Islamic Banking & Finance

Q - Why is interest banned in Islam?

A.C. Company
Pakistan

A - The holy Qur'an, (the book of Allah) makes it expressly clear in many verses that interest in any form is forbidden by Islam. In one of the Hadiths of the Holy Prophet (SAW) he holds any person who receives it, gives it, witnesses it and records it accountable.

In fact the Qur'an gives a warning that those who refuse this divine decree will face a severe punishment on Judgement Day.

Allah says in Surah al-baqarah (2), verse 275:

"Those who devour usury will not stand except as stands one whom the Evil one by his touch has driven to madness. That is because they say: 'Trade is like usury'. But Allah hath permitted trade and forbidden usury".

Surat al-nisa (4), verse 161:

"That they took usury, though they were forbidden, and they devoured men's subsistence wrongfully; We have prepared for those among them who reject faith a grievous punishment."

With regard to loans for consumption purposes, in times of need, ethical considerations demand that people should help each other without charging interest, because to charge interest amounts to taking advantage of a person's weaker economic position, which is against the Islamic spirit of justice and equity. Today, credit is mostly given for production purposes rather than consumption.

There are at least five reasons why interest is undesirable:

1) Transactions based on interest violate the equity of a business. In business the outcome of any enterprise is always uncertain. Yet the borrower is obliged to pay the agreed rate of interest, even if he makes a loss on his enterprise. Even if he makes a profit, the interest he has to pay may amount to more than the profit and this clearly militates against the Islamic norm of justice.

2) The inflexibility of an interest-based system leads to a number of bankruptcies and this results in loss of productive potential for the whole society as well as unemployment for many people.

3) A bank's commitment to keeping its depositors' money safe as well as paying them a fixed amount of interest makes banks anxious to recover their principal as well as the interest. Thus more loans are provided for those who are already successful, while potential entrepreneurs are prevented from starting up.

4) The interest-based system discourages innovation by small businesses. Big businesses can risk trying out new techniques and products because they have reserves of funds to fall back on if the new idea does not succeed. Small businesses cannot try new things because they would need to borrow money on

interest from banks to do so and if their ideas failed, they would have no way of paying back the loan or the interest and would be bankrupt.

5) With the interest system, banks have no interest in a venture except in so far as there are possibilities of recovering their capital and earning interest. Any business plan put to them is judged only on this criterion.

Q - Please inform us if it is lawful to seek payment before the delivery of a leased object?

A - Firstly, It is essential to consider the contract for the purchase of items separate from the lease contract owing to differences in the requirements and the rules particular to each contract.

The initiation of a contract to import items that stems from an understanding of the presence of a lessee for those items and his/her determination to lease them must be limited to the motivation or the reason (for the same) which happens to be that mutual promise. This, however, should not lead to confusion with regard to the duties of each party or to ambiguity with regard to their responsibilities.

The contract to purchase items is between the bank and the importer. Everything connected to the contract, like responsibilities, payment, and results becomes the responsibility of those two parties. The contract to lease is between the client and the bank. Likewise, the responsibility of the lessee to make payments stems from his taking possession of the item(s) leased to him, which constitutes the subject of the lease contract. The responsibility does not stem from payment of the amount financed either in advance or later on. Rather, that is a matter that concerns the bank, and the bank is to bear it on its own. So, before delivery of the items (in part or entirely) there is nothing to justify the right to receive payments. This is because the lease contract is the contract that is subject to time, and no rent will be due merely because of the contract, but rather as a result of the subject of the lease being made available. Even so, rent payment may be made in advance when availability is ensured for the entire period of the lease, even before the lease usufruct is exhausted. Still, the important thing is that the rent be countered by the usufruct, and this is not possible before delivery of the leased item.

Secondly, the rent payment must be known exactly, with regard to the amount and the due date. An indication of the same, by saying that it should represent so much profit, is not acceptable. This may be no more than an indication of how the rent is to be calculated, and there is nothing wrong with that. Even so, it is essential that the rent be specified in the contract itself, far removed from any mention of profit.

Q - What is the Shariah position in regard to an Islamic Bank making deposits in foreign banks, and then using the interest that accrues from such deposits for purposes like training or research and development?

A - Muslim may not deposit in a foreign bank. However, if necessity leaves no other recourse, or if circumstances otherwise compel him/her to do so, and then the deposits earn interest, the interest may not be benefited from by the individual Muslim, or by the Islamic Bank (if the bank makes the deposits). Nor may such earnings, if spent in charity, reduce Zakat liability. Nor may they be used to settle debts. At the same time, however, the earnings should not be left at the disposal of the foreign banks so that these may grow stronger in opposition to Islam and Muslims. Rather, such earnings should be withdrawn and then spent on the general welfare of the Muslims. Such earnings may not, however, be spent on the construction of mosques because only pure and lawful earnings may be used for that purpose. The reason for this is that leaving those earnings to the bank may become a factor in strengthening the enemies of Islam. At the same time, it is unlawful to destroy the earnings because the destruction of wealth is unlawful.

Regarding the proposal to use the earnings for a research and training institute, that may certainly be considered to be in the interest of the general Muslim public, and is therefore a lawful recipient of those earnings. This is certainly better than leaving the money to the foreign bank, or destroying it.

Q - Does the Islamic Development Bank offer any type of financing?

A.I
USA

A - The Islamic Development Bank (IDB) does offer financing with a view to promoting intra trade among the Islamic countries.

The IDB and some Islamic banks and financial institutions have established an "Islamic Banks' Portfolio to achieve these objectives, besides serving as the nucleus of an Islamic financial market.

This Portfolio's main objective is to promote and co-finance intra-trade and instalment sale. It is also an invitation to participate in the promotion of trade links and exchange of benefits among Muslim countries.

The (IDB) manages the operations of the Portfolio as a "Mudarib" according to the Regulations of the Portfolio and decisions of the "Participants' Committee", by making use of its own facilities and human resources and the outside assistance of experts in Islamic Shariah, the Securities Market and other relevant technical fields, if necessary.

The assets and liabilities of the Portfolio are completely separate from those of the IDB. Its accounts are independent from the Bank's ordinary, accounts and are audited every quarter of the Hijra year by two external auditors. Net profits are distributed annually to participants. The resources of the Portfolio are mainly oriented to exporters and importers within the private sector, besides the possibility of financing operations of the public and government sectors.

The different types of financing the Portfolio are involved in are:

Direct Financing - This type of financing is provided only from the Portfolio's resources and within the beneficiary country's ceiling. There is a financing contract between IDB as Portfolio Manager and the beneficiary.

Joint/Parallel Financing - The Financing takes place upon joint agreement among the donor institutions, but there are separate agreements between each party and the beneficiary due to differences in mark-ups, repayment periods or any other terms and conditions.

Syndication - This takes place under the management of the Bank/Portfolio, which invites the co-financing banks and financial institutions.

There are two agreements: (a) a "Mudaraba agreement between the Bank/Portfolio and the Financiers; and (b) a financing agreement between the Bank/Portfolio, as Mudarib, and the beneficiary.

Modes of financing

To finance operations submitted to it, the Portfolio adopts Shariah-compatible modes of financing like:

Murabaha: It is a sale contract at a price considered as the capital, i.e. cost price plus a specific profit based on the fact that the party making the purchase order is getting ready to purchase the item he ordered. The first contract which proves the ownership, has to become effective before the second contract can enter into force and by virtue of which ownership of the sold item is transferred to the party making the purchase order. The maximum period for this mode of financing is 18 months according to the type of commodities, which are mostly intermediate and consumer goods.

Salam: This represents a purchase or sale contract of goods or products to be delivered in the future with advance payment of the price according to Shariah Rules, which stipulate that the price and maturity period should be known, and the quantity as well as quality of the sold item should be defined. The maximum financing period here is 18 months, according to the type of commodities which are mostly intermediate and consumer goods.

ljar (Leasing): Under this mode, any asset owned by the Portfolio is leased upon the order of the lessee who finally owns the item after he settles the final instalment of its price. The maximum period for this mode of financing is 7 years, according to the type of commodities which are mostly machinery, equipment and capital goods.

Instalment Sale: This involves the purchase of a commodity upon the request of a beneficiary and re-sale of the item to him, with payment of the sale price in quarterly or half-yearly instalments. Ownership of the asset is transferred to the purchaser upon its arrival at the port of the beneficiary country. The maximum period of financing under this mode is two years and the commodities are mostly intermediate or capital goods.

Equity: The Portfolio may have equity participation in the capital of Islamic financial institutions as well as industrial, commercial and agricultural corporations.

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Q - My question relates to the Islamic unit trust fund, what is its concept and what investments are utilised by the trust?

N.M
Malasysia

A - A unit trust is an investment vehicle which normally suits all categories of investors in the medium and long term periods. In the short term and specialist categories, market volatility is more relective. It is certainly one of the most efficient and cost effective ways of participating in the market. What makes it compliant with the Shariah is that the risks and rewards are shared by the investors who employ the expertise of the professional managers.

There are three important factors which are involved in Islamic unit trusts, western investrment expertise, islamic finance expertise and Shariah guidelines provided by Islamic religious scholars. This way individual Muslim investors, Islamic corporate bodies and financial institutions can participate in the international financial markets. Islamic unit trusts focus mainly on equity investments in Islamic banks and financial institutions, stock markets of Muslim countries and companies managed under the Islamic system.

Investments used by Islamic unit trusts include: Mudarabah in which all the capital of a business is provided by the unit trust and the business expertise and management is the responsibility of the third party. Profits are divided between the third party and the Trust in accordance to the terms of the contract.

Murabahah in which the third party wishing to purchase equipment or goods requests the Trust to purchase the goods at cost and add a reasonable profit, which will accrue to the Trust.

Musharaka, which is a joint venture agreement by which the Trust advances funds, which added to a third party's funds produces a participation in the equity of the venture. Profits and losses are shared by the parties in direct proportion to their contributions.

Ijara and Ijara Wa Iktina which is a contract under which the Trust finances equipment, a building or entire project for a third party against an agreed rental, together with an undertaking from the third party to make payments to the Trust which will eventually permit the purchase by the third party of the equipment or project. The difference in value between the cost of the original finance and the total payments made by the third party would be for the benefit of the Trust.

Q - Is it ok to invest in the stock market (not options) by actually buying and selling stocks for companies that are NOT involved in haram deallings? And under what conditions?

M.A
Pakistan

A - Modern scholars of Islamic law have determined that, when certain conditions are met, it is lawful to invest in the stock market, and that the earnings which result, if any, will be halal. In fact, when you purchase shares in a company you actually acquire an equity interest, which means that you, as a shareholder, are actually a partner in the business. Then, as a partner, your equity is exposed to risk so that you actually share in either profits or losses. All of this equates to the Islamic concept of musharakah and is clearly halal.

Even so, there are several conditions that must be satisfied before one may invest in stocks. To begin with, one must be sure that the business of the corporation offering the stock must be halal. This means that the corporation must not be involved in any of the "sin" industries like entertainment, alcohol, pork, conventional finance, and so on. Of course, this is a vast subject with many details. In general, however, the broad guidelines are self-evident.

Scholars have developed another set of criteria for stocks, and these have to do with the capital structure of the corporation. These criteria are three, and their purpose is to determine the extent to which a corporation is involved in riba. In other words, these criteria represent tolerance levels for eligibility; companies that stay within the prescribed criteria, or screens, may be invested in by Muslim investors. On the other hand, if a company's capital structure is such that it goes beyond the tolerance levels, or falls outside of them, then it will not be lawful to invest in that company. Again, without going into details, the three financial screens are:

1. total debt divided by total assets must be less than 33%

2. accounts receivable divided by total assets is equal to or greater than 47% (where receivables = current + long term receivables)

3. non-operating interest income must be less than 10%

Of course, these criteria are the results of modern fiqh scholarship and should be understood to represent the current state of thinking on the subject. As such then, they represent interim tolerance parameters and not the last word on the subject. In recognition of the sensitivity of the subject, it is recommended that Muslim investors place their money in Islamic mutual funds that are professionally managed and have the added guarantee of a qualified Shari`ah Supervisory Board.

In fact, the importance of such a Board cannot be underestimated. Obviously, there is the matter of determining which stocks qualify on the basis of the criteria outlined above; and such decisions will best be made by a Shari`ah Board. Oftentimes, Shari`ah Suprevisory Boards will work hand in hand with money managers on issues related to these criteria. But beyond that there are several other areas of importance for Muslim investors. Perhaps most importantly, there is the matter of purification. From the balance sheets of corporations, if it is determined that the company has non-operating interest income (though less than 10%), then this must purified. The Shari`ah Supervisory Board will ensure that this is being done; it will also advise management as to what should be done with the funds collected through the purification process. Likewise, the Shari`ah Supervisory Board will ensure that the management of the fund will manage cash reserves in a manner that complies with Shari`ah teachings, and that the strategies of the fund, and its policies as well, are Shari`ah compliant. For example, many funds have defensive strategies which require that when the stock market is underperforming, or volatile, holdings there will be liquidated in favor of more stable instruments like treasury bills, or commercial paper, or bonds, or the like. A Shari`ah Board will see to it that such steps are avoided, and that only halal alternatives are chosen.

In short, if a Muslim investor is comtemplating a substantial investment in the stock market, s/he must be careful to do so prudently; both in terms of profitability and in terms of Shari`ah compliance. To ensure profitability, particularly in the long run, prudence dictates that the investor seeks out a reliable and established Islamic mutual fund. And to ensure Shari`ah compliance, the investor should be sure that the fund is supervised by a reputable board of Islamic scholars, i.e., scholars who combine knowledge of the Shari`ah sciences with a practical understanding of modern finance. Al hamdu lillah, the number of such funds is on the increase; and with the tawfiq granted by Allah, it is hoped that a variety of Shari`ah-compliant alternatives will soon be available to Muslims in need of financial services, including banking, insurance, and investments.

Q - This question relates to debtors defaulting on an Islamic finance based transaction. Specifically, most non-Muslims are concerned about the debtor defaulting in their payment. In the conventional system, defaults in payment of loans is punished by the imposition of interest for the time extension. However, under the Shariah, this is not allowed as it constitutes riba al-nasiah. Moreover, Islam encourages the creditor to give time extension when the debtor fails to pay the debt. How does the creditor discourage the debtor from defaulting? Can a penalty be imposed on the debtor for defaulting? What factors do you consider when deciding whether an extension of time should be given?

M.S
Pakistan

A - It is necessary to bear in mind that there are basically two categories of financing, loans and investments. Under loans there is basically one type that is provided for by the Shariah which is Qard Al Hasan - a loan granted on compassionate grounds free of interest or service charge. Only certain categories of people qualify. The other category includes mudaraba, murabaha, ijarah, musharakah etc.

Islam makes a distinction between two categories of defaulting debtors. One type is he who defaults by necessity, i.e. a person whose financial situation is such that with the best of intentions he simply lacks the means of paying. The Qur'an is explicit that this is the debtor who deserves compassion and to be given a grace period. It is required that the defaulter be given respite until he is able to pay. The Holy Qur'an expressly states:

"And if the debtor is in difficulty, grant a delay until a time of ease. But if ye remit it (the debt) by way of charity, that is best for you if ye only knew. (2:280)

This verse suggests that creditors should readily grant pressed debtors additional time to pay. Islam does not encourage a creditor to give an extension to every debtor who defaults. The extension is for debtors in genuinely dire straits.

As for the second type, the debtor who refuses to pay even though he has the

means, he is a perpetrator of injustice (zulm) who, far from deserving alms, exposes himself to possible punishment.

The Holy Prophet SAW condemns the person who delays the payment of his dues without a valid cause. He said in a hadith "The well off person who delays the payment of his debt subjects himself to punishment and disgrace".

The fulfilment of one's obligation under all contracts is a religious duty for every Muslim. Allah says:

"O ye who believe! Fulfil (all) your undertakings." (5:1) And He says:"...and keep the covenant. Lo! of the covenant it will be asked." (17:34)

So he who defaults deliberately contravenes Allah's law. The Prophet S.A.W. for this reason said in a hadith: " the defaulting (matl) of a man of means (ghaniyy) is wickedness (zulm)."

With regards to enforcement of the debt, the contract entered into between the Islamic financial institution and its client is legal and valid and in the event of default the Islamic financial institution can exercise its right in court to enforce the contract based on a creditor and debtor relationship.Some Islamic jurists hold that that which is compulsory in religion is enforceable in law. Also there is a majority view that anything prohibited in the Shari'ah if committed can be punished under what is called ta'zeer, where the punishment is not specified.

On the penalty to be imposed on the defaulter, the Judge exercises his discretion depending on the nature of default. He can admonish, threaten, disgrace or even jail the defaulter and if necessary dispose of his asset to pay the debt. However, it is generally agreed by Islamic jurists that a monetary fine is not one of the options open to the Judge in this case as this would amount to a monetary penalty for delayed payment, which is riba or interest.

Some contemporary views suggest that such a fine is permissible if it is applied to charity as a deterrent, but this seems to some as, at best, doubtful in its validity.

On what measures an Islamic bank can take to protect itself from defaulting clients, firstly, Islamic banks operating in a non-Islamic environment will need to ensure that the laws of the land punish defaulters on commercial contracts or have deterrents as a fall-back. Secondly, and perhaps more importantly the onus is higher in an Islamic bank for establishing the character of the borrower, by obtaining a character reference, possibly a credit check of the client's past borrowings. The primary assumption is that this situation should not arise as every true Muslim should pay his debts when due as a religious obligation.

And Allah knows best

Q - If a buyer is unable to pay for goods he/she has ordered, is it lawful for the bank to purchase the goods from him/her by making the payments that remain? And may it then enter into a new contract with the client for a lease, purchase, or murabahah sale of the goods, on condition that the client repays the bank within a fixed period of time?

F.L
Malaysia

A. The Shariah Advisory Board's opinion on this matter is that if the new contract is concluded with the client for an amount greater than the previous one, the bank will have entered into an unlawful transaction. The Board further clarified that if the amount in the new contract is the same as the previous one, the bank will derive no benefit from the transaction, and there will therefore be no reason to enter into a new agreement, unless its purpose is nothing more than to help its client.

Q - I wonder if you have any information about Islamic banking and derivative instruments. This involves a foreign exchange deal with a client. The issue that arises is whether the client would be better suited to using currency options rather than simply fixing the exchange rate forward by using a forward contract. Is it allowed under Islamic banking law to use such an instrument? Are currency options in dealings allowed under the Shariah?

G.N
Dubai

A - Contemporary Muslim jurists are divided on the matter of forward currency contracts. They are generally agreed, however, on the impermissability of currency options. The general practice among Islamic banks is that they will agree in advance on the sale and purchase of foreign currency at a certain rate, with the understanding that the transacting will take place at a later date. Islamic law treats this arrangement as a promise, and several of the classical jurists held a promise to be binding. The caveat here is that if the promise is linked to anything that suggests a contract, such as a down payment, the deal will take on aspects of a sale of debt for debt, which is clearly prohibited by the Shariah

Q - I would like to get some clarification on an investment strategy (market neutral) that I wish to employ in a new Islamic hedge fund. The hedge fund will take a long position in one stock (buying) and taking an offsetting short position in another stock (selling) to neutralise the inherent risk. The short selling is not for the purpose of speculating but solely for hedging purposes and risk control purposes.

I am looking for some comments that have been made by Islamic scholars on the matter or if you can guide me as to whether such a strategy would be permissible under Islamic law to someone who can make qualifying remarks.

A.M
U.K

A - Short selling is based on an educated guess that stocks will go either up or down in value in the near future. Such a guess may be characterized as speculation, and there is nothing wrong from a Shari`ah perspective with speculation unless it involves ambiguity in the essentials of the contract (in which case it becomes gharar and will lead to the invalidation of the contract). Likewise, the strategy for managing risk by taking offsetting positions is one that is consistent with Islamic principles. But the problem in the strategy that you outline in your question is in the details of short selling.

Generally speaking, short selling involves the borrowing of stock and then their sale in anticipation of later repurchase at a lower price. The strategy is completed thereafter when the borrowed stocks are returned to their owner. Selling long is essentially the reverse of this process. The problem for Islamic investors is that if they are to profit from the sale of stock, they must own the stock. Under those circumstances, the advantages of short selling, the limited capital exposure and the capital gains leverage, are nullified. Even so, the strategy of taking offsetting positions is a valid one.

Q - In the recent past many conventional banking institutions have opened Islamic banking divisions within the same bank to extend Islamic products to their customers to attract this line of business which had proved profitable. In addition they also established banking relationships with other Islamic banks operating under the strict guide lines of the Sharia. The balance sheets of such banks reflect both conventional and Islamic banking products. Is it permissible for conventional banking institutions to intermingle in Islamic products to their advantage and whether the return on investments received by customers based on Islamic products through such conventional banking institutions are halal and permissible under Sharia.

M.C
Saudi Arabia

A - Before answering this question, a short introduction may be in order.

A number of conventional banks have begun to offer Islamic products. Some of these banks are Muslim owned and managed, and some are not. Contemporary scholars have cooperated with the Muslim-owned banks for two reasons; firstly, because the services and products they offer are halal, and secondly because they hope that if the Islamic operations of these banks are successful, then perhaps they will convert all of their operations to Shari`ah -compliancy. The cooperation of scholars with non-Muslim owned and managed financial institutions is based on their understanding that Muslims are presently in need of the experience and influence that these institutions possess. Thus, even though there is little likelihood that such institutions will ever convert all of their operations to comply with Shari`ah principles, the purpose they serve at the present time is to offer stability in serving the financial needs of Muslims individuals and organizations. Likewise, their presence in the Islamic investment sector lends the sector an important degree of credibility. Finally, these institutions are ideal vehicles for the training and education of a new generation of Muslim financial professionals.

Now, with regard to the question of whether or not the profits earned by the Islamic products offered by these banks are halal, the short answer is yes, the profits are usually halal. In other words, if the ways in which these profits are earned are known to be Shari`ah-compliant, then the profits will be halal. But investors should be careful. Conventional institutions have been known to take advantage of the religious sentiments of Muslims by marketing products that are Islamic in name only. The only guarantee against this sort of abuse is the presence of a reputable Shari`ah Supervisory Board. Some conventional banks have even attempted to abuse the institution of Shari`ah Supervisory Boards by

marginalizing their participation and limiting their access to the bank's dealings. As a general rule, however, the presence of reputable scholars on a Board will ensure that the products it offers are indeed Shari`ah compliant.
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Q - I have a money market account in a bank in the USA. Is this a lawful account from the Islamic point of view? I would also appreciate some information about what type of investments the money market is using?

Dr M.O
USA

A - In a traditional interest based system such as the one you are investing in, the money market becomes a means by which financial institutions can adjust their balance sheet and finance positions in these markets. Short-run cash positions, which exist as a result of imperfect synchronisation in the payment period become essential raw material for the presence of money markets. A money market in this case becomes a source of temporary financing and an abode of excess liquidity in which transactions are mainly portfolio adjustments and no planned or recently achieved savings need be involved.

Within the Islamic financial system money markets can be operative, provided they have assets which are eligible for this market. The existence of broad, deep and resilient markets in which financial intermediary assets or liabilities can be negotiated is a necessary ingredient. The basic raw material for the money market is the existence of pools of excess liquidity.

Further in an Islamic financial system, the liabilities that an economic unit emits are by necessity closely geared to the characteristics of its investments. The liabilities that financial intermediaries emit are expected to have nearly the same distribution of possible values as the assets they acquire. Also they must be flexible enough to handle cash shortage periods for individual banks based on some form of profit sharing. Thus given that debt instruments cannot exist, money market activities will have characteristics different from the traditional system.

Investments in the Islamic money market system include instruments that satisfy the liquidity, security and profitability needs of the markets while at the same time ensuring compliance with the rules of the Sharia, i.e, the provision of uncertain and viable rates of return on instruments with corresponding real asset backing. One principal activity of money markets in this system are arrangements by which the surplus funds of one financial institution can be channelled into the profit-sharing projects of another.
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Q - What is the Shariah ruling in a case where an exporter sends goods to the bank, offering them for sale either to the bank directly, or through the bank to another by means of agency?

M.A
Bahrain

A - There is nothing to prevent the bank from buying the goods for itself, or from selling them to another by acting as the exporters agent. When the bank buys the goods for itself it will have the right to sell them to any of its clients by means of murabaha or musawamah (a sale of bargaining), for cash or credit. The source of this ruling is the verse in the Quran that says: Allah has made sales lawful, but has prohibited riba (2:275).

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Q - What is the Shariah ruling in regard to the following transaction?

A company enters into a transaction with the bank to install equipment that the company owns for an agreed price; and then, in a separate transaction, the bank contracts with a contractor for the installation of the equipment for a certain price.

S.H
Egypt

A - From a Shariah perspective, the bank's undertaking such business is lawful as long as the two transactions remain separate.
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Q - Certain reservations arise with regards to companies whose shares are sold on credit, such as the company not being careful about lending with interest and borrowing from interest based banks. And that the company's holding is cash either in deposits in banks or in funds. The question for consideration, then, is whether or not it will be lawful to deal in the shares of such a company for either cash or credit?

O.A.M
Kuwait

A - There is no legal impediment to dealing in the shares of such a company on credit when the price is greater than the cash holdings of the company so that there will be something to match the cash holdings and the rest will be matched by the other assets. In answer lo the second part of the question, regarding the lending and borrowing on interest, if the majority of the company's transactions are of the nature of lending and borrowing on interest, then it will not be lawful to deal in its shares. However, if these transactions are only undertaken occasionally and do not constitute the focus of its activities, then it will be lawful to deal in the company's shares. The rationale for this ruling is that such dealings are sometimes unavoidable, and may therefore be overlooked.
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Q - A customer approached our company to buy merchandise and promised to buy it on a deferred payment basis. We made arrangements for the merchandise to be shipped. Before the arrival of the merchandise, we received information that the customer had financial problems and was indebted to his creditors, to the extent that he was under investigation by the courts. Our dilemma is, do we carry out our promise to him and deliver the merchandise (as agreed) thereby becoming a part of the court investigation? Or do we cancel delivery in order to protect our rights?

J.K
Indonesia

A - A promise, according to the entire community of jurists, is not legally binding. It is essential, moreover, to protect the wealth of the shareholders and depositors by not delivering the goods to a wanted person. In the event that a contract has been completed, and knowledge of the buyer's situation before delivery of the merchandise is revealed, no delivery should be made. This is because the seller is more rightfully entitled to the goods than the rest of the person's creditors, as the goods that were sold to him might well be confiscated and never recovered owing to the buyers bankruptcy.
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Q - May an Islamic institution lawfully finance a project to construct a residential building on land owned by its employees, and then sell the building to them for the cost of construction plus an agreed upon profit?

M.H
Saudi Arabia

A - Such an arrangement is unlawful for the reason that it represents a loan with profit and not a sale. This is because the project involves no profit that accrues lo either of the parties lo it even if it is called murabahah.
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Q - Are fees charged by a bank or finance house in return for services provided to patrons at the time of purchase, cancellation and changing possession (of cars), in accordance with the principles of the Shariah?

I.S
Pakistan

A - It is not lawful to take an amount in return for cancelling a sale because the business done by the bank or finance house in cancelling a sale, and all that follows, is in fact what the bank or finance house is supposed to do in its capacity as a party to the cancellation.
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Q - If a company sells merchandise for a delayed payment and seeks to retain possession of the goods as security until the buyer has paid in full, is this lawful?

M.A.I
Malaysia

A - Such an arrangement will be lawful only if both parties agree to it. In doing so, the buyer will be foregoing his right to take immediate possession of the merchandise, in return for the deferred payment. The goods may be considered security for the purchase price. If the goods are destroyed, it will be the responsibility of the seller, who is the pledgee, and who will pay either its value or its price, whichever is lowest.

The reason for this is because the hand of the pledgee on the security is the hand of the guarantee, because he was satisfied with the possession of the goods, as a guarantee that what he was owed would be paid. This opinion is based on the Hanafi school.

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Q - Is it permissible for a bank or finance house to open letters of credit for the importation of women's clothing, which may not be modest?

M.D
USA

A - Such clothing is not in itself prohibited. Rather, the prohibition is for its use in ways that do not accord with the Sharia, for example lewdness, or in the display of beauty to those for whom that display is not permitted. Since it is not possible to say with authority that the clothing will be used in ways that are not pleasing to the Almighty, it will therefore be lawful to open such letters of credit.
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Q - As a bank executive, my work takes me to different parts of the world, what is the lawfulness of consuming foods such as beef, chicken and other foods prepared with their by products in non-Islamic countries?

M.U
Ukraine
A - The general principle with regards to food products particularly in Jewish and Christian countries is that they are lawful unless there is reason to believe that they have been tainted by pork or anything else that is unlawful for consumption by Muslims. In Communist and atheist countries, however, the general principle is that it is unlawful to consume food products unless there is reason to believe that they are halal and have been slaughtered in accordance with Sharia teachings.
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Q - What is the Sharia ruling in regard to an advance received from a client in return for his/her binding agreement to buy goods from the bank and to be consistent in repaying his instalments. Further also that the amount advanced will be kept in a current account until such time as all responsibilities in regard to the shipment of the goods have been met.

Y.S
Germany

A - Such an advance given to the client is what is called `urbun, and is actually a price paid by the buyer in order that he may have the option for a certain period of time to either continue with the deal or pull out.

Where the buyer decides to continue with the deal, the advance becomes a part of the price. In the event the buyer decides not to go through with the deal, the advance becomes the right of the seller, and is forfeited by the buyer. Before the contract of sale is completed, or in cases of a pledge to purchase (such as Murabaha), the advance given by the purchaser is not called `urbun, nor does it have the same legal properties.

Rather it is an amount given by the purchase pledger so that if he fails to live up to his end of the contract, the amount advanced may serve to recompense the bank for its expenses. If there is a remainder, after the bank is recompensed, it will be returned to the client. If the advance is insufficient as recompense, the purchase pledger should pay the rest.

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Q - Is a transaction lawful, where a person wants to buy a new car from a Finance House by selling his used car to a third party who will then take possession of the used car and pay its price to the Finance House. Further, the applicant will then pay the difference and take possession of a new car from the Finance House, or the amount will be an advance. Finally, is it permissible if the applicant agrees to buy a car from the Finance House in return for the purchase of his used car by a third party?

L.U
United Kingdom
A - In the opinion of the Board, the first part of the question describes a situation similar to selling the used car to another company. Then the company pays its price to the seller of the car, or authorizes its transfer to whomever the seller wishes, like the Finance House for example. Then the patron agrees with the Finance House to pay the remainder in return for his taking possession of the new car. This form of transaction is permitted by the Shari'ah I and there is nothing wrong with it. In the second part of the question, the patron's agreeing to buy a car from the Finance House in return for the purchase of his used car by a third party, the patron's agreeing (lit. obliging himself) is not lawful. Rather, what is lawful is if the applicant buys a car from the Finance House and its price includes both the used car and an amount in cash, regardless of whether the sale takes place all at once or at a later time; but without specifying any price for the used car, or referring to it in the contract.
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Q - What is the Shari'ah ruling in regard to the issuance of certification for a client that states that he has a balance in his account for a specific amount when, in fact, he does not possess that balance?

A.S
Saudi Arabia
A - Certificates granted concerning account balances must be in keeping with the truth. If the patron has no balance in his account, he may be loaned a sum for his account and given a certificate to that effect.
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