The Global University in Islamic Finance
INCEIF
CIFP part 1
SH1002 Shariah rules in financial transactions
Bai Al-Arboon
Semester September 2010
Name: Abdirahman Sh. Mohamed Omer Dirir
Matric No: 1000366
Kuala Lumpur, Malaysia.
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Table of content:
Introduction ………………………………………………………………………… 3
The definition of bail al-urbun………………………………………………………4-5
View of the scholars on the application …………………………………………….6-9
The basic shari’ah ruling …………………………………………………………10-11
bai al-urbun and other contract………………………………………………….12-15
The current practice of the application in Islamic finance……………………..16-17
Comparing Features of the Short Sale and Arboon Sales…………………………18
Conclusion …………………………………………………………………………….19
References …………………………………………………………………………….20
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Introduction
Islam is not only a religion in the ordinary sense of the word, but a complete system of life.
While other religious codes provide guidance only for the relation between man and his Creator,
Islam guides man in his relationship with God, and gives him the norms which govern his
temporal existence, since Islam is concerned with the spiritual, political, social economic, moral
and all other material aspects of the human being.
On the other hand, Shariah Law encourages Muslims to perform activities known as Muamalat
or transaction, which is confine to Muslims and it is open to practice by non Muslims.
There are more different types of Islamic transactions which basically allowed from the Shariah
law, at same time there are certain business transactions which considered unlawful in Islam and
cannot be carried out in an Islamic bank. For example trading in alcohol, intoxicating drugs,
gambling or producing pornography are contrary to Islam.
Bai-al-urbun is a one of the sale that argued between scholars, some of them they allowed while
others are prohibited, and each of the scholar have a evidence to proof their idea.
It refers to a sort of transaction through which a person who wants to purchase commodity in
future, will pay percentage of cost at present time and at determined date if he purchase the
commodity he pays the remaining cost at the time of settlement. If he does not purchase the
commodity, he cannot get back the initial payment because he did not fulfill his promise.
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Concept
There are types of sales which are suspected for most of the people, because of some scholars
they allowed while others are prohibited. And bai urbun is one of them.
Bai Urbun is sale contract which a small part of the price is paid as down payment/deposit, by
the buyer, which the main objective for remaining price is to exchange in a future date. In the
case the buyer perform the contract, that means the amount of urbun will be a part of the price,
but if the buyer did not execute the sale , he will loss the down payment, which is considered a
gift to the seller.
The definition of Bai Al- Urbun
The literal meaning: there are more than sex different ways for the Arabic word which is
similar to the down payment like urbun, Al- arboon, urban, arbun, arban, but the most usefully
and practicable are (urbun, Al- arboon) which is also nearly the linguistic of Arabic language.
As a technical term: Urbun has defined into more than one definition from different schools of
thought and even classical and present scholars. In the beginning we choose the definition of
urbun in a view of four Islamic juristic scholars. What they mentioned in their books, also I will
discuss some definitions of group scholars according at present time. (1)
First: the definition of Hanifa
The man has to buy the commodity and pay darahim to the seller, so if he accepts to take the
commodity the darahim will be part of the price. But if he didn‟t perform the sale the darahim
will be recover from him
1
) bia al-urbun in the light of Islamic law, abu hissam al-din al-darfawi, p (3-5).
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Second: the definition of malikia
Imam Maalik said (the man has to buy slave or fledgling then he says to the one he bought from
him, I will give you a dinar or a dirham or more or less if I took the good, and the one I gave you
is a part of the price‟s item. But if I left the commodity the amount I gave you is yours.
Third: the definition of shafia
To buy a good (buyer), and to give him (seller) darahim to be part of the price if the buyer satisfy
the commodity otherwise it will be gift.
Fourth: the definition of hanabila
To pay after the contract a small amount and to say if I took the commodity I complete the price
of the item, if not the amount is yours.
Contemporary definition
Islamic Fiqh Council defined (selling the good to the buyer with paying a sum of money to the
seller, that if he takes the item will be calculated the amount of the price, but if he left the amount
will belongs to the seller).
Dr.abdirsaq Al- Sanhuri defined Urbun is the price of using the right to change a contract for the
purchase or lease, where by the two parties agreed to appoint this price, So to have right to
abandon his commitment to such contract.
Sheik Sadi Abu Geab said: It is what the buyer accelerates with the price, and if he agrees it will
be calculated among the part of sale, otherwise the seller will deserve it.
The definition where by transmitted from our classical scholars actually it is definition by
example, and it gives us a form of forms of urbun, also that is suitable for their great works. I can
say to have the full and complete definition may included on three attributes:
1- being inclusive.
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2 - as a deterrent.
3 - Being a short in words, devoid of padding.
Perhaps the nearest definition for the ex-scholars is what Bahooti defined urbun saying: «to pay
after the contract something by saying: if I took the good I complete the price, otherwise it is
yours »
The selected definition:
Bai al-arboon: the buyer has to pay sum amount to the seller after the contract, if he took the
good it considered as part of the price, but if he didn‟t take the amount will belongs to seller.(2)
View of the scholars on the application
Jurists differed in opinion regarding this type of sale, so there are two main opinions:First: the team forbids this sale
Classical jurists differed over the legal status of this contract, most of them forbidding it based
on a Prophetic tradition (which referred to the transaction under the name bay ˘ al-urban).
Although that tradition was deemed no authoritative, because of missing links in its chain of
narration, most classical jurists still deemed the contract forbidden, because of two thing:1- In this sale there is a gharar, because since the seller does not know whether or not the buyer
will conclude the sale. Moreover, they argued,
2- the potential seller gives the potential buyer in this contract an option (in contemporary
parlance: a call option), but if the buyer proceeds to exercise that option, the down payment
counts toward the price, and the seller would thus not have been compensated forth option.
2
) bai al- urbun and the current application, Ali bin Muhammad bin Hassan Al-Zayli, (P 10, 11, 12).
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3- Some classical jurists have clarified that included option for the case of urbun should be
properly compensated. It is in this regard that they ruled that the seller is compensated only if the
buyer did not exercise his right, and even that may not be sufficient compensation for the time he
had to wait, during which he was not able to sell the property and benefit from its price.
Evidences of this group:
Most of jurists said the bai al-urbun is prohibited like shafi, malik, abu hunifa, ishaq ibnu rawia,
ibnu Abas (Allah blesses him), al – Hassan and others.
The evidences or proofs of this group are from the Quran Al- Karim and Sunah Al- Sharif. Here
on below explanation of their evidences:1- from the Quran Al- Karim
Al- Qurtubi said in his Tafseer (5/150): it is consuming people‟s property with illegal and bai al
irban considered as a part of this action. This does not work and not allowed for scholars in Alhijaz and Al- Iraq , because it is a matter of selling gambling, ambiguity, risk, and eat the money
unlawfully without compensation or gift and that is invalid unanimously.
Abu hayyan said :( unlawful is every way which Shariah not allowed, so bai al-arboon include
2- from Al- Sunah:
The hadeeth which Amar ibnu Shui‟ab narrated from his father and from his grandfather, that our
prophet peace and blessing be upon him (prohibit bai al- irban). Also the prophet peace and
blessing be upon him said: (it is not allowed for salve in sale and two conditions in a one sale)
narrated by five scholars.
3
(3)
) bai al-urbun, Dr. Afiif Hamad, University of al-qudus, 2007, p (4, 5,6).
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Second: the team allowed this sale
Islamic past jurists are allowed bai al-arboon, like Saidina Omar Al-Khattab, Abdilah ibnu Omar
Al-Khataab, and some from tabi‟in like Mujahid, Ibnu Sirin, Nafi bin Haris, Zaid bin Aslam and
the Hanbali school . They considered it permissible based on the practice of Saidina Omar AlKhattab. Also Imam Ahmed has mentioned that there is no problem in bai al- urbun because of
Khalifa Omar has practiced and allowed it.
Evidence of this group
1- from the Quran Al- Karim:
In surah Al-Baqarah: verse (275), Allah says: (Allah has permitted trade and prohibited interestriba-). This verse is general for all different kinds of sale, either there is clear evidence from
Quran and Sunah which prohibit the sale. For the case of bai al-urbun we don‟t have correct and
strong evidence which prohibit bai al-urbun, so the sale will stay under permissibility.
2- from the Sunah Al- Sharifah:
The hadeeth which sahabi Hassan Said bin Aslam narrated from our prophet Mohamed peace
and blessing be upon him said: (The Messenger of God was asked about down-payment sale (alurban), and permitted it. This hadeeth is sender (mursal Hassan), and it mursal to Hassan Zaid
bin Aslam.
The second proof is hadeeth which narrated Nafi‟ ibn „Abd Al-Harith: “That he bought for Umar
the jailhouse building from Safwan ibn ‟Umayya for four thousand Dirhams, on the condition
that if „Umar approves it, then the sale is executed, otherwise, Safwan may keep four hundred
Dirhams.” (4)
4
) bai al- urbun and the current application, Ali bin Muhammad bin Hassan Al-Zayli, p ( 16-17).
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The third evidence is from some tabi‟in, among them Mujahid, Ibnu Sirin they don‟t see any
problem with permissibility of bia al- urbun. For the view of Ibnu Sirin there is no problem if the
buyer gives a down payment to other part.
Ibnu Sirin says: to the man renting the house or ship, if you bring to me with such amount the
good will is yours, otherwise it will be mine. So those are the senior of tabi‟n and jurists they
allowed taking in bai al urbun and dealing in it.
Ibn Al Qayem has found proof of the admissibility of this kind of contract in the statement of Al
Bukhari who quoted Ibn Sirin when he said: "A man told the operator of a caravan I would like
to join your passengers, but if I did not depart with you on a certain day you would be entitled to
a sum of one hundred Dirhams. When he did not travel on the set date, he willingly agreed to
comply with the condition." Such contract is deemed binding upon the seller who has no power
to abstain from executing it. The buyer, however, has the option to buy within the mutually
agreed period.
in this sale Ahmad ibn Hanbal believed that the practice of bai al-urbun is permissible, also the
majority of jurists of his time had different opinion, but he depend on the prophetic traditions.
The scholars of tradition believe that hadeeth bin Aslam which premised bai al-urbun consider
with a weak chain of narration, also this narration was further supported by another weak
narration which Nafi‟ ibn „Abd Al-Harith narrated that Umar ibn Al- Khattab allowed down
payment toward the purchase of a jailhouse.
Ahmad deemed the narrated Hadeeth on urbun sales weak, however classical Hanbali and
contemporary jurists of most schools that bai al- urbun ( down payment sales) have become
general and essential for commercial transactions, it is also provides compensation towards the
seller for waiting and delays, in case the buyer take a decision to not perform the bai al- urbun.
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The basic shari’ah ruling
As I mentioned above there are two views towards the ruling of bai- al urbun which from
different jurists, some of them they don‟t allow bia al urbun like (shafi, malik, abu hunifa, ishaq
ibnu rawia, ibnu abas). While others they allow like (Omar Al-Khattab, Abdilah ibnu Omar AlKhataab, Mujahid, Ibnu Sirin, Nafi bin Haris, Zaid bin Aslam).
For the contemporary scholars like (Dr.Al- Qaradawi, Dr. Wahab Al- Zuhaily, Dr.Rafiq AlMasri, Dr. Al- Sanhoori) they allowed bai al- urbun regarding the condition that some of the
Hanbalis have ruled which is determined for the waiting period, because we don‟t know how
long the seller must wait.
The view of Dr. Al- Qaradwai in his analysis and comparison of the evidence for and against the
arboon sale, he has declared that he opponents of bia- al urbun have relied on a hadith which
premised on a condition that involve appropriation by the seller of the buyer‟s property without
any exchange.
As for the reliability of hadith which reported by Nafis ibnu Harith, Al-Qaradawi has mentioned
that this hadith is undependable, which this evidence was supported by other hadith recorded in
Nayl al- Awtar, which in really express that (Our Prophet Mohamed - peace and blessing be
upon him - was asked the ruling of bial al-urbun, and he declared it is permissible). But as I
mentioned above this hadith was said to be mursal, because its chain of transmitters includes a
weak narrator.
Therefore Al- Qaradwai observes it must be determined on rational grounds. As I noted on
pervious pages that Imam Ahmad Ibn Hanbal relied on the example of Saidna Umar ibn alKhattab and did not considered bai al-urbun to list into the category of unlawful appropriation.
This ruling is similar the state of al- Qaradwai, because he adds that this is more suitable to our
current times and in greater harmony with the spirit of the Shari‟ah, which seeks to remove
hardship and facilitate the people‟s convenience.
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It was asked Ibnu Bas the formal mufti in Saudi Arabia (Allah mercy him) about bai al- urbun:
he said in his opinion there is no problem with performing urbun sale - considering the correct
view of our scholars- if the two parts agree to take urbun before they complete the sale.
For the Wahab Al- Zuhaily, he said in my observation bai al-urbun is valid and permissible, we
can perform urbun sale accordance with ur‟f (custom), because the al- ahadith contained on this
matter (urbun sale) which each of the groups has bring as evidence , was not valid.
In my humble observation it is valid and permissible to use the urbun sale considering and
following the convention, since the Hadiths were used to argue on either side have all been
shown to be weak. So this is the decision of the Islamic jurisprudence Council (Majma‟ Al-Fiqh
Al-Islam) - the most prestigious international juristic body- in its eighth session in Brunei on the
first of Muharram, 1414 A.H.
In Malaysia, since there were two opposite views related to this method of trading. The Shariah
Advisory Council has declared that the idea of bai‟ al- urbun is permissible and it can be
progressed as an instrument in the Malaysia Islamic capital market. Actually it has been a
general practice in any population to deal with down payment (deposit) for their business
transactions, so the main concept is the two parties which involved the contract will not lose their
rights within certain given period.
This is not opposite to Shariah principles, because it is under urf sahih which means we have to
ensure the level of a muamalah is running perfectly. In its 13th meeting on 19 March 1998, in a
discussion on composite index futures contract, the Shariah Advisory Council passed a
resolution permitting bai` `urbun from the Islamic jurisprudence perspective. So they concluded
that bai al- arboon is permissible according the hadith of the prophet (peace and blessing be upon
him) which show us the prohibition of bai al- urbun is weak.
5
(5)
) Islamic finance, law, economics and practice, Mahmoud A. El-Gamal-Rice University- ,p (91-96).
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bai al-urbun and other contract
Murabahah:
Literal meaning of: Murabahah comes from the word ribh which means increase.
Technically, Murabahah is the mark-up disclosed to the purchaser as per the seller‟s purchase
price for a trust-sale of a certain specified asset, excluding monetary assets such as cash and
receivables. Murabahah sale may be contracted on cash or credit basis
The Bank shall provide funds for financing on the basis of an agreement for sale and purchase of
goods. The term for payment of prices for goods by which provide the customer to the Bank
shall be based on the terms agreed by the Bank and the customer.
The bank my finance Murabahah contract in part or all of the purchase price for the goods at
agreed quality specifications, if the bank delegates the purchase of the goods to customer as
(wakalah), the Murabahah Agreement must be executed after the goods in principle have become
the property of the Bank. Although the Bank my request the customer to make a down payment
or urbun upon signature of the initial agreement for the customer order for the goods.
When the bank requests from the customer to pay down payment or urbun, that means to ensure
if the customer ready to perform the contract by purchasing the good, otherwise the bank does
not need to be in a position where he has finished the purchasing of good, then the Bank will
find the buyer has already changed his mind.
In the case of down payment, if a customer refused or cancels to purchase the goods after making
the down payment, the real costs of the Bank must be paid from the down payment and the Bank
must return the surplus down payment to the customer.
However, if the down payment is insufficient to cover the loss borne by the Bank, the Bank may
demand further payment from the customer to cover the remaining loss.
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Mudharabah
Mudharabah is a contract which involves agreement between two parties, namely rabb mal
(investor) which provides 100% of the fund, and mudharib (entrepreneur) who manages the
project in accordance with Shariah principles.
Any profit from this investment will be apportioned based on the pre-agreed ratio at the
inception of the agreement. However, any losses will be fully borne by the rabb mal.
In Mudharabah muqayyadah or (restricted Mudharabah), the Rabbul Mal who provided fund will
have the right to choose specific investment or securities namely Discounted Islam Negotiable
Instruments (INIs) for capital protection and a basket of stocks for yield enhancement.
The Profit from Mudharabah investment is distributable between Rabbul Mal and Mudharib
based on an agreed profit sharing ratio. The 90% of the capital provided by the customer who
will get at least an amount that is equivalent to his/her initial capital 100%.
The other part of the capital is invested in equity basket (Al- Baraka Islamic Population Index)
through an agent using the Arbun mechanism.
The Arbun represents initial payment amount for the purchase price of the index. Upon maturity,
if the Bank has to pay the remainder of the purchase, the Bank will subsequently sell the index in
the market and the profit derived from the sale will be shared accordingly with the customer.
If the Bank revokes the purchase, the initial payment amount will be forfeited by the seller
(through the agent).
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Bai al-urbun and call option
Basically, contemporary jurists and Islamic financial practitioners they consider that the
similarity of this arrangement to a call option, also it is binding on the seller not on the buyer.
Really, some classical Hanbali jurists had even think that the option period should be determined
or to be fixed, otherwise the seller may have to wait for the possible of the buyer to decide
whether or not to perform his right.
Some scholars have justified the permissibility to options by drawing a parallel with bai alurbun. Urbun refers to a sale in which the buyer deposits earnest money with the seller as a part
payment of the price in advance but agrees that if he fails to ratify the contract he will forfeit the
deposit money which the seller can keep
The analysis of the difference between the down- payment sale (urbun) and the modern call
option is concluded that the letter cannot be synthesized from the former. However, some of
institutions have been performing call options under the name urbun, because they are ignoring
some of the finer legal differences between the two contracts.(6)
The comparison between the bai al-urbun and call option
Bay al-Urbun is a sale involving urbun (the earnest money). The seller does not return the urbun
in case the latter does not confirm the contract.
We can say the call option may be considered near to Bai„al „Arbun:1- in the sense that the seller does not return the premium or advance payment to the buyer
2- If the latter does not exercise the purchase option and the buyer loses the option premium even
if the option is exercised and the contract is confirmed.
6
) Islamic finance, law, economics and practice, Mahmoud A. El-Gamal-Rice University- ,p (91-96).
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3-In the case of Bai„al „Arbun, however, the option premium is adjusted in the sale price when
the contract is confirmed.
Bay al-tawrid
The best definition of this contract is the definition of sheikh. Abdulla Al Mutlaq :( It is contract
which one of the two contracting parties will undertake to hand over the other part to movable
things, with a particular price).
For the most common image of this contract is as following:
1- Each of the contractors must pay amount of money which calculated as basic of the proportion
of the price, to ensure each parties have to obligate the contract and to implement it.
The buyer must pay full amount to the third party, or to give the management of the market, to
ensure the implementation of the contract, and the seller will return the down payment to the
buyer. Finally the amount paid by the buyer will calculated as part of the total price.
2- To pay the price of the good with delayed until to delivered the good, or one part move to
other for the delays, as stipulated in the contract.
3- The buyer has to pay insurance, or guarantee or urbun, which is calculated as the price of the
item deferred delivery.
Based on what we discussed on above with the permissibility of bia al-urbun, and what our
contemporary jurists clarify that bai al-tawreed is allowed based on third image.
Finally, we can say the bai al-urubn is allowed based on the last image which the buyer pays the
urbun, and it considered as a part of the total price, if the deal is completed.
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The current practice of the application in Islamic finance
Bai Al-urbun stand for a mount which cannot be returned in case the buyer cancel to purchase
the good, on the other hand the down payment show us the intention of the buyer to purchase the
asset and is typically toward goods that will be delivered at a later date.
The next table or form will indicates the basic structure of bai al urbun which is practiced in
islam banks, although there are different practice which many banks use for bai al-urbun:-
This is a simple Bai al-urbun structure
1- Make down payment
BUYER
2- Deliver asset.
SELLER
3- Pay remaining purchase price
The urbun or down payment is part of the total price which agreed between the two parties
(seller and buyer), but if the buyer does not take the delivery asset there is no refundable to him.
let is simplify the steps which i mention in above :1- Buyer and seller agree on a price and the buyer pays a down payment or urbun, for example
he has to pay 15% of the total purchase price. In this contract two things must be specified and
agreed by each party (the asset and the delivery date).
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2- In the time of agreed delivery date, the seller delivers the asset to the buyer, at same time the
buyer collects it from the seller.
3- When the buyer delivered the asset, after ensure and check the asset, the buyer must pay the
remaining balance of the purchase price. For example if he pays 15% of the original purchase
price as urbun or down payment, the amount he has to pay is 75%.
Example of Bai al Arboon
Mohammed agrees to buy a motorbike form Ahmed‟s Bahran, who have a special motorbike
garage with specific amount 1,533RM.
The motorbike that Mohammed wants and agreed with seller is not new, and it has been in the
showroom for a few weeks. However the seller will check the motorbike if it is working before it
is collected, and to ensure that it is roadworthy.
Although the deal is done, the seller would like some sort of guarantee, because he does not want
to be in a position where he has finished all the work only to find the buyer who has changed his
mind. The seller requests from the buyer a down payment and the buyer will agree to pay sum
amount on 533RM. When Mohammed goes to collect the motorbike, he has to pay the remaining
amount which is 1,000RM.
If Mohammed had pulled out of the purchase, the 533RM would have been forfeited by the seller
to cover the cost of work he had done in getting the motorbike ready for sale. (7)
7
) see Al-Zuhayli (2003, vol. 1, pp. (99–100).
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Comparing Features of the Short Sale and Arboon Sales
1. In a Shariah-compliant Arboon Sale, stocks are purchased using an arboon contract so that the
investor actually takes ownership of the stocks. By means of the arboon contract, no stocks are
borrowed. In a conventional short sale, shares are borrowed under a “Master Securities Lending
Agreement” and then sold into the market. The Arboon Sale employs a “Master Securities
Arboon Sale Agreement” instead to ensure the investor‟s ownership of whatever stocks are later
sold into the market.
2. In a classical arboon sale, the buyer agrees to purchase goods by paying earnest money against
an agreed sale price. In the Arboon Sale, the prime broker agrees to sell stock to the investment
manager at the quoted (and therefore agreed) market price. The investment manager makes an
arboon down payment and assumes ownership of the stocks.
3. The Arboon Sale equivalent is structured with a specified “date of ultimate settlement of the
purchase and sale” at which time the unpaid portion of the purchase price has to be paid (the
“Closing Date”). This complies with the condition stipulated by the OIC Fiqh Academy that a
time period for payment of the remaining purchase price must be specified.
4. In the classical arboon sale, if the buyer does not complete the purchase within the time period
specified, he must return the goods and forfeit the down payment of earnest money. In the
Arboon Sale, if the investment manager decides not to complete the sale, he returns the shares
and forfeits the arboon earnest money.
5. In a classical arboon sale, once the purchaser has paid the arboon earnest money to the seller,
he is free to dispose of whatever he purchased. In an Arboon Sale, once the investment manager
has made a down payment equal to a margin account deposit, he may arrange through the prime
broker to sell the stocks purchased by means of the Arboon Sale to a third party at the market
price when the sale is concluded.
6. In order to close out the transaction in the Arboon Sale, the investment manager instructs the
prime broker to purchase the required number of stocks from the market at the market price.
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Using these securities, the investment manager terminates the Arboon and the Prime Broker
retains the earnest money. The same process is used in a conventional short sale.(8)
Conclusion
Islamic banks are using a special variant of Arboon in which the client pays small part of the
price up-front and payment of the price and the object of sale are both delayed, so different
scholars has different idea about transaction of bia- al urbn is allowed or not allowed.
But I mentioned above in Malaysia Shariah Advisory Council passed a resolution permitting
bai` `urbun from the Islamic jurisprudence perspective. So they concluded that bai al- arboon
is permissible according the hadith of the prophet (peace and blessing be upon him) which
show us the prohibition of bai al- urbun is weak.
That is similar what has been discussed by the Islamic jurisprudence Council (Majma‟ Al-Fiqh
Al-Islami) - the most prestigious international juristic body- in its eighth session in Brunei on the
first of Muharram, 1414 A.H.
8
) bai al- urbun and the current application, Ali bin Muhammad bin Hassan Al-Zayli, p 28.
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References
Arabic references:-
1- bia al-urbun in the light of Islamic law, abu hissam al-din al-darfawi, p (3-5).
2- bai al- urbun and the current application, Ali bin Muhammad bin Hassan Al-Zayli, p ( 10, 11, 12).
3- bai al-urbun, Dr. Afiif Hamad, University of al-qudus , 2007, p ( 4,5,6).
English references:-
1- Islamic finance, law, economics and practice, Mahmoud A. El-Gamal-Rice University- , p (91-96).
2- Financial Transactions in Islamic Jurisprudence Al-Zuhayli (2003, vol. 1, pp. (99–100).
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