Dr. Alimi Saheed CIFE,CISSA,CIFA. TRADE IN ISLAM Dr. Alimi Saheed CIFE,CISSA,CIFA.

Trade Transactions Trade is permissible according to the Quran, Sunnah, consensus of Muslim scholars and analogical deduction. Allah Says: “...but Allah has permitted trade..” (Al-Baqarah:275) And: “There is no blame upon you for seeking bounty from your Lord” (Al- Baqarah:198)

Trade Transactions “ ...but only {in lawful} business by mutual consent....” (Quran: An-Nisa: 29) “ Selling should be only by mutual consent”. (related by Ibn Hibban, Ibn Majah) “ Do not sell what you do not have (or possess)’. “ Allah and His messenger prohibited the trade of intoxicants, dead animals, pigs, and idols”. ( related by Al- Bukhari and Muslim)

Legitimacy of Sales (Trading) Qur’an Texts Hadith Texts The prophet was asked: which are the best form of income generations? He replied: a man’s labour and every legitimate sale. ( al-jami’ As-saghir). The truthful and honest trader is among is among the prophet , the righteous and the martyrs ( At-Tirmidhi).

Salaf-as-Saliheen texts: Imam ash-Shafi’i stated: the general rle for all sales is permissibility as long as they are concluded by consenting, capable decisions makers, except for what the messenger of Allah has forbidden; or what is sufficiently similar to what the messenger of Allah has forbidden; anything different from those is permissible following the permissibility of sales stated in the book of Allah Almighty. (Al-Fiqh al-Islami wa adillatuh).

Ethics of Trading Avoidance of excessive profit. Complete disclosure of information: all merchants are resurrected on the of judgement as sinners, except those who feared Allah, treated their customers well and were truthful (at Tirmidhi). Ease of conduct: Allah is merciful to the man who is easy when he sells, when he buys and when he collects his loans(Bukhari).

Avoidance of swearing even if truthful: swearing destroys the goods and wipes out their blessings (Bukhari/Muslim). Frequent paying of charity: O merchants, the devil and sins are present at each sales, so purify your sales with charity (Abu Dawood). Documentation and witnessing of all debts and future contracts.

Trade Transactions “ ...but only {in lawful} business by mutual consent....” (Quran: An-Nisa: 29) “ Selling should be only by mutual consent”. (related by Ibn Hibban, Ibn Majah) “ Do not sell what you do not have (or possess)’. “ Allah and His messenger prohibited the trade of intoxicants, dead animals, pigs, and idols”. ( related by Al- Bukhari and Muslim)

Basic Concept of Trade ‘Iwad (counter value) Ghorm (risk) Kasb (effort) Daman (guarantee)

Conditions for a valid sale Halal products Ownership of commodity Existence and possession of Commodity Valid contract

Haram Trade Habali-il-habala Musabada ( fresh for dry date) Muhaqala (sale of wheat in ears) Selling of animated pictures Sale of pigs/dead animals Mulaamasa Bay’ al -Ina

Types of Invalid Sales Sale of a non existent object Sale of undeliverable goods Sale of liabilities(including debts) Sale of liabilities with a deferred price Sale of IOUs

BASIC PRINCIPLES OF IF It is based on the following principles: Prohibition of RIBA Application of AL-BAY’ Avoidance of GHARAR Prohibition of MAYSIR Prohibition from HARAM TRADE

RIBA Definition of Riba Types of Riba Prohibiting Dealing in Riba

Definition of Riba The lexical meaning of “riba” is “increase”. Allah (SWT) said: “But when we pour down rain on it, it is stirred to life, and it swells (rabat){22:5}. Thus, the growth that comes forth from the ground is labelled as riba. The definition of Riba covers both riba al-nasi’ah as well as defective sales.

Prohibition of Riba. Riba is forbidden in the Quran, as stated in the verses {2:275-279}: Those who devour usury (riba) will not stand except as stands one whom the Evil One by his touch hath driven to madness. That is because they say: ‘trade is like riba’, but Allah hath permitted trade and forbidden riba.

Prohibition of Riba Contd. ‘O you who believe, fear Allah, and and give up what still remains of riba, if you are believers. But if you do not, then take notice of a war from Allah and His messenger but if you turn back, you shall get your capital sums without increase or decrease.{Q2:275-276 & 278-279}

Prohibition of Riba ‘Ibn Masud narrated that “the messenger of Allah (saw) cursed the one who devours riba, the one who pays it, the one who witnesses it, and the one who documents it”. Riba is like committing Adultery 36 times after the advent of Islam.(Ahmad) Riba is 72 degrees of (evil) the least of which resembles committing adultery with ones mother (Ibn Majah)

The Prophet (SAW) also says: ‘There will come a time for people when they will consider riba lawful by means of trade’. ‘If you sell to one another with inah , hold the tails of cows, are pleased with agriculture, and give up jihad , Allah will make disgrace prevail over you and will not withdraw it until you return to your religion’.(Abu Dawud) ‘There will come a time when people will eat riba even the one who will not eat it may not spare its dust’.

Types of Riba Riba al-nasi’ah(Delay Usury): this was the only type known to pre-Islamic Arabia. This is the riba collected in compensation for deferring a due debt to a new term of deferment.

Types of Riba Contd. Riba al-buyu(Excess/Trade Usury), :It is also known as riba al-fadl, which is the trading of one set of goods that are eligible for riba for another set of the same goods, with an increase of one compensation over the other.

Riba al Fadl The prophet (SAW) states this type of transaction is prohibited in six items: “Gold is to be paid for gold, silver for silver, wheat for wheat, barley for barley, dates for dates and salt for salt, like for like and equal for equal and payments is to be made hand for hand. The prophet also states, ‘if this classes defer, then sale as you wish, if payment is made hand to hand.’

Islamic Finance Options MUSHAARAKAH(PARTNERSHIPS) MUDAARABAH MURAABAHAH IJAARAH DIMINISHING MUSHAARAKAH SALAM ISTISNA’

Mushaarakah This refers to partnerships, which involves partners sharing in provision of capital, as well as profit and loss. Generally speaking, the profit and loss sharing is based on ratio of invested capital. It helps to dissipate risk among partners while facilitating a large capital base for the project. A lead partner may head and be paid his wages.

Mudarabah This refers to silent partnership, where an investor (rabb-al- maal) partners with an entrepreneur (mudarib) in a business venture. The rabb-al- maal funds the venture fully while the mudarib manages the venture. Profit sharing ratio is determined ab initio. In event of a loss, the mudarib losses his efforts while the rabb-al-maal losses his funds.

Murabahah Cost Plus Sales It refer to a sale where the buyer and seller are both aware of the initial price, profit margin and requires the price be fungible. It is a form of trust sales. It is used mainly to finance purchases of items like cars, business equipments etc It is usually a two stage process requiring a request to purchase an item and then a resell to the client, with a profit margin and repayment in instalment usually.

IJAARAH Lease This refers to the transfer of ownership of permitted usufruct for a known period in exchange for a compensation.i.e.to give something on rent. This is not a form of sale However, an approved form of sale is the Al Ijaarah thumm al bay’(AITAB/AIMAT) AITAB is a lease with promise to sell. It differs from conventional hire purchase

Diminishing Musharakah (DiM) Another form of Musharakah, developed in the near past, is ‘Diminishing Musharakah’. In this concept, a financier and his client participate jointly either in ownership of a property, equipment, or in a commercial venture. The share of the financier is further divided into a number of units and

Diminishing Musharakah (DiM) It is understood that the client will purchase the units of the share of the financier one by one periodically, thus increasing his own share till all the units of the financier are purchased by him so as to make him the sole owner of the property, or the commercial enterprise, as the case may be. It is widely used in house financing

SALAM Salam is a sale whereby the seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advanced price fully paid at spot. Here the price is cash, but the supply of the purchased goods is deferred. The buyer is called “rabb-us-salam”, the seller “muslam ilaih”, the cash price is “ra’s-ul-mal” and the purchased commodity is termed as “muslam fih”. For simplicity, I shall use the English synonyms of these terms.

SALAM Salam was allowed by the Holy Prophet (SW) subject to certain conditions. The basic purpose of this sale was to meet the needs of small farmers who needed money to grow their crops and to feed their families up to the time of harvest. After the prohibition of riba, they could not take usurious loans ,therefore, it was allowed for them to sell the agricultural products in advance

Benefits of Salam Salam is beneficial to the seller, because he receives the price in advance It is beneficial to the buyer also, because normally, the price in salam is lower than the price in spot sales. It is a viable tool capable of revamping the agricultural sector. It is a spectacular finance option capable of transforming the real sector of the economy especially the small and medium enterprises

ISTISNA’ Istisna’ is the second kind of sale where a commodity is transacted before it comes into existence. It means to order a manufacturer to manufacture a specific commodity for the purchaser. It is necessary for the validity of istisna’ that the price is fixed with the consent of the parties and that necessary specification of the commodity (intended to be manufactured) is fully agreed to.