‏"‏ ‏.‏ ‏"‏ فَلَهُ أَجْرُهَا وَمَنْ مَنَعَهَا فَإِنَّا آخِذُوهَا وَشَطْرَ مَالِهِ عَزْمَةً مِنْ عَزَمَاتِ رَبِّنَا عَزَّ وَجَلَّ لَيْسَ لآلِ مُحَمَّدٍ مِنْهَا شَىْءٌ ‏"‏ ‏.‏

Bahz b Hakim reported from his grandfather:

The Messenger of Allah () said: For forty pasturing camels, one she-camel in her third year is to be given. The camels are not to be separated from reckoning. He who pays zakat with the intention of getting reward will be rewarded. If anyone evades zakat, we shall take half the property from him as a due from the dues of our Lord, the Exalted. There is no share in it (zakat) of the descendants of Muhammad (). [Sunan Abi Daud 1575; Graded Hasan by Albani]

Someone refused to pay zakat. Whoever pays it he has its reward. And if someone refuses to pay it we will take half of his wealth. This is one of the severities of Allah. And none of it is for the family of Muhammad.

The chain is controversial, however most of the scholars accept this narration.

Some scholars make taweel and say it was abrogated by the Hadith that says there is no right in wealth except zakat. This hadith about right in wealth is very famous, however this Hadith is weak.  

The other people say that the sahabah did not apply it.

Another evidence:

Some of the bedouin refused the idea of zakat after the death of the Prophet, some of the bedouin refused the idea of zakat being paid to a central government. Both of these groups were fought by Abu Bakr, which shows that the above hadith was abrogated.

The response to this is that it would not have applied in any case.

These evidences are not specific and show that there is indeed financial punishment for not paying zakat. So those who say that financial punishments are not permissible at all, have to show evidence for it, since we know that there is indeed financial penalty for zakat and if an exception was made for zakat then they have to show it.

So our question still remains, is it permissible to apply financial penalties in the General case?  

Another evidence: [couldn’t find this hadith]

Hadith was asked about hanging fruit. The prophet said he who eats from need and without gathering in his clothes no sin upon them. And whoever does more than that then they owe twice the amount and the punishment.

As an explanation of the above hadith, if your company provides free water, you might consume it at work, but you are not free to take cases of the water bottles home.

Albaani says this chain is problematic. Because Abdullah bin Amr wrote down a collection and it was passed through his children and it was only in written form. The problem was writing had a lot of variation and so had to be checked orally.

However after the above criticism, Albaani still says this hadith is hassan. But Sh's opinion is that it is weak.

Another hadith they quote is from s abu dawud. The penalty for taking a lost camel and hiding it is its price and an amount similar to that.

Its chain is weak in English but in the Arabic it says that the Hadith has some supporting evidence.

Ibn Hazm said that this hadith is not authentic because it is from the unique or solitary narrations of ... from his father, and this is from his writing and not ....  

If hadith is not supported from any other source, then it is considered to be weak due to its solitary nature.

Another evidence:

Hadith: If somebody transgresses against you, you should transgress against them in the similar manner.

You could say that this could be true in general but there is some particularization involved when applying it.

الشَّهْرُ الْحَرَامُ بِالشَّهْرِ الْحَرَامِ وَالْحُرُمَاتُ قِصَاصٌ ۚ فَمَنِ اعْتَدَىٰ عَلَيْكُمْ فَاعْتَدُوا عَلَيْهِ بِمِثْلِ مَا اعْتَدَىٰ عَلَيْكُمْ ۚ وَاتَّقُوا اللَّهَ وَاعْلَمُوا أَنَّ اللَّهَ مَعَ الْمُتَّقِينَ

Sahih International [2:194]

[Fighting in] the sacred month is for [aggression committed in] the sacred month, and for [all] violations is legal retribution. So whoever has assaulted you, then assault him in the same way that he has assaulted you. And fear Allah and know that Allah is with those who fear Him.

Another evidence:

Hadith from Sunan Abi Dawood: The penalty for taking a lost camel and hiding it is the cost of the camel and an equal amount on top of it.

Edit: An evidence closer to this one is the only one I could find:

حَدَّثَنَا قُتَيْبَةُ بْنُ سَعِيدٍ، حَدَّثَنَا اللَّيْثُ، عَنِ ابْنِ عَجْلاَنَ، عَنْ عَمْرِو بْنِ شُعَيْبٍ، عَنْ أَبِيهِ، عَنْ جَدِّهِ عَبْدِ اللَّهِ بْنِ عَمْرِو بْنِ الْعَاصِ، عَنْ رَسُولِ اللَّهِ صلى الله عليه وسلم أَنَّهُ سُئِلَ عَنِ الثَّمَرِ الْمُعَلَّقِ فَقَالَ ‏"‏ مَنْ أَصَابَ بِفِيهِ مِنْ ذِي حَاجَةٍ غَيْرَ مُتَّخِذٍ خُبْنَةً فَلاَ شَىْءَ عَلَيْهِ وَمَنْ خَرَجَ بِشَىْءٍ مِنْهُ فَعَلَيْهِ غَرَامَةُ مِثْلَيْهِ وَالْعُقُوبَةُ وَمَنْ سَرَقَ مِنْهُ شَيْئًا بَعْدَ أَنْ يُئْوِيَهُ الْجَرِينُ فَبَلَغَ ثَمَنَ الْمِجَنِّ فَعَلَيْهِ الْقَطْعُ ‏"‏ ‏.‏ وَذَكَرَ فِي ضَالَّةِ الإِبِلِ وَالْغَنَمِ كَمَا ذَكَرَهُ غَيْرُهُ قَالَ وَسُئِلَ عَنِ اللُّقَطَةِ فَقَالَ ‏"‏ مَا كَانَ مِنْهَا فِي طَرِيقِ الْمِيتَاءِ أَوِ الْقَرْيَةِ الْجَامِعَةِ فَعَرِّفْهَا سَنَةً فَإِنْ جَاءَ طَالِبُهَا فَادْفَعْهَا إِلَيْهِ وَإِنْ لَمْ يَأْتِ فَهِيَ لَكَ وَمَا كَانَ فِي الْخَرَابِ - يَعْنِي - فَفِيهَا وَفِي الرِّكَازِ الْخُمُسُ ‏"‏ ‏.

Narrated Abdullah ibn Amr ibn al-'As:

The Messenger of Allah () was asked about the hanging fruit. He replied: If a needy person takes some and does not take a supply away in his garment, he is not to be blamed, but he who carries any of it away is to be find twice the value and punished, and he who steals any of it after it has been put in the place where dates are dried is to have his hand cut off if its value reaches the price of a shield. Regarding stray camels and sheep he mentioned the same as others have done. He said: He was asked about finds and replied: If it is in a frequented road and a large town, make the matter known for a year, and if its owner comes, give it to him, but if he does not, it belongs to you. If it is in a place which has been a waste from ancient time, or if it is a hidden treasure (belonging to the Islamic period), it is subject to the payment of the fifth.

Camels can go long time without water and food, the rules for the lost camel is that you do not touch it, the camel will find its owner eventually. This hadith says that penalty for stealing a lost camel is twice the price of the camel.

Albaani says that this hadith is sahih.

Footnote: Punishment for fornication is hadd punishment and banishment for a year. Some say that the banishment is not from the hadd punishment but from the tazeer.

Another evidence:

Sunan al Kubra by al bayhaqi, incident from the time of Umar, somebody sold a camel and the camel was slaughtered, the person whose camel was stolen went to Umar and complained about it, Umar asked for the price of the camel and the person replied it was 400, Umar then asked the person who stole it to pay 800.

Another evidence:

Umar ibn Khattab when he used to hire somebody as civil servants, he would take half of the wealth. Footnote: Sh could not find any evidence whether these were actually statement of Umar.

Umar would take half of their wealth, because the civil servants had a higher rank in the society and hence they got advantages in the business transactions which was hard to control. So Umar (ra) took half of their wealth to compensate for this advantage of theirs.

Discussion about financial penalties

Most of the scholars of the past were speaking about whether governments can levy a financial punishment on the people. They did not discuss the permissibility of individuals ability to levy such financial punishment on the people.

The bulk of contemporary scholars say that it is acceptable.

The idea of financial punishment in itself is not prohibited in Islam. However the question that we need to discuss financial penalties in stipulations made in the contracts itself. The only way to enforce some penalty is to hit them in the wallet, but we cannot charge an increase in the amount of loan because charging somebody a financial penalty because they are late in making a payment is riba, which is clearly forbidden.

Next week we will discuss this issue in depth, Insha-Allah

[Edit: Today many of the ahadeeth are not easily showing up on the I am still trying on some of them…..]

2013-09-29 Class Notes

Sh had conversation with Abu Saud (a scholar from Saudi-Arabia who is expert on Islamic finance and economic issues) about the credit card industry in Saudi Arabia which he will discuss later.

Are late fees on loans riba?

It is an issue to get people to pay back their loans in time, so what halal alternatives are available to get people to pay their loans in time. In order to discuss this issue, we will study some fatwas.

Fatwa: Late fees is the essence of riba

Q: I would like to ask a question in relation to my business. I sell cars and I do not charge them interest. If they pay late then I charge them late fees. Is this halal?

Fatwa: The answer by Sh. Salih al Munajid is as follows: This late fees that you charge is the essence of riba. This is exactly how it was done in the time of jahiliyyah.

A problem related to this is the following.

Fatwa: Pre-defined payment schedule for monthly tuition fees for Islamic school

Q: Suppose there is an Islamic school which needs money for the school which comes from the fees that they charge. So if people pay late then what are the schools going to do about it?

Fatwa: Once the tuition fees is agreed between the school and the parents then it cannot change and any charging of late fees is riba. The provide the following options to the parents: If first three days of the month then pay $300, if from 4th day to 10 day then $350 and if from 10th day to 15th day then it should be $400 (these numbers are just to capture the idea and are not the exact numbers from the lecture).  

The person who wrote the fatwa says that this is different than late fees which is riba and the above innovative payment schedule is that the parents are shown these schedule of fees beforehand.

And they say that if the parent does not pay their fees in time, their kids will be thrown out of the school. Edit: It is difficult to really enforce this option.

Students in the classroom proposed that the parents could be asked to pay a deposit, some said ask the parents to pay all of the annual fees beforehand. However if this was enforced, you would not have many students in your Islamic school. The schools are politically sensitive and they are not for business purposes but to strengthen the Islamic community.

Penalty Alternatives: Repossess the item purchased via loan

Suppose the person has bought the car, and he is late in paying the fees. One alternative is to repossess the car and sell it and then whatever amount is above the loan then extra money goes to the one who was paying the installment. If money falls short then the person who was paying the installment owe the money to the bank.

Islamically if one cannot pay then we should give him respite since repossessing their car might cause great financial harm due to their inability to go to work, etc.

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.

Discussion about the late payment schedule fees

However if there are any extra expenses that (Ulema agree upon) one can (like school in the above example) can charge that kind of expenses from the parents.

Footnote: The basis of late fees is generally the penalty so that is why it is riba. However if basis for late fees is some expenses that late payment has caused then that can be charged to the customer.

The late fees cannot be legally binding, if they are not late it should not be charged.

Penalty Alternatives: Incentive payments for finishing project on time

What about the case of the project? You are hiring people for this (Ja’ala contract) and late fees is causing slowing down of the project.

Lets say you are building a Mall and every month of delay costs you money. This is like a reward contract so one can say that if you finish by this day then I will pay you this much and if you finish by this time then I will pay you this much. This is permissible since the contract has a different nature. Here one is allowed to give the incentive in this kind of the contracts. In the contract the level of quality has to spelled out and if the quality is not met then one may seek some money back which is not financial penalty but return of some money due to not meeting the contract quality requirements.

AAOIFI ruling on this issue

These are associated with someone who has debt and has the means to pay the debt. If person is not paying the debt while he has the means then it is Dhulm:

حَدَّثَنَا مُسَدَّدٌ، حَدَّثَنَا عَبْدُ الأَعْلَى، عَنْ مَعْمَرٍ، عَنْ هَمَّامِ بْنِ مُنَبِّهٍ، أَخِي وَهْبِ بْنِ مُنَبِّهٍ أَنَّهُ سَمِعَ أَبَا هُرَيْرَةَ ـ رضى الله عنه ـ يَقُولُ قَالَ رَسُولُ اللَّهِ صلى الله عليه وسلم ‏ "‏ مَطْلُ الْغَنِيِّ ظُلْمٌ ‏"‏‏.‏

Narrated Abu Huraira:

Allah's Messenger () said, "Procrastination (delay) in repaying debts by a wealthy person is injustice." (Bukhari)

If the debt installment is delayed then the financial penalty may go to the charity but the one who is giving the loan cannot utilize this money. AAOIFI do not really present any evidence to back their claim except a statement that this is well established in the Maliki school of law. Is this halal?

First question is that is this riba rather than a form of punishment? From the perspective of the one who is paying back the loan, it is riba. So it is a bit strange fatwa by AAOIFI. However from the notes at the end of the fatwa, it probably was adapted not after a detailed discussion. So this fatwa may be reviewed in the future. It looks like AAOIFI is giving this fatwa based on Maslaha. If society was more honest, then we will not have to deal with this. Due to lower levels of honesty, the practicality of the situation is demanding that such measures be taken.

Footnote: The loan in Shariah is a brotherly act and not a business transaction. So the time value of money is made forbidden. However if we are doing a business transaction then time value of money is recognized. Here the price of the commodity can be increased if it is being paid overtime.

On the credit cards in the Muslim World (Malaysia and Saudi Arabia)

Say if you go into a bank in Malaysia, then they will look at your financial situation. Say they give you the line of the credit of $15k. They determine this based on Al Eina (which is forbidden according to a hadith but somehow allowed in the Shafi school of thought). The bank will choose a piece of land and they will sell it to (say Muhammad) for $20k overtime. Immediately they will buy back the land from Muhammad for $15k and this establishes the line of credit. They are going to pay the bank for this piece of land overtime $20k.  

Abu Saud mentions that in Saudi Arabia on this issue there is a conflict between the older Ulema (in 80s) and the younger Ulema (in 50s) on this issue. If cardholder has good standing then it does not matter and they will give him credit line. However, if you are reaching the limit, then bank buys some metal (say $5k) and they sell this to the cardholder overtime as $6k. The bank then arranges for the metal company to buy back this metal for $5k as cash. In Malaysia it is done via land (which does not move so it is called Al Eina) and in Saudi it is being done with moveable metal (it is called al Tabarruk).  

2013-10-06 Class Notes

Islamic Credit Cards

We started discussing how the Islamic credit cards work.  We saw the scheme of buying metal or land and sell it to the credit card holder over time. Before we discuss these innovative schemes, we will discuss how they justify these schemes.

Malaysian Credit Card Innovative Schemes

They check the customer’s credit worthiness before determining the line of credit. If they decide it is $5,000, then the bank will choose a piece of land which they already own (sometimes it is the same piece of land for many customers) and sell it for let’s say $15,000 over a period of time to the customer for whom they want to give a $5,000 line of credit and then buy it back from him over a period of time for $15,000. [Upto this point it is clear, I think] They keep this $10,000 in a trust fund which the customer does not have access to. The customer cannot access this amount it is collateral for the credit card transactions.

??????? [I really did not understand this concept of a trust fund and what role it plays????? May be we should ask? what do you think?] Shaikh started the discussion with 5k line of credit and said that the value of land that is 5k is sold over a period of time for 15k and thus create a 5k line of credit and the trust fund allows the banks to charge you profit under the guise of the land transaction deal.

Now when you use the card, the bank will pay on your behalf. The bank gives you a qard hasana for the transaction amount. You have 30 days to pay off the transaction. If you did not pay it off, then they dip into the trust amount and they charge you profit. So the banks dip into the trust fund only if you fail to pay off the transaction in 30 days.

So everything starts with transaction of purchasing land over a period of time which is a cash transaction. The banks could not have given you a $10,000 loan and expect $15,000 back from you since it is riba. However they sell you piece of land for $10,000 and expect payments of $15,000 back from you. We are now discussing this scheme.

Sh discussed the net present value of money which changes over time because of the purchasing power of money. Money which is $10,000 today could have a future net present value of let’s say $15,000. Edit: Please note when we give a loan to somebody, we forego this future value of money, we cannot charge them any increase, since it is the essence of riba.

Discussion on Al-Eina transaction

The Shariah board of Malaysia have approved this transaction. Their argument is that they are Shafi and that is the reason why they are able to approve it. They say that not only (Al Eina) is not haram, it is not makrooh either. The scholar Mawardi went into some details to show that such transaction is not Riba. He further argues that it is a very beneficial transaction which is good for the whole economy. Some later Shafi scholars later said that Al Eina is disliked and they said that true Al Eina is only permissible if the true intention of the parties is hidden and unknown.  

Imam Shafi says that if a man buy goods from somebody with a line of credit, then there is no harm whether they sell it to somebody else for a higher or lower amount.

The Malaysian board is not looking at the intention behind the whole scheme which is to charge an increase for a loan, they are simply looking at the legality of buying and selling land based on a line of credit for whatever amount they want.

In the Hanafi school, Al Eina transactions are haram. Imam al Shaybani said that I hate this type of transaction so much since ....In the Hanafi school, Abu Yusuf did not see anything wrong with Al Eina. The Hanafi school mixes Al Eina and Tawarraq transactions.  Ibn al Himam? said that it is known that Al Eina is haram.

Hanbali madhab says that Al Eina is haram.

Hadith: If you leave .... and if you start engaging al Eina .... then Allah will bestow upon you disgrace that will not leave you until you forsake Al Eina.

There is some weakness in the chain of this hadith. This hadith uses Al Eina but does not define it. [Could not find it on]

Al Eina is selling something for cash and buying it back over time for an increase.

Hadith of Ayesha: Ya Umm al Mumineen!.....I sold a slave to Zaid for 800 dinar for cash and then bought it back over a period of time for an increase?????  Ayesha said that evil is what you bought and what Zaid sold. Ayesha said that both of your transactions are haraam. She said to Zaid that his jihaad with the Prophet (pbuh) would not be accepted if he did not forsake this transaction. [cannot find it either on]

This hadith was recorded by Bayhaqi who is known as the second shafi because of his contribution to the shafi madhab. he included in his sunan ..... and the isnaad of this hadith is good, even though Imam Shafi said that we do not confirm any hadith of this type from Ayesha. Which means there is a gender bias of Imam Shafi, it shows that they did not affirm the hadith which discusses financial matters.

Ayesha did not attribute this to the Prophet (pbuh).

Imam Shafi says that if you have two transactions which are innocent then there is nothing wrong with it. If you sold a car for $10,000 and then turn around and buy it back for an increase while paying it over time. However if the intention is known and clear then it is haraam, even in the Shafi school.

Shaikh mentions that this scheme is published by the Malaysian banks and it is the basis for the increase in amount or riba for the credit card transactions.

Footnote: Discussion of hadith narration that are eye witnesses or are just narrations????

Footnote: A bit of discussion about why any crime that results in hadd punishment, the eyewitness of women was not accepted. This was because women were considered unreliable witnesses due to emotional stress would make them unreliable. However now there are many crimes being committed by women nowadays and maybe they are not as emotionally impacted as before????

Other Credit Card Schemes

Sh is showing a flyer that shows 0% for the credit cards. Some of the flyers from Emirates show 0% but they have many fees annual fee, cash withdrawal fee etc which also includes late payment fee. Their late payment fee is fixed at 180 dirham.

Kuwait has an ijara system with late payment fee of .... but if you pay off within ... days then there is no fee.

What is the difference between Al-Eina and Al-Tawarraq?

If I buy a car from party A and sell it to party B, there is actual transfer of ownership and risk involved since I may not find the party B. This is Tawarraq where the person seeking liquidity sells it to third party.

In Al Eina, the person seeking cash sells and buys from the same party. In Hanbali madhab considers Tawarraq as halal and so the older Shuyukh allow it for the banks in Middle East. The banks inform these shuyukh that they are dealing with Tawarraq and ask for their legal opinion, since they say it is tawarraq these transactions are considered permissible.

Shuyukh Abu Saud, Al Shubayli respond that this is collective arranged Tawarraq and hence it is not halal. The Shafi do not discuss Tawarraq at all, since Al Eina is already halal for them. We continue next week InshaAllah.

2013-10-13 Class Notes


[Note taking started 10 minutes late]

Why someone may resort to Al Eina and Al Tawarraq is to have liquidity. Another way is to find people who can loan you what is Qard Hasan as a brotherly act.

Tawarruq is at least doubtful -- you want cash, but you’re willing to pay over time for the cash. So there is no doubt that there is some element of riba here. If people have good level of taqwa then they will stay away from it.  

Example: Saeed ibn Al Musayyib was asked about someone who sold a commodity to his sister over time and then she asked him to resell it in the marketplace for a cash price. He said if the seller has anything to do with the second sale, it is prohibited. [Could not find this hadith on]

Hasan al Basri was a tabiee of Ibn Abbas (ra). In the time of tabieen, they used to sell silk, a silk sale is basically tawarraq. Hasan al Basri was asked that: “I sell silk overtime. A woman tells me to sell it for her since I know the market.”

Al Hasan Al Basri replied said: “give the buyer the commodity and then leave them. Do not sell it or buy it, but you may guide the person to the marketplace.”

If you move to the time of the madhabs were forming, it did seem that tawarruq did become a source of liquidity.

Even if you are paying over time for a property, that property belongs to you, and if it is destroyed then it is your responsibility.

There are two narrations from Imam Ahmad, one that says Tawarruq is permissible and another that says that it is not permissible. The reason for it is due to the different perspectives.

Let says my intention is not to violate riba or try to create liquidity, but the end result is that you have paid more money for the same item at that time which is the essence of riba.

Dominant opinion of the Hanbali school is that tawarruq is halal.

Ibn Taymiyyah who is from Hanbali school says that your intention is not to acquire the property but to work around prohibitions of riba, he says that tawarruq is not permissible.

Ibn Taymiyyah, ibn Qayyim and ibn Qudammah branch of the Hanbali school say that tawarruq is haraam. However the other school of Hanbali (the one dominant in Saudi Arabia) considers Tawarruq as halal. Younger generation is having problem with this view of Tawarruq being halal.

The banks describe their credit card transactions as tawarruq and they ask for opinion from their scholars about whether tawarruq is halal, the Hanbali scholars say that tawarruq is halal.

However in reality you have to study the tawarruq transactions in detail. There is such a thing as reverse tawarruq which we will study soon.

The Hanafi school confuses Al Eina with Tawarruq and they sometimes used these terms interchangeably. The later Hanafi scholars said that Al Eina is haram while tawarruq is permissible.

The Maliki school is one of the strictest rules who view both Al Eina and Al Tawarruq as prohibited.

Since the Shafi school sees no problems with Al Eina, they hardly discuss tawarruq.

Conditions placed on Tawarruq

Over time, this practice became very common for achieving liquidity. Because this practice became so common, they later on placed conditions on tawarruq. The classical scholars realized that there is something shady going on with Tawarruq and they had to place some conditions on these types of transactions.

Condition #1. The person who uses Tawarruq must be in true need of the money. It has to be a true need.

Condition #2. Must not be able to obtain liquidity through other means.

Condition #3. The contract should not include anything that resembles riba.

Condition #4. You must take the possession of the good before you sell it.

Types of Tawarruq:

Tawarruq Type #1: Individual Tawarruq

There are three possible scenarios for Individual Tawarruq.

Scenario #1: A person needs cash and he buys a good over time and then sells it for cash without any indication he’s doing it for cash.

Is this scenario halal?  Could it ever be as simple as this scenario?

Many students said that this should be halal.

Let’s say that a Muslim studies Economics in the West and determines that interest is okay. And he says that the only way that he can partake in interest transactions is via scenario #1, then would it be okay? Majority of the class said that it is not halal.

Scenario #2: Person A goes to Person B and says he would like a loan, but person B doesn’t have money, so he gives him an item to sell at the market and then he sells it for cash.

Is this scenario halal?

Majority of the contemporary scholars say that this type of tawarruq is also halal.

In this scenario, both parties are aware for the need of cash and they are participating in this transaction to get cash. However there is risk involved because the party needing cash might not be able to sell.

Scenario #3: Person A goes to Person B and says I can’t loan it to you but I can sell this to you over time.

Here one party owns the property or item so it is halal???

Tawarruq Type #2: Financial Tawarruq or Organized Tawarruq

Bank purchases good for cash. They don't actually possess the item. They purchase it and sell it to the customer for cash over time. The banks might arrange more than one party in acquiring the items to be sold over time.

Sometimes the Bank sells back the good to the seller of the goods over a period of time. Sometimes the bank finds other purchasers for the good over a period of time. Sometimes there are many intermediaries involved with different owners of the goods.

The end result looks like somebody is selling goods and somebody else is buying it over a period of time. This is tawarruq.

We have to ask the question is the allowed legally or ethically, whether it violates the law or the essence of the shariah.

Shaikh says that he can prove this is not allowed legally. According to the Shaikh, this is not allowed since if this is agreed upon in advance then it is 3 or 4 contracts in one. Sometimes banks do this as a business agreement. If you come to them saying that you need liquidity then this is their offer immediately.

Sukook is nothing more than organized tawarruq as well.

Some companies blatantly use organized tawarruq is because the conclusions of the majma al faqih was very vague. They did not make a strong statement against tawarruq, except they said that it is not permissible to execute ... and reverse tawarruq in one transaction because it is a deception.

Some people claimed that since the council of scholars did not rule against it strongly, they considered it to be okay to practice tawarruq.

One who is somewhat against organized is Mufti Taqi Usmani: Even though the 4 schools allow it, it is better to lend without riba. If the ‘offer’ and ‘acceptance’ is there then it is considered ‘makrooh’ or ‘kirahah’.

Footnote: These Islamic banks have to compete with their Western non-Islamic banks who pay interest. So to attract customers the Islamic banks are doing things like this.

Tawarruq Type #3: Reverse Tawarruq

The final conclusion is that the basis for the Islamic Credit Cards is not on sound Islamic principles. The banks advertise 0% interest rates for the cards and charge a flat fee for late payments. However nowhere do they mention that this late payment fee is given to charity.

Banks use tawarruq and other unsound legal means to in essence charge interest for goods over time. And they justify it because they have to pay their depositors a return on their investments.

So this conclusion is indeed not surprising at all. This concludes the class for this quarter.