Introduction to the study of Financial Transactions

1. Introduction to the study of Financial Transactions From the book: Reasons for prohibiting the financial transactions Edited and Compiled by Dr. Khaledbin Abdul-Aziz Al-Sulaiman4 Translated by : Dr. Hafiz Muhammad Afzal

2. Basic Introduction Topic 1 Includes: First: The Four Quarters of Jurisprudence Second: The most important theories of Financial Jurisprudence Third: The most important rules of Jurisprudence Fourth: The most important rules for Financial Transactions Fifth: The stages of studying the Financial Crisis

7. How to be sure that all procedures are free from •                  the legal prohibitions? Topic 2 Comprises of: • First: The meaning of the rule: (the origin of financial transactions are permitted), and the condition of their realization Second: the basic reasons of the forbidden transactions • Third: Limitations and Boundaries Fourth, the basic reasons of the prohibited transactions in detail

8. First: The meaning of the rule: (the origin of financial transactions • are permitted), and the condition of their realization From the mercy of Allah to his servants in the legislation of transactions is that the basis behind all the worship are fixed and permanent. Worship can not be enforced without evidence. The origin in financial transactions are always permitted; no prevention of financial treatment unless there is evidence. This means that a continuous rule of financial transactions is their permission, unless the evidence indicates prevention. The people have the right to choose for themselves the dealing they want and that they believe to be in their interests, but with the adherence to the ethical rules set by the Islamic Shari'a, which guarantees them to achieve their interests in the right form. In other words, what is required from both contractor is to ensure that their contract is abide by Islamic laws in the right form and this will contribute to enhance the credibility of dealing between people and taking care of the balance between individual and collective interests of the society

10. Third: Its bounded reasons The rationale behind these five reasons : All the legal prohibitions are due to one main reason, which is the reason of harm. Because all the rules and regulations of the Sharia were imposed to fulfill one main purpose which is to bring interests and benefits, and similarly all the prohibitions made by Sharia also were also made to achieve the main purpose - which is to removing evil and damage from the society.   Injustice: The general ruling of the Quran and the Sunnah is that all prohibitions leads to the achievement of justice and the prohibition of injustice; Based on the above, the condition of harm and injustice is the basis for all financial prohibitions. But there are other detailed and direct ramification in the ruling. All prohibited financial dealings are invalid unless meet the conditions of presence of usury, uncertainty and risk and fraud in them. And if some situations does not fit with these three things then these dealings must include the conditions of injustice in them, And if it is not present , then all prohibited dealings must be possessing some sort of harm. Because the just rulings imposed by Sharia can not forbid any dealing unless it consists of harm for the people (life) or for their wealth or for both of them.

11. Usury First: Definition of Usury Fifth: Contemporary Application Comprises of: Second: The proof of its Prohibition Fourth: The objectives behind Prohibition Third: Criteria

12. First: The definition of Usury • Usury(Linguistically) is growth and increase • Traditionally it means is an unjustified increment in borrowing or lending money, paid in kind or in money above the amount of loan, as a condition imposed by the lender or voluntarily by the borrower. • Meaning of addition • involves an exchange of unequal quantities of the same commodity simultaneously (Usury of excess). • The additional cost incur due to the postponement of one of the two commodities subject to exchange in which the shar'i law requires that they need to be exchange right away without any delay (Usury of postponement in sales) • the additional cost imposed on one of the contractors against the other due to postponement (Usury of debt)

13. Second: The proof of its prohibition • The Proof from Quran • But those who devour interestbecome like the one whom Satan has bewitched and maddened by his touch. They have been condemned to this condition because they say, "Trade is just like interest',whereas Allah has made trade lawful and interest unlawfu1.Henceforth, if one abstains from taking interest after receiving this admonition from his Lord, no legal action will be taken against him regarding the interest he had devoured before; his case shall ultimately go to Allah.But if one repeats the same crime after this, . he shall go to Hell, where he shall abide for ever (275) • Allah deprives interest of all blessing and develops charity;and Allah does not like an ungrateful, sinful person (276) • As to those who believe and do good deeds, establish the Salat and pay the Zakat, they will most surely have their reward with their Lord and they will have nothing to fear nor to grieve. (277) •  O Believers, fear Allah and give up that interest which is still due to you, if you are true Believers (278) • but if you do not do so, then you are warned of the declaration of war against you by Allah and His Messenger. If, however, you repent even now (and forego interest), you are entitled to your principal; do no wrong, and no wrong will be done to you. (279)

14. Proof from Sunnah : • The Prophet said: “Avoid the 7 sins …….” and he mentioned one of them (the consumption of usury) • There is nothing worst then usury in the financial prohibited dealings as it is the only sin that Allaah has resembled the person who takes usury of making war with Allah and His Messenger. • The usury has great evils, it destroys the society as a whole, and it is dangerous: it has long term negative consequences; and its real sense of negative influence on the society is almost non-existent. And when it gets strong in an environment, it brings financial crisis where money lenders are not only affected but the economy of the whole country get influenced too, so it is a slow killer of the economy as the cigarette kills the smoker body slowly. And because the negative consequences of the usury are dominant than its so called benefits, wise people always warn about it throughout history, and justified its wrong implications with strong logical reasoning.

15. Third: Types of Usury and their Criteria 2. Usury in Debt 1. Usury in Sales Definition: the one who buy wealth from usury And the wealth of usury consists of following 6 commodities or anything associated with: Gold, silver, floor , barley, dates, salt, And gold and silver shall include all that is costly. The other four categories are all related to the problem of consumption and saving Important note: the doctorine of Hanafi and Malki agreed to expand the circle of usury of delay in sales to include what is by nature far from the six famous commodities; they also prevented postponement between the two commodities of same nature. the increase imposed on one of the contractors against the other with respect to postponement. Criteria Types Criteria for usury of sales is due to one of the following rules First rule: If exchanged commodities get together in terms of (reasons of prohibition) and product nature, both the usury of delay and excess become are illegal.And the second rule: If the exchanged commodities are togetherin terms of (reasons of prohibition) and there is difference in product nature, only usury of delay is forbidden without usury of excess. The meaning of usury of excess:involves an exchange of unequal quantities of the same commodity simultaneously . Criteria for usury of debt: A conditional increase in one of the exchanged commodities based postponement. Accordingly, its scope is broad and includes any kind of commodities. This is the type of usury referred in the verses of the Holy Quran. Therefore, it is called "usury of Qur'aan", and also known as "usury of era of ignorance", "obvious Usury ", "forbidden usury from its origin " and also usury of debt and usury of delay. The last three names are more common. . Meaning of usury of delay in sales: the increase in the timing (delay) in one of the two articles subject to exchange in which the shar'i criterion requires that they need to be exchange on time without delay. • The increase in the usury of debt and usury of delay are dependent on the duration set at the beginning. Usury of delay in sale, however, is different from the two aforementioned type of usury. Here, the increase occurs due to the postponement of the commodity by one party which was required to be exchanged on time during the transaction.

16. Fourth: The objectives behind Prohibition • Among the greatest purposes of forbidding usury: is to prevent debtor from the negative influence of usury, the entire society, including the one who is creditor. One of the injustices on the debtor is thata wise person does not pay excess without a benefit, unless he is in a need. The exploitation of his need is the key injustice. The money lenders take wrong advantage of people's need for cash and provide them with cash with usury. There might be some so-called benefits of usury, but as it accumulates, it becomes more then what the needy person borrower, who receives no compensation in exchange for the delay. Postponement may be a temporary solution to his problems but in a way that makes the solution more difficult, and brings a severe injustice. • Among its injustice for society also is that that usury tempts the money lenders to generate money from the money without investing them in economic projects benefiting the community, and this makes money move away from the real value represented by the economic reality, resulting in financial crises in the economy which hits the whole country, and decision-makers are forced to sacrifice by taking more debt and to create new investment opportunities that will revive the real economy and to reduce the gap between economy and debt. • Among the purposes of the prohibition of usury of sale: it is prevented to block the way to usury of debts. This is due to dangerous nature of usury of debt and the severity of its evils. And among the reasons for usury of sale leading to usury of debt: is that If usury of excess is permitted, people will indulge in it and sell their commodities (with excess) through postponement. and this excess will be then similar to the excess of postponementand this is clearly usury of debt. And also, if usury of delay is permitted in sales, where the value of the exchanged commodity is equal and by Sharia laws, they have to be exchanged immediately, then the value for the amount to be offered on immediateexchangewould become less then the amount which would be paid in postponementand this is clearly usury of debt.

17. Fifth: Contemporary Application The application of usury are many including: • savings accounts with interest, • uncovered documentary credit, • bonds, • currency trading in the global currency market through margin purchase, • earning from SWAP rates, • and two-day stock clearings • and some applications on uncovered credit card such as: taking interest from the customer against deferment, • over charging the client for the actual cost of issuing the card, • taking cash withdrawal fees over the actual cost, • and paying the customer additional value for the commodity against the amount deducted from the merchant.

18. Uncertainty and Risk First: Definition of uncertainty and risk Fifth: Contemporary Application And this includes Second: The proof of its Prohibition Fourth: The objectives behind Prohibition Third: Criteria

19. First: Definition of Uncertainty and Risk • Uncertainty linguistically: situation where outcome is uncertain • It traditionally refers to the income due to chance where one party win and other loose

20. Second: The proof of its prohibition • Proof from Quran: Believers! Intoxicants, games of chance, idolatrous sacrifices at altars, and divining arrows are all abominations, the handiwork of Satan. So turn wholly away from it that you may attain to true success • Famous Hadith: The Prophet (ﷺ) forbade the type of sale which involves risk (or uncertainty) and a transaction determined by throwing stones. • There is a consensus of Islamic Jurist that uncertainty and risk in dealing is prohibited

21. Third: Criteria • The criteria for uncertainty to be instrumental (expressed in short language and writing): the contractual dealings with a lot of risk and uncertainty, if the contract is on authentic basis and it is not based on the needs. • The instrumental uncertainty is based upon four conditions. • Condition 1: High risk and Uncertainty:And this the important principle of uncertainty which come into our mind from Hadith where Prophet emphasized on it. • Condition 2:Uncertainty has to be in one of financial contract • Condition 3:Uncertainty is basd on an authentic contractual basis • Condition 4: The contract is not based on a need • .

22. Fourth: The objectives behind Prohibition Objective of Sharia in preventing the sales of uncertainty: to preserve the ties of brotherhood and love among the members of the Muslim community, to close the door of enmity and hatred, And to prevent as much as possible aspects of discounts. as the contract which is based on uncertainty confirms the discount. The objectives behind preventing the sales of uncertainty: And these are: to save one of the five necessities that is money. This is because allowing a Muslim to enter into high-risk transactions exposes his wealth to damage and loss, and the sharia law protects money and prevents all that leads to its destruction.

23. Fifth: Contemporary Application • Contemporary applications of uncertainty: • commercial insurance contract, • futures market in the stock exchange, • futures contracts, • sale and purchase of options, • and the public paid discount card.

24. Fraud First: Definition of Fraud Fifth: Contemporary Application Comprises of: Second: The proof of its Prohibition Fourth: The objectives behind Prohibition Third: Criteria

25. First: Definition of Fraud • Fraud linguistically: get others to fall into the trick • Fraud traditionally refers to the deception by saying or action to entice a contractor in the contract and to bear it. So it means that one deliberately influence the intention of one of the parties to the contract, so that the deception can be made through contract, and he goes for it in a false means, And if the contractor become aware of reality, he will not accept the contract. This influence and deception could be from one of two contractors, and could be from a third party, but at the behest of one of the two contractors. This deception may be due to either by word or action. • The difference between Aleatory and fraud: also aleatory has more significant impact on the contract than fraud as the objective ruling about aleatory contract is related to corruption of contract. While the fraud (and in particular the actual deceptive action) makes the arrogant contractor to choose between modification of the contract in such a way that the outcome of deception is minimal for him. .

26. Second: The proof of its Prohibition • Proof from Quran: My people! Give full measure and weight with justice, do not diminish the goods of others, and do not go about creating corruption in the land. • They thus try to deceive Allah and the Believers, but they succeed in deceiving none except themselves and they realize it not  • Proof from Hadith: A person came to the Prophet and told him that he was always betrayed in purchasing. The Prophet told him to say at the time of buying, "No cheating.“ • It is narrated on the authority of Abu Huraira that the Messenger of Allah (ﷺ) observed: He who took up arms against us is not of us and he who acted dishonestly towards us is not of us. • }

27. Third: Criteria • Criteria for proven fraud: the prices are different in the sight of knowledgeable people • Conditions to be the proof for Fraud: • 1.A person should be ignorant of deception, and not having awareness • (2) The fraud is done by one or both of the contractor, or from some one else but through one of them. • 3. The fraudulent means were the part of decision of the contract. • 4 - The deception is hidden and invisible, and can not be easily accessible from the contract

28. Fourth: The objectives behind Prohibition The purposes of the shar'iain prohibiting the fraud are many: stopping the corruption\deception in the world, If it is made permissible to circumvent the people's wealth by deceiving, dishonesty and by corruption and by depriving them their rights, the infected goods will be common in the market,; the goods will spread to the people's food, drinks, clothes and transportation, and their lives become dangerous, And this will cause, ill people not to use quality products and services.Among the purposes of the Sharia in the prohibition of deception - also -: taking into account the interests of the general Muslim, and not to fall in the disruption of their belongings. Anyone who look for shortcut to become wealthy, even if this affect the general Muslim interest, and occupy their wealth by deception and dishonesty: This is the evidence of his selfishness and poor affiliation towards his religion, Muslim nation and his homeland. This is why when the Prophet (peace and blessings of Allah be upon him) stopped to a situation of cheating where the good food was placed on the top and the bad at the bottom. He condemned it to the best and described it as a fraud that leads to the defame of Muslims values, and indicates the poor faith; as Prophet said: (( He who deceives is not of us.")). Among the purposes of the Shariah in the prohibition of fraud is - also – to protect the interest of the deceptive person and to remove the damage that was concealed from him at the time of the contract.

29. Fifth: Contemporary Application • One of the contemporary applications of fraud financial • fraudulent commodity contract, • Fraud commercials and advertisements, • Fraud in electronic stock exchanges. This type is one of the most dangerous forms of deception, because electronic transactions are so fast and easy that they attract a large number of people who are easy to deceive. On the other hand, it is difficult to identify the person who initiate deception.

30. Fourth reason: Injustice First: Definition of Injustice Fifth: Contemporary Application Comprises of: Second: The proof of its Prohibition Fourth: The objectives behind Prohibition Third: Criteria

31. First: Definition of Injustice • Injustice linguistically: Unfairness, transgression of the limit, and placing the object in the wrong place • Injustice traditionally is the financial transaction which entails the taking of one of the contractor’s money without having any right on it

32. Second: The proof of its Prohibition There are many proofs for prohibition of Injustice: including From Quran: “Believers! Do not devour one another's possessions wrongfully; rather than that, let there be trading by mutual consent.  You shall not kill yourselves. Surely Allah is ever Compassionate to you” Prophet Said: It is not permissible to take the money of a Muslim except if he is fully content 

33. Third: Criteria The key criteria for injustice to be present in the dealing: (to occupy the money of others without the right). If there is no any other reason present (except the reason injustice) then it is also a prohibited dealing. While if the injustice appeared with another reason, such as with fraud the act of prohibition will be due to fraud and injustice. This leads to another question: What are the examples in which the problem of injustice arises only without the three detailed reasons? The answer: Examples are many: The first and second example: A man is not to undersell his brother, nor is he to fry to out haggle his brother." Example three and four: pricing, monopoly .

34. Fourth: The objectives behind Prohibition Among the legitimate purposes of prohibiting the financial transactions in which there is injustice: that injustice in all its forms has serious harm, and with its accumulation, it leads to corruption of the whole of life. On the other hand, justice is the basis of goodness and the strength of life for all mankind. Among the purposes of the prohibition of contracts that involve injustice is also that injustice leads to enmity and hatred among people, and leads to conflict and rivalry between them, because injustice is harmful, and a wise person will not harm himself in a way which may lead him to dispute in court to restore his rights. The tolerance of the oppressed may be affected by the persistence of the hatred in his chest, which may cause him to take revenge when the opportunity arises.In addition, bringing justice and the prevention of injustice is one of the most important legitimate purposes of financial transactions.

35. Fifth: Contemporary Application One of the contemporary applications injustice: Judgments for cash debts based on recession or hyperinflation. If a trader wishes to carry out a particular business, but there is a statutory condition that prevents him from doing that activity, he is exploited by another person due to which this trader has to registers the business in his name in return for paying the merchant a lump sum

36. Fifth reason: Harm First: Definition of harm Fifth: Contemporary Application Comprises of: Second: The proof of its Prohibition Fourth: The objectives behind Prohibition Third: Criteria

37. First: Definition of Harm • Linguistically it means opposite of usefulness, and the most important meanings: narrow and hated and harm and reduction in wealth and people • Traditionally it refers to financial dealings that promotes the harm for either of the two contractors either harm themselves or others upon the no, equal or more profit

38. Second: The proof of its Prohibition • The proof from Quran: but if they are more than two, then they shall inherit one-third of the inheritance,after the payment of the bequest that might have been made or any debts outstanding against the deceased, providing that the bequest causes no injury. This is a commandment from Allah; Allah is All-Knowing, All-Forbearing. • “Whoever harms others, Allah (SWT) will harm him; and whoever causes hardship to other Allah will cause hardship to him.” • ahya related to me from Malik from AmribnYahya al-Mazini from his father that the Messenger of Allah, may Allah bless him and grant him peace, said, "There is no injury nor return of injury.".

39. Third: Criteria • : Criteria for harm to be instrumental: That the harm is likely to be equivalent to the benefit and that such harm is obtained immediately, or more likely to be obtained in the future.

40. Fourth: The objectives behind Prohibition Removing harm is one of the most important purposes of Islamic sharia. And it leads to the main purpose which is the realization of the interests of the slaves in this world and in the Hereafter. The prevention of harm and corruption is beneficial for the humans And the establishment of interest and benefits is the key teaching of Prophet Muhammad orders.

41. Fifth: Contemporary Application • Among the prohibited dealings which cause harm: It is prohibited to contract for what has been proven to be harmful to a person, such as drugs, smoke, medically prohibited medicines, corrupt or expired foods or beverages. • It is also prohibit signing contract which negatively influence the religion or morality of Muslims, such as contracting the establishment of websites and blogs network or television channels or newspapers or magazines against the teachings of Sharia or so. • It is also prohibit contracting the dealings which corrupt the minds and morals of Muslims, whether that corruption is by extremism and extremism in religion, or the dilution of religion and questioning. • Other examples include renting a property on a forbidden or mostly forbidden commercial activity; such as selling the so-called shisha, Hooka. Gambling, or working with the banks based on usury.

42. Contracts which allow Exit Topic 3 Comprises: • First: Types of Financial contracts Second: Compensation contracts and Types Third: The most prominent contracts of compensation

44. Saudi Organization for Certified Public Accountants Second: The contracts for Compensation And these are most important nominated contracts These are the contracts in which the meaning of the exchange is found by all party members Types Characteristics 1. Exchange of Commodity with Price: Sell. 2. Exchange of Commodity with Commodity : Barter, Swap. 3. Swap the price for the price: exchange. 4 Swap a deferred commodity at an accelerated price: forward buying. 5 - Exchange of deferred commodity at a deferred price: sale of term. 6. Commodity swap at original price and known profit: Murabaha sale. 7 Swap materials with the manufacture of the price: Istisna. 8 Swap a known benefit: Ijarah 1- the compensation between the two parties are based on the cooperation for both parties, their consensus and defect free. 2 Such contract are doubtful about profit and loss according to their basis 3 . Such contract can not made for non-existent, commodity and only valid for those cases where cost is set for commodity. 4 It require full information, to achieve the integrity of exchange. 5 Does not combine compensation and a donation in order to complete the netting. 6. If the exchange is a beneficial ,the characteristics of such exchange can be constrained at the begining

45. Third: Important Compensation Contract: Sale 1. Definition of Contract, Sale 2. The aspects of the contract in general and selling in particular Definition of Sale Definition of Contract 1. Two contractors (Seller and a buyer) • 3. The formulation :intended here • The Contractors are evaluated based on their will, and their satisfaction with the contract • Known as : • Signed and accepted • Its intended function • It is held unanimously and held by the public 2. Two exchanged articles (Commodity with commodity or with price To sell Linguistically mean taking something and giving something. Traditionally it means: the exchange of a commodity in a fixed or deferred price Or a case or deferred commodity. Contract linguistically mean linking two things And traditionally it mean when a will is linked to another in a manner that entails a legitimate obligation. This definition does not include unilateral will Its definition in the broad sense is any act that gives rise to legitimate obligations, whether it is issued by two or more parties, such as sale, or unilaterally such as a waqf.

46. Terms of sale and terms in sale 2. Terms during Sale 1. Terms of sale The binding by one of contractors to others for his benefits Terms when formulating the contract Terms for contractors Terms for subject of contract The second type is the corrupt one which is not what contract was made for . And it has three types: 1. A condition which could be nullified the contract from origin, for example, when one of the contractor want to impose condition on other another such as lsking for loan. 2. The contract remain right but condition become invalid. For example, when one contractor requires no loss during contract. 3. A condition due to which the sale is prohibited from origin. For example, contractor demand additional thing with the required one The first type: is the correct one, which is what the contract required according to subject.. It has three types: 1. The condition for which the sale is required in the contract 2. The condition which goes in the favor of contract by imposing specific mortgage. 3. The seller requires to fix the known benefit of sale. For example, living for a month by himself in his rented home. It is not prohibited in the case of Slave woman. • Same place • Agree and acceptance of contract from both sides • Assertion of strong wills and clear expression And conditions for the subject of contract: 1. It has to be legal 2. Beneficial according to legitimate way 3. Ability to deliver 4. Full ownership of it 5. Have knowledge about it or have used it Intellectual (Reached to Puberty, wise , not banned by court) and a person of free of choice