The insurance contract
The commercial insurance contract is one of the unlawful contracts because of the gharar (risk due to uncertainty about the sold item) involved. The Messenger of Allah was reported to have forbidden the gharar-based selling. [Muslim on the authority of Abu Hurayrah, may Allah be pleased with him]
In such a contract, the customer does not know whether he will be exposed to an accident, in which case he would take more money than what he has paid to the company, or whether he will lose his money if no accident happens to him; and that is a great gharar which makes such contract unlawful.
Some people say that it is permissible, supporting their view by the fact that permissibility is the basic rule, and that the company takes money in return for the guarantee. It is the same as a man who says to another: "Follow this way, and if any harm befalls you I will guarantee the loss." Thus he bears the guarantee. It is said that this is the opinion of the Hanafi juristic scholars.
In refutation of this opinion, we would first state that this opinion is not held by the Hanafi juristic scholars. Rather, they hold that guarantee is due if the cause of the destruction of one’s property goes back to his being deceived until he follows the way of risk.
Furthermore, a guarantee according to Islamic Sharia depends on the following reasons:
2- Being a reason for damage, such as a person digging a well on the way of the people;
3- Occupancy by someone who is not a trust holder, whether the occupant is a transgressor, like an usurper, or not a transgressor, like a seller, since the item offered for sale remains in the hand of the seller and is guaranteed by him. That he is not a trust holder means that it is not subject to the ruling of the trust because the trust is not guaranteed in the hand of the trust holder so long as he does not commit negligence; and
In the insurance system, the company is committed to give recompense, not through any of those four ways, but according to the gharar-based contract signed with the customer; and this is impermissible.
Scholars have given an alternative to this, i.e. cooperative insurance.
What is cooperative insurance?
It is that a group of people vulnerable to similar risks participate, each with a certain sum of money, in a fund specified to pay compensation to anyone of them who suffers damage.
What is important here is that if the collected money exceeds the compensation given to the participants, they have the right to take back the rest. If the compensation is more than the money paid, they are required to pay more to cover the shortage. The ultimate goal is to cooperate in bearing the calamity. This type of insurance is permissible because it is based on the principle of solidarity rather than gharar-based selling.
Ibn Al-Qayyim said:
Pricing may be unlawful or fair and permissible. If it is to wrong the people and compel them, with no just cause, to sell things they do not like to sell, or prevent them from what Allah has made permissible for them, it will be unlawful. If it is to do justice between the people, such as to coerce them to compensate with the like of the value, and prevent them from what is unlawful for them, i.e. taking what is beyond the like of the value, it will be permissible, or even obligatory.
The bill of exchange
It is that somebody gives money to another person with the condition that the money is paid back in another country.
It occurs in three forms:
1- To give money to somebody as a debt to be paid to a third person in another country. In this case the traveler takes the debt.
2- The traveler himself gives the debt to somebody and takes money instead of it from a third person in another country, because he is afraid to keep the money with him on the journey.
3- There is no third party; however, the giver takes back the money from the same person to whom he has given it but in another country.
The ruling on this contract is debatable among the scholars. Some see it as impermissible under the pretext that it is a loan that yields an interest. But the correct opinion is that it is permissible since the interest here is not extra money.
The sale of debt:
There are two forms of selling a debt:
1- A person owes a debt of, say,1,0000 dollars, and thereupon he agrees with the debtor to receive a car as an immediate compensation for the debt. This is permissible without a problem.
This is the Fatwa given by Shaykh Al-Islam Ibn Taymiyah taking evidence from the hadith in which he (the narrator) said:
I went to The Messenger of Allah and said to him: "O Messenger of Allah! I sell camels at Al-Baqee‘ for dinars and take dirhams (instead) or for dirhams and take dinars (instead)." On that, the Messenger of Allah said: "There is no wrong to take (dirhams instead of dinars) by their price on the very day, so long as you leave each other with nothing unpaid between you."
[Ahmad and Abu Dawood]
2- A person owes a debt of, say, 1,000 dinars and agrees with the debtor to take, instead of it, 1,000 sa‘s (3 litres) of wheat a year later. It is impermissible according to the majority of the scholars, depending on the hadith in which the Messenger of Allah forbade the debt for debt sale (a delay for delay sale). [Ad-Daraqutni on the authority of Ibn ‘Umar, may Allah be pleased with them.] They argue that there is consensus among the scholars on the prohibition of the debt for debt sale.
But both Ibn Taymiyyah and Ibn Al-Qayyim opt for the permissibility. Ibn Al-Qayyim said in this issue:
There is neither a text nor consensus to support the prohibition of selling debt with debt. What is forbidden is to sell the deferred payment for (goods whose delivery is) deferred, according to which both parties undertake to deliver both (the sold item and the compensation) later.
Sale of vacation
It has many forms, including the following:
1- The owner takes money in lieu of vacation from the renter because he is in need of money to expand his estate, for example. This is permissible because it is a sale of a part of benefit which is separate.
2- The owner takes money in lieu of a vacation from the renter because the laws limit his right to rent his estate for a charge that is usually paid for similar estates. Instead such laws oblige him to abide by a compulsory charge, limit his right regarding evicting the tenant when the lease period expires; or because the values of rental fees have changed due to the monetary inflammation of the paper money. In such cases, the owner takes the money in lieu of vacating the premises as compensation. This is also permissible because it is considered a charge, thereby the renter is entitled to occupy the estate. It may also be considered a part of compensation in return for a benefit. Yet, it is a separate part.
3- The renter takes money in lieu of vacating the premises from the owner, and this happens in two cases:
a- In return for the renter vacating the estate because his lease has not ended yet and by so doing he takes compensation for what remains of it.
b- In lieu of the renter having given the money for vacating the premises to a previous owner, and the new owner asks him to leave the estate in return for taking what he has previously paid. This compensation is valid, under Sharia in both cases.
4- The renter takes money from a new renter in lieu of vacating the premises. This happens in two cases:
a- The lease has not yet ended, so, the new renter asks him to cede it to him and take compensation for what remains of it; and it is permissible.
b- The laws authorize the renter to force the owner to renew the contract every time it ends. So, a new renter comes and says to the owner that he is ready to cede this right which permits the renter to force the owner to renew the contract every time it ends and leave the estate in return for compensation. But this is impermissible because it is compensation for an illegal right.
Islamic banks benefit from the salam contract:
Salam is the sale of a specific item to be delivered later, as we have previously clarified. In this sale, the buyer gives the price in advance, on the condition that the seller undertakes to give him a particular commodity not available at the moment, within a specific term agreed upon between them. The time should be determined and the price delivered in full, on the spot, without deferring anything thereof.
The seller benefits by receiving immediate funding, and the buyer receives the commodity at a price more often lower than the time the commodity is offered in the market. For example, if one buys 100 sa‘s of dates by a salam contract, he receives them at a price lower than that by which they would be sold when offered in the market at the usual time. It is requisite that the salam contract should not be made on two items in which Riba An-Nasee’ah may be involved. In other words, it is impermissible to conclude a salam contract for exchanging gold and silver, or two different currencies because it leads to riba (interest).
Islamic banks conclude a salam contract in some cases, so, what are the relevant rulings?
1- The Islamic bank buys a commodity by a salam contract at a lower price. Once the bank receives the sold item at the time agreed upon, it deputizes a commercial company to market the commodity in return for a percentage of the profit. The merchants may do the process from the beginning: to pay the demanded prices in advance and receive the commodity at the specified time and market it in return for a percentage of the profit.
This is permissible because it is a deputation in return for a charge. However, there is only one problem regarding this type of sale, which is the multure (Qafeez At-Tahhan). It is a famous dealing through which a person gives a miller, say, a kilogram of barley to grind and agrees with him that he would take 0.25 of the resulting flour as a fee for the grinding service. Some scholars held the prohibition of such a practice, depending on a hadith forbidding the multure transaction. This hadith was narrated by Ad-Daraqutni but it is weak. They argue that, by doing this, some of the grinding that the worker has done will be due upon himself to himself. However, the correct opinion is that doing this is permissible since there is no evidence to support prohibition.
2- The Islamic bank buys an item from a particular merchant by way of a salam contract and deputizes him to market it by himself. This contract is risky because it opens the gate to riba. The dealing takes the form of funding through a loan in return for an interest, and the salam contract turns to be unreal.
3- The Islamic bank sells to the seller himself after the term expires, that is, when it is time to deliver the commodity, the bank sells it to the seller once again. This is permissible, regardless of being selling before delivery, provided that the new price on the very day of payment is equal or less than the previous price in order that the buyer would not receive profit for what he has not guaranteed. This opinion is chosen by Ibn Taymiyyah and Ibn Al-Qayyim, and one of the two opinions reported from Imam Ahmad . In this case, there is no suspicion of a loan leading to benefit. But, it may be argued that the bank receives no benefit if it sells with the same price or even less. In reply, let us say that it is impermissible for the bank to open a gate to riba through circumvention.
4- The Islamic bank sells the item it has bought by a salam contract before its delivery to a third party. This is impermissible because there is textual proof of the forbiddance.
5- Parallel Salam: it is that the Islamic bank sells to a third party other than the one with whom it has concluded the first salam contract, with a salam contract having the same specifications as the first. However, the contracted item is different. and the price is paid in advance. In this way, the bank gives the first party a sum of money and receives, from the second party, a greater sum of money in order to receive benefit. Once the time for delivery is due, the bank receives the commodity from the first party and gives it to the third party. Is this permissible? There is nothing wrong with this because they are two contracts that are approved by the Sharia and involve no Sharia proscription.
An important form should be mentioned here: is it permissible for the Islamic bank to transfer the debts due to it on some customers as a price for the Salam transaction in which case the price is much lower? Of course, this is impermissible because it is a sale of a deferred payment for (goods whose delivery is) deferred.
It means that the first party asks the second party for something that is not yet manufactured so that the second party manufactures it for him with materials brought by the manufacturer, according to particular specifications, in return for a specified fee.
What concerns us here is the parallel istisna‘, according to which a party concludes an istisna' contract with the Islamic bank, which goes to the manufacturers and makes a similar istisna' contract on the same item. Then, once the bank receives the manufactured item, it delivers it to its petitioner: Is this permissible?
Yes, it is permissible, provided that the bank's role in this process should not be unreal in the sense that the buyer does and also supervises the second istisna' process and then receives the manufactured item. This means that the bank's role is just to sign the documents because the deal turns into a loan for interest provided by the bank by way of trickery.
Conditioning that maintenance should be done by the renter
The majority of Islamic jurists see the condition, put by the owner, that the maintenance should be undertaken by the renter, as invalid, arguing that in this way a part of the rental fee will be of an unknown amount, and thus it is invalid because of the jahalah (ignorance) involved.
But a question to raise is that, in those days, the equipment and tools needed permanent maintenance, and it is very hard for the Islamic bank to do this. So, is there anything in the Sharia to prevent the bank, when renting them, from stipulating the condition that the maintenance should be on the renter?
Some scholars say that this is permissible, provided that both the owner and the renter should agree that the latter will undertake maintenance as a deputy on behalf of the former. Then, the costs will be paid by the owner or at least deduct them from the rental fee.
Rental which leads to ownership:
On 6th of Thul-Qa‘dah 1420 A.H., the Council of Senior Scholars issued a resolution which deems the contract of renting which leads to ownership impermissible under Sharia. The resolution was approved by a majority of 16 versus 3 of the 19 members of the corporation.
The problem with this contract is that it is a sale, rather than a rental contract, even though it takes the form of renting as a trick, so that the seller could be able to restore the sold item if the buyer fails to pay the price in full. They are, in fact, two opposite contracts in one contract, because if it is a sale contract, the item should not return to the seller, and if it is renting, the item should return to the seller. The ruling here is contradictory.
Furthermore, in this contract, the seller combines both the compensation and the compensated item in case the contract is repealed. This is impermissible because by this combination the seller will take more than his right.
It is said that the contract of rental which leads to ownership is, in fact, a contract of sale by installments. But even if it is so, the contract will have implied a condition which invalidates it, i.e. the seller's keeping the ownership of the item; and this contradicts the content of the contract. That is why it is invalid.
It is also said that it is a rental contract with a condition of selling at the end of the lease. However, it is not a real sale: it is rather a trick which ensures that the seller retains ownership of the item; and this nullifies the content of the contract. It is made in the form of renting with a condition of selling. Therefore, the item is not sold with its same price in the market.
The same applies if it is defined as a rental contract with the condition of gifting, because the gift here has a return, i.e. the item's price. This makes it a sale that is subject to the rulings of sale. The same also applies if the deal is given the description of a lease contract paired with a promise of selling or giving as a gift. This is so because the binding promise here is but a trick and circumvention.
In sum, the contract of renting that leads to ownership, which is common these days, is not valid. But, it is permissible for the merchant to sell the item for the market price at the end of the lease. It is also permissible to make it a sale contract and mortgage the item for its price, or put, on the buyer, the condition that prevents him from disposing of it until he pays all the installments. Some Islamic banks do this by writing on the car's license that it is under installments, and thus could not be registered in the traffic department in a name other than its owner until all the installments are paid. Then, the bank gives a certificate that the buyer has paid the installments in full.
These are some Sharia solutions as alternatives for the contract of renting which leads to ownership; and Allah knows best.
Muzara‘ah and musaqah (sharecropping):
Musaqah is to give trees whose fruits are edible to somebody to water and take care of in return for a specific share of the fruits. Muzara‘ah is to give a piece of land to somebody to cultivate in return for a specific share of the crops, be it half or one-third or so of the crops.
The Hanbali scholars of Fiqh regard musaqah and muzara‘ah as permissible if they are done in return for a specific share of the fruits or crops, arguing that the Prophet gave the land of Khaybar to the Jews to work on and cultivate and take half the yields. [Al-Bukhari, Muslim, At-Tirmithi, Abu Dawood, An-Nasa’i and Ahmad]
The majority of scholars base their objection to that on the fact that those are two unlawful contracts should the worker’s charge be a specific share of the fruits, taking their evidence from the Hadeeth in which the Messenger of Allah forbade mukhabarah or muzara‘ah according to another narration. [Muslim on the authority of Thabit ibn Adh-Dhahhak]
Hanbali scholars of Fiqh reply to this evidence by arguing that what is intended is the forbiddance to fix the fruits of a certain part of the land to the worker because this fixed part may not yield and others may produce fruits. The evidence is taken from the tradition narrated on the authority of Rafi' ibn Khadeej, may Allah be pleased with him, in which he said:
We used to work on the fields, more than anybody else of the Ansar. We used to rent the land for the yield of a specific portion of it. But sometimes that portion would yield fruits and the other not (or vice versa). So, we were forbidden (by the Prophet ) to follow such a system. [Al-Bukhari and Muslim]