Contracts and Deals in Islamic Finance. Kureshi Hussein

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      Proponents of theories on Islamic finance do recognize the difference between a spot price for an asset and a deferred price for an asset. Shariah scholars recognize that the deferred price of an asset can be greater than the spot price of an asset in a sale transaction. They also recognize that a seller can repurchase an asset sold to a buyer and vice versa, but do comment on the combination of two sale contracts between a buyer and a seller that result in cash flows that resemble a loan disbursement and repayment with interest. There is no difference between bai inah and riba in essence, but there is considerable difference in form as the former is a sequence of sale contracts and the latter is a contract of lending. In essence it seems that a sequence of legal sales has resulted in a transfer of money for money. This is referred to as “legal means to illegal ends.”16

      Can the element of the intentions of both parties be taken into consideration? Here arises a fundamental question of what madhab (school of thought) we are referring the judgment to and what methodology of usul ul fiqh we are referring to. The Shafi madhab accepts this transaction as it does not (apparently) recognize the relevance of intentions especially if they are undisclosed by either party.17 So in essence, intentions are left to be between man and God.

      Imam Al Shafi writes, “When one purchases a commodity from another and takes its delivery, and the price happens to be on deferred terms, it is not objectionable for him to sell it to the person from whom he had purchased it or to someone else, for a cash price less than his purchase price or higher, or on credit, or against another commodity.”18

      Many scholars, however, feel that this saying has been taken out of context, and Imam Shafi did not refer to the contract of inah by name. Were two parties contracting merely to create cash flows that replicate loans, and “the second sale is considered to be conditional on the first, by virtue of custom, thus resulting in both contracts being invalid”?19

      The Shafi madhab also does not recognize saad ul dhariah as a source of shariah law. Saad ul dhariah means to block legal means to result in illegal ends and as an approach to law is a secondary source of law in shariah.20 The Shafiis would contend that if each sale contract were to fulfill the requirements of a sale contract, they cannot be termed invalid.

      Nevertheless, the contract of bai al inah remains controversial to this date and is accepted in Malaysia, but is frowned on in the Gulf Cooperation Council, or GCC, Saudi Arabia, Pakistan, and other Muslim countries.

      Taken as a financial transaction, it is also implied that the original sale is based on the condition that A will buy back the asset from B and the second offer and acceptance is already agreed on. Would it make any difference if the deferred price was not calculated by either party but was merely the market price for a heavily traded asset, like wheat, for instance? What are the risks that Party A is exposed to? Party B could in essence sell the asset to Party C, or decide to hold the asset and enjoy its usufruct. The rapid sequencing of both these sales mitigates this risk. Party A is also exposed to credit risk, in that Party B may be unable to make the required payment in 90 days. Party A can demand that some other asset be held as collateral with Party A to ensure repayment. The asset here plays a crucial function.

      If this transaction seems charged with controversy for the reader, let it be no surprise as it has been so for more than 1,200 years. Scholars have seen it as an attempt to circumvent the contract of riba; others have seen it as an alternative to riba, depending on the intentions of the parties involved. This contract, however, if deemed permissible, allows economic units short of liquidity but with an availability of fixed assets to use their assets to raise funds or liquidity. This need is fundamental in any business, no less a bank that is in a perpetual state of asset/liability mismatches.