I got your comments on our group’s evaluation of Islamic banks and Mudarabah companies. The MBA project we are doing is in the second week of June, 1997. Your guidance would help us in presenting the true picture of an Islamic Financial lnstitution (lFI) at LUMS. It would be quite helpful if you answer following questions:

Q: (1) Why cannot currencies be sold at rates different than the market or spot rate? How are currencies of different countries different than ordinary goods which can be sold at prices different than the market?

(2) Why is discounting of bills of exchange in different currencies permitted when currency itself cannot be traded below the spot rate?

(3) Can one party in a ‘promise to sell/purchase’ agreement ask for a security, whether cash or any kind of collateral, from the other party?

(4) How can an agent’s (agent being the bank) fee be determined if he is made responsible to collect the amount written on bill of exchange on behalf of it’s client? Wouldn’t such kind of agency fee or service charge become an excuse for charging interest? How can one prevent it?

(5) Is it injustice if two or more partners agree on a ratio of profit, not the loss, which is different than the ratio of capital contributed by each partner?

(6) Are the following rules correct according to Shariah:
a. It is permissible for the lessee to let to a third party during the lease period whether for the same rental or more, as long as the asset is not affected by the change of user.
b. It is permissible to stipulate in a contract of Istisna that price would be reduced by a specific amount per day upon delay in delivery by the seller.

(7) What steps can an Islamic Financial Institution take to prevent the concentration of wealth among the rich individual of a Muslim society?

A: Here are the answers to your recent questions:

(1) If the currencies are of the same country, they cannot be sold at a rate different from their face value. However, if the currencies are of different countries, they can be sold on spot at whatever rate agreed upon between the parties which can be different from the market rate. However, if the payment is deferred on either side, it must be in accordance with the market rate. This condition is put to restrict the use of this transaction to the genuine needs, otherwise it may be taken as a device to effect riba transaction. The details of the rules regarding the transaction of currencies are available in my Arabic book Akham AI-Auraq AI-Naqdia which has also been translated.

(2) The discounting of bills of exchange even in different currencies is not permitted in Shari’ah. The reason is that a Bill of Exchange stands for the amount of the bill which is a debt payable by a seller. If it is sold or purchased for cash, it means that two currencies are being exchanged where the payment at one side is deferred and I have already mentioned in answer to question No.1 that if the payment is deferred on either side, the price should not be different from the market spot rate.

(3) The promise to sell/purchase is merely a promise. It does not effect the contract of sale itself, therefore, no rights or obligations of a sale can arise out of a promise only. Hence no party can ask for security or a collateral for the fulfilment of a promise. Because the security or collateral is justified only where a liability or a debt has actually come into existence while in the case of promise no debt or liability is created. It is only an undertaking to sell/purchase a commodity in future. When the actual sale cccurs on a deferred payment basis the debt will be created and at that time it will be justified to ask for a security.

(4) If the bank has been made an agent to collect the amount of a Bill of Exchange on behalf of its client it is permissible for the bank to charge a fee for this service. The fee may be determined by the parties on whatever basis they agree upon. However, it should not be tied up with the period of the maturity of the bill. With this condition this transaction will not, hopefully, be instrumental to charge interest.

(5) In a Musharakah contract the parties may agree on a ratio of profit different from the ratio of their investment with the only condition that a partner who in expressed terms, relieves himself from the liability to work for the partnership cannot claim a ratio of profit higher than the ratio of his investment, for example, if ‘A’ has invested 60% of the capital while ‘B’ has invested 40% the parties can agree that ‘B’ will get 60% of the profit and’ A’ will get 40% of the profit. However, if ‘B’ has, in expressed terms, put a condition in the contract of Musharakah that he will never work for the enterprise, he cannot claim more than 40% of the profit.

(6.a) A lessee can sub-lease the property to a third party with the permission of the lessor, if the rent charged by him from the sub-lessee is equal to the rent payable by him to the original lessor. This sub-lease is permitted with the consensus of all Muslim jurists. However, if the lessee charges from his sub-lessee a rent more than the rent payable by him to the original lessor, it is not permissible according to Imam Abu Hanifah, but it is permissible according to other Imams.

(6.b) It is permissible to stipulate in a contract of Istisna that price would be reduced by a specific amount per day upon delay in delivery by the seller. The contemporary scholars of Islamic Jurisprudence have allowed this type of contract on the basis of the following ruling given by the classic Fuqaha:

(و صح تردید الاجر بالتردید فی العمل) کإن خطتہ فارسی بدرھم
او رومیا بدر ھمین (وزمانہ فی ال) ۔۔۔۔کان خطتہ الیو م فبدرھم
او غدا فبنصفہ۔ [ردالمحتار لا بن عابدین ص ۷۲ ج ۶]

(7) In fact the answer to this question requires a detailed treatise, but without going into details the following steps may be taken by the Islamic Financial Institutions to prevent the concentration of wealth among the rich of its society:
Firstly, they should maximise the use of Musharakah and Mudarabah instead of Murabahah or Leasing, because the real alternative to interest in a true Islamic economy is Musharakah and Mudarabah which paves the way for equal distribution of income among the members of the society and they are very competent and strong instrument diverting the flow of wealth from a few rich people to the common lot. Secondly, they should find out ways and means to finance the small scale trade and industry. For this purpose an Islamic financial institution should rise above the level of pure commercial and material benefits and should set their priorities in wider interests of the society of which they, themselves, are an inseparable part.[1]

[1] Mudarabah is a distinct class of partnership in terms of which the one party, called the rabbul maal, hands over capital to another, called the mudaarib, on the basis that the mudaarib trades with such capital and the resultant profits (if any) are shared between them in pre-agreed proportions (such as two-thirds to the rabbul maal and one thirds to the rnudaarlb).1
The essence of this class of partnership is that it is a partnership relating to profit only. The mudaarib is entitled to profit in accordance with the agreed profit sharing ratio by reason of his labour, and the rabbul maal is similarly entitled to profit as a return on his capital. It follows that ordinarily, in the absence of defined negligence and/or breach of contract, the losses of the partnership will be offset against accrued profits, and thereafter against capital. It also follows that the contract of mudaarabah will be void if the agreement stipulates that the rabbul maal must work together with the rnudaarib.2
Mudaarabah is a unique class of partnership in that it brings together both capital and labour and employs them productively in business. A person has the capital but not the skills and expertise, whereas another has the skills and expertise to conduct business but not the capital. There is therefore a genuine need to recognise such a partnership which was prevalent at the time of the Holy Prophet (SAW). He confirmed its validity and the noble companions (may Allah be pleased with them) transacted on the basis of mudaarabah. The jurists are accordingly unanimous (IJMA) in regard to its validity. 3
The contract of mudaarabah itself is concluded by offer and acceptance, or by the use of words which indicate that the parties intend to conclude a contract of mudaarabah. For example, the rabbul maal says to the mudaarib: “Take this capital (e.g. R100,000.00) for the purposes of mudaarabah, and expend labour on the basis that the resultant profits will be shared equally”, or the rabbul maal says: “Take this cash and treat it as capital, and the profits will be shared equally between us” and the mudaarib accepts the offer’
Upon conclusion of a valid mudaarabah contract, the following legal consequences arise and attach to the mudaarib:

a) the mudaarib, in receiving the capital from the rabbul maal, is a trustee (AMEEN) in the sense that he is not ordinarily obliged to compensate the rabbul maal in the event of loss or destruction thereof. 5
b) the mudaarib, in commencing his labours, is an agent of the rabbul maal in dealing with and disposing of the property because he does so on his (the rabbul maal’s) instructions as the owner thereof. 6
c) the mudaarib, if he makes a profit, shares therein by reason of his labour, and because the object of mudaarabah is to make a profit.
If, on the other hand, the contract of mudaarabah is void for any reason, then the mudaarib is entitled to remuneration for his labour equivalent to the market rate. If the mudaarib breaches a valid condition of the contract of mudaarabah, then he is strictly liable to make good any loss because he has dealt with the property of another without authorisation.”
The contract of mudaarabah may be general without any limitation as to duration, or class of business to be conducted, or place where such business is to be conducted, or otherwise as to the category of suppliers and merchants to be dealt with. The contract however may be limited as to any of those matters. The rule in this regard is that the rabbul maal may impose any condition in the contract which is beneficial to him, and the mudaarib is bound to observe such condition otherwise he will be in breach of contract. If the condition is of no benefit to the rabbul maal, then the condition itself will be invalid without affecting the validity of the whole contract8 (EDITOR)

1. AL-MUGNI, VoI 5, Page 134
2. RADDUL MUHTAAR, VoI 5, Page 645
3. BADAI US-SANAI, Vol 6, Page 79
4. MAJALLAH, article 1405
5. RADDULMUHTAAR, VoI 5, Page 646
8. MAJALLAH, Article 1407, Commentary of Allama Itasi (RA)