Gharar in Islamic Law - Assignment Example

? Gharar in Islamic Law (Part 2) No: Gharar in Islamic Law (Part 2) Introduction The Shariah refers to the divine law as contained in the Quran and Sunnah. However, most of the classical Islamic law on financial transactions is not contained as rule / law in the Quran and Sunnah but is based on the often divergent views held by the established schools of law. The particular form and contents of Murabaha agreement is not the same. If a bank’s Religious Supervisory Board is satisfied that the bank’s activities are in accordance with Shariah law, that concludes the matter, so there being no provision in Bahrain law or Islamic law generally, for an appeal by a customer of the bank against the Board’s ruling and certification. Finally, even if the relevant agreements amounted to agreements to pay Riba, the principal sums advanced could validly be claimed (Usmani, 2001). Hence, Murabaha Agreements should be in accordance with Islamic law, all that is required is certification by Islamic Bank’s Religious Supervisory Board and the principal amounts are dispensed in accordance with the terms of Murabaha Agreements (Usmani, 2001). The Gharar contains uncertainty in a contract or sale where the goods may or may not be available (the bird in the air or the fish in the water). It shows ambiguity in the consideration or terms of a contract. As such the contract would not be void. An example tainted with Gharar is an agreement to sell goods which have already been sold (Vogel and Samuel, 1998). This paper finds Gharar in depth in three contracts. The three contracts that I have analyzed in this paper are about car, property and stocks. The Bank has followed the methods of Islamic banking while still Gharar can be found in them. Elements of Riba and Gharar are present in the contractual documents. The transactions if carried out under the mentioned products (cars, stocks and property) require Murabaha Financing. The important ingredients of the Murabaha Financing Agreement are The Preamble: it is an integral part of the agreement; Definitions: incorporation of the terms: a) Account b) Agency Agreement c) Agreement d) Client Financials e) Declaration f) Due dates g) Goods h) Murabaha Account i) Purchase Price j) Security k) Security Deposits; Purchase and Sale Agreement; Mode of Payment; Representation of the Client; Representation of the Institution; General Covenants of the Client; General Covenants of the Institution; Warranties of the Institution; Security; Risk of Loss; Takafol; Damages; Governing Law and Jurisdiction; Set off; Acceleration; General; Execution of document by the Counterparts ( The Institution and The Client); Dated; Witnesses; Schedule of Documents: a) Agency Agreement b) Declaration c) Promissory Note d) Description of Security (Ghafoor, 1995). Murabaha Finance Agreement for Car The first contract is about Murabaha Finance Agreement for car. The contract is about a client bank agreement on buying a car in instalments but there are several conditions for the client, which he has to adhere in order to get the car. A down payment is given after which, monthly instalments are fixed for the customer. As this is a Murabaha contract, therefore it is essential to know about Murabaha. Murabaha is a term in Islamic Fiqh and it refers to a particular kind of sale having nothing to do with financing in its original sense. If a seller agrees with his purchaser to provide him specific commodity on a certain profit added to his cost it is considered Murabaha transaction. The basic ingredient of Murabaha is that the seller discloses the actual cost he or she has incurred in acquiring the commodity and then adds some profit thereon. This profit may be lump sum or may be in fraction (Al-Qardawi, 2001). In conventional financing, the financier lends money to the client on interest. After giving the interest bearing loan, the financier has nothing to do with its usage. In the case of Murabahah no money is advanced by the financier. Instead the financier purchases the commodity by itself or through its agent as per the requirement of the customer. Since the transaction cannot be completed unless the client assures the financier that he / she wishes to purchase the commodity (Usmani, 2001). If we notice the point that is “if the delay occurs in payment of instalment on the due date, the bank has the right to demand the rest of the debt. In this case, the policy of early payment is applied and this includes all delayed payments resulting from demands and execution procedures. In this case, the bank has the right to apply all legal acts to preserve its rights and the client bears all resulting consequences from extra expenses or otherwise.” This point clearly shows that there is presence of Gharar in it as there is a lot of uncertainty for the client. The client has to bear negative consequences if by chance he fails to make the payment within due time. In the Islamic mode of financing a selling price once agreed cannot be amended / altered even the customer failed to meet his / her obligations. The seller cannot ask for higher rate of return on investments. In Shariah, there is no concept of charging over and above agreed terms. However, failure to meet commitment by the customer on time attracts penalty. The penalty so imposed on the customer should go to the charity (Ahmed and Shabbir, 2009). The point that “At delivery, the client is committed to sign the appropriate delivery form, and the bank does not bear any commitments, obligations or liabilities resulting from delay from the part of client in receiving the car\cars” is again questionable in terms of uncertainty. This appears as a huge risk for the client as the bank takes no responsibility related to commitment, obligation and liability that can be there in case of late reception of the car. Again the point that, “The bank does not provide any guarantees on the sold car\ cars. In the case of any guarantee provided from a third party on the sold car\ cars, such guarantee is transferred to the client” is again showing uncertainty because the bank gives no surety of the sold product. However, it should give some form of surety because the client is giving a huge amount of money for the commodity. The point that, “The client is fully aware that investment in financial stocks holds risks (profit and loss). He / She is also aware that his / her decision to buy the stocks or selling it independently, and is not based on a direct\indirect advice from the bank, that the bank does not verify any investment decision made by the client” shows uncertainty in the contract that can be termed as Gharar. The client is held responsible for the purchase wholly and the bank stays away from any kind of responsibility in spite of the fact that the client has taken the car from the bank. Lease Agreement for Property According to the contract, the client wishes to rent out the aforementioned property. The land owner has leased the property. This comes under the category of Ijarah. It means give something to someone on rent. It can be used for any transaction when the services of someone are hired by someone else. It could be used where the services of a doctor, lawyer or labourer were hired to provide service. In terms of financing the property is to be rented out to someone by someone. It amounts to leasing. The right to use the property is transferred but the ownership remains with the owner. There should be an agreed period of lease and agreed consideration. All the liabilities emerging from ownership remain with the leaser but those emerging as user of the property remain with the lessee (El-Gamal, 2002). Generally there are two types of contract a) one is specified the rental to be paid during the tenure of lease and b) leaser unilaterally promises to sell the assets to the lessee at the end of lease period at an agreed price or to give the assets to the lessee. This arrangement meets Shariah requirement. Now the lease becomes one of the major instruments in the Islamic mode of finance (Saleh, 1986). The point that “the bank is obliged to to deliver the property to the client in the specified date in item 3- rent period. And the client is delivered the property after signing a document stating that he / she has received the property. In the case where the bank fails in fulfilling this obligation, the client is entitled to terminate the rent contract and the bank has to return all previous payments paid by the client unless the two parties agree to amend the timing of the rent starting date” shows uncertainty (Gharar) as the client faces the risk of contract termination even in case he pays all the dues. The point that “The client is taking a full responsibility of any losses or damages on the property as a result of his actions” is again showing a risky situation for the client as there can be some accidental happening due to which, there can be negative consequences for the client and he can be held liable for all the damages to the property. There can be a termination of the contract and the client knows about this thing. The property remains the bank’s property until and unless, all dues are not paid, still the client has to bear maintenance costs that is causing Gharar in the contract as it is said that, “The client, and on his personal expense bears all the operational maintenance required for the rented property according to the familiar standards”. Again in case of any modifications to the property, the client is held responsible to pay for the removal of modifications as it is said that “The client bears all expenses resulting from the damages occurring from this removal”. The is in an insecure position client when he is held responsible for paying any extra charges as it is said, “the bank is entitled to bear the client the responsibility of paying any costs or expenses relating to collecting its legal rights on the client according to the terms and provisions of this contract”. Therefore, there is uncertainty here and Gharar can be noticed. Murabaha Finance Agreement for Stocks This contract is about buying of stocks. The client wishes to buy stocks in instalments from the bank. Again this is a Murabaha Finance agreement, therefore, the client is aware of the cost of the stocks and also knows about the profit that the bank wishes to take from the client for the sale of the stocks. However, while analyzing the contract, we can find the elements of Gharar in the contract. The point that, “Whereas the deliverance of the stocks was impeded or delayed for any given reason out of control of the bank, the bank bears no legal liability for such delay especially with respect to the decreases in the stock price” shows uncertainty. The bank takes no responsibility of futuristic costs of the stocks and the client can face high loss on the purchase of stocks. Islam prohibits against high probability of loss and regards this as Gharar. The second point that is worth mentioning in regard to Gharar is “if the delay occurs in payment of instalment on the due date, the bank has the right to demand rest of the debt. In this case, the policy of early payment is applied and this includes all delayed payments resulting from demands and execution procedures. The bank has the right to initiate legal course of action to preserve its rights and the client has to bear the consequences from extra expenses or otherwise.” The client has to bear extra costs that is a risky situation and comes under the category of Gharar. “The client is fully aware that investment in financial stocks holds risks (profit and loss). He / She is also aware that his / her decision to buy the stocks or sell it independently, and is not based on a direct\indirect advise from the bank, that the bank does not verify any investment decision made by the client” is another point that informs about uncertainty in the contract. The client is alone responsible for the loss and it is his independent decision to take the risk to buy the stocks. There cannot be two opinions that the Islam clearly prohibits interest bearing (Riba) and the speculative trading (Gharar). Keeping in mind the cited prohibitions, financial structures of all Islamic products should be free from Riba and Speculation. Some of the scholars are of the view that some of the products of Islamic financing based on Islamic prohibitions. The aforementioned methods are identical to conventional. Hence, chances of involvement of Riba or speculation or both cannot be ignored. To avoid riba or speculation free transactions, innovative products should be in place to refrain from such transactions which against the teachings of Quran and Hadith. Besides mentioned products there is a possibility of interest element in the establishment of letter of credit. The solution of this problem is nothing but to have excess liquidity with the foreign banks. References Al-Qardawi, Sheikh Y., 2001. The Lawful and the Prohibited in Islam. Egypt: Al-Falah Foundation. Ahmed, Imran and Shabbir, Ghulam, 2009. Frequently asked Questions on Islamic Banking. 15 Jan 2012. El-Gamal, Mahmoud A., 2002. Islamic Finance: Law, Economic and Practice. Cambridge: Cambridge University Press. Ghafoor, A. L. M. Abdul, 1995. ‘Islamic Banking’. Interest Free Commercial Banking. Netherlands: APPTEC Publications. Obaidullah, Mohammed, 2005. Islamic Financial Services. Jeddah: Islamic Economics Research Center. Saleh, Nabil A., 1986. Unlawful Gain and Legitimate Profit in Islamic Law: Riba, Gharar and Islamic Banking. Islamic Economy, 3. pp. 115-124. Also available at Usmani, Muhammad Taqi, 2001. An introduction to Islamic Finance. Washington: CQ Press. Vogel, Frank E. and Hayes, Samuel L., 1998. Islamic Law and Finance: Religion, Risk, and Return. Netherlands: Kluwer Law International. Read More