The Pairs: Understanding Islamic Finance Concepts
This is an old method I learned from very experienced and wise individuals a long time ago in my first days in Islamic Finance. It is used as a learning tool and an aide-mémoire.
The aim is to combine two similar concepts or contracts, define them in the fewest words but in the most similar terms possible making sure you differentiate their meaning.
The learning is in the effort.
Here are some examples. Pay attention to the differences and the operative words.
Bai’ Bilthaman Al-Ajil: Sale with a Margin where Payment is Delayed
Salam: Sale with a Discount where Good is Delayed
Salam is really just the reverse of a Deferred Payment Sale, except that the good has to be fungible.
The next pair is very important, as many people face confusion in this issue. This is the difference between Gharar and Jahalah:
Gharar: Uncertainty of the Possession of an object
Jahalah: Uncertainty of the Characteristics of an object
Gharar is more encompassing than Jahalah, so if Jahalah exists, then it’s also considered Gharar, but not the reverse, Gharar can exist where there is no Jahalah. An example is selling your car whose description is well known so no Jahalah exists, but the car has been stolen or missing, so Gharar exists.
Here’s the definition from AAOIFI Shari’ah Standard No. (31) Controls on Gharar:
“The difference between Gharar and Jahalah is that Jahalah refers to lack of knowledge about the details of something, in spite of knowledge about its occurrence. In this sense, Gharar is more comprehensive than Jahalah. Therefore, all things that are unknown involve Gharar, whereas not all things that involve Gharar are unknown.”
Here are a couple more:
Hawala: Transfer of Debt from one Person to another
Suftaja : Transfer of Money from one Place to another
Suftaja has been debated and disputed as to whether it creates a benefit, as in fact it’s a Qard (Loan) to another person in one town, and where the loan is repaid in another town. It aids the lender in transferring money to another location and to avoid the dangers of the road.
Sadaqa: Gifting to another for the sake of Allah
Hadiya : Gifting to another for the sake of Friendship
These two above, Sadaqa and Hadiya are essentially the same, as they are gifting for no consideration, except the difference is in the purpose.
Some more pairs:
Hiba: Transfer of Ownership to another during one’s Life
Wasiya: Transfer of Ownership to another after one’s Death
Qard: What Can NOT be beneficial Without being Consumed
Aariyya: What CAN be beneficial and Must Not be Consumed
Aariyya is simply lending someone an object to use, for example a neighbor might borrow certain tools or a fan in hot weather. It is also called “I’arah” pronounced similar to Ijarah but without the J.
Here’s an interesting one. In today’s language these two are always used interchangeably, however, they do have a difference. We can see the explanation for this on such sites as: www.el-eman.com, where they explain that Daman relates to a guarantee on the debt itself, whilst Kafala relates to guaranteeing the presence of the debtor mainly.
Kafala: making present the “Debtor”
Daman: making present the “Debt”
Although, some also say that Kafala can be divided into two types, one relating to a person, and the other to debt itself.
In some books, the authors attempt to explain the differences in concepts or contracts to the reader, such as in the AAOIFI Shari’ah Standards.
Ijarah and Ju’alah are always somewhat confused, which is why in many books an explanation is needed to point the differences. This is from AAOIFI Shari’ah Standard No. (15) on Ju’alah:
“7. Distinction between Ju’alah and Ijarah
Ju’alah is distinguished from Ijarah on the following grounds:
7/1 Ju’alah is valid despite uncertainty of work deeming the determination of the required result by the offeror as sufficient.
7/2 Ju’alah does not require acceptance.
7/3 Entitlement to compensation depends on completion of work and delivery of result.
7/4 Ju’alah is valid even if the other party is not known.
7/5 As a rule, Ju’alah is terminable, while Ijarah is binding.”
We now know some of the differences, but we need to keep the phrases short, so we cannot use all the differences. We focus therefore on a few and make the pair:
Ijarah: Specific offer to Someone to perform a task paid by Agreement
Ju’alah: General offer to Anyone to perform a task paid upon Performance
Here also, we have some disputes as to how general Ju’alah has to be to be differentiated from Ijarah. So here’s an example of what a Ju’alah sounds like: “Whoever finds my missing keys, will receive $20.” This helps you better understand the difference.
Sometimes this pairing can be seen in some articles where the author compares concepts in this fashion. The next four are from an article on Ijarah by Dr. Khalid Al-Mushaiqih, Professor at The Shari’ah College, University of Qassim, Saudi Arabia:
Bai’: Transfer of ownership of Asset For compensation
Ijarah: Transfer of ownership of Usufruct For compensation
Hiba: Transfer of ownership of Asset Without compensation
Aariyyah: Transfer of ownership of Usufruct Without compensation
Usufruct of course is the benefit of an asset, or the right to use without ownership of the asset itself.
In the above, the author differentiated the contracts based on whether they involved an Asset (Ayn), or a Usufruct (Manfa’ah).
Of course now that you see the above, you can actually exchange them as well, for example, compare them based on whether there is, or not, any consideration for the contract, such as Bai’ and Hiba:
Bai’: Transfer of ownership of asset For compensation
Hiba: Transfer of ownership of asset Without compensation
Knowing the operative word or words is what is needed. In the above example, the main difference is whether there is compensation or not.
If you notice at the beginning, we also compared Hiba with Wasiya. All three are related in the Transfer of Ownership factor, however, Bai’ and Hiba also meet in that they are in the person’s lifetime, as such we only highlight the main difference which is that Bai’ is for a consideration while Hiba is for free.
Hiba and Wasiya also have in common the Transfer of Ownership, and For No Consideration, however they differ that Hiba is in one’s lifetime while Wasiya is after death.
And thus, it’s much more reflective of the contracts to compare Bai’ versus Hiba, and Hiba versus Wasiya.
They are not always easy to find, but sometimes you’ll find the differences hidden in a paragraph. Then you have to take out the essential part and make the pair yourself, such as this one on the difference between Istisna’a and Ijarah from the Shari’ah Standard No. (11):
“Difference Between Istisna’a and Ijarah
The contract of Istisna’a differs from the contract of Ijarah in the sense that the latter is a contract of services without any commitment to supply materials whereas the former requires that the manufacturer or builder provide both services for the transformation or construction process and ultimately to supply the materials in the form of the finished items.”
So now we take the essence of the contracts and attempt to put it into a pair:
Istisna’a: Contract of Services With materials
Ijarah: Contract of Services Without materials
In this above example, the pairing doesn’t work quite as well. The reason is that Ijarah is a much more comprehensive contract, as it includes both services, such as hiring of people, and the hiring of assets, as in a rental agreement.
Here are some more:
Murabahah: A sale where cost is Known and Margin is negotiated
Musawamah: A sale where cost is Unknown and Total Price is negotiated
Both Murbahah and Musawamah are Sales, but the difference is in how the Price is achieved.
And it’s not only with contracts that this could be done, it can also work on concepts such as the following:
Riba Al-Fadl: Inequality in an exchange where Equality is Demanded
Riba Al-Nasa’a: Delay in an exchange where Immediacy is Demanded
These two kinds of Riba are very important, as they are part of what is called “Riba Al-Buyou”, or Riba of Sales. When they are together in a transaction, they form “Riba Al-Nase’a”, which is the main kind of Riba, such as in a loan, where it’s stipulated that repayment includes an increase, thus having Inequality and Delay.
Here are some more:
Ayn: In an Exchange, what is Present
Dayn: In an Exchange, what is Absent
So if you buy a car on deferred payment, the car is the Ayn, while the deferred payment, the debt, is the Dayn.
Mithli: Fungible, Guaranteed by the same kind
Qimi: Non-Fungible, Guaranteed by its value
Fungible of course means it can be substituted easily, such as a Kilo of white sugar. These two above are very important, because a designation of “Mithli” has important contractual consequences such as whether it can be sold on Salam basis. While a designation of Qimi implies a more specific product whose destruction requires damages of its value, for example a valuable painting.
Here’s another one from AAOIFI Shari’ah Standard, this one is from the definitions page of Standard No. (42) on Financial Rights:
“Right of Utilization (Intifa’)
The right of utilization is a juridical concept that refers to a person’s temporary right over the asset of another person, who authorizes him to use it, exploit it, and dispose of its usufruct, but not the asset itself, during the period of utilization. The majority of jurists, including the Shafi’is, Malikis and Hanbalis, distinguish between the ownership of usufruct (Manfa’ah) and ownership of utilization (Intifa’). Granting ownership of utilization (Intifa’) only allows a person to directly utilise [the asset]. Granting ownership of usufruct (Manfa’ah) is more general and comprehensive; it allows its owner to use the asset himself or to enable others to use it, either for compensation, as in a lease, or without compensation, as in gratuitous lending of the asset.”
From this we can then create the pairs:
Intifa’: Ownership of Utilization for Personal use
Manfa’ah: Ownership of Usufruct for Comprehensive use
The more you do this, the better you will understand the contracts and concepts, and the difference between them. It’s not always an easy task, as one has to limit the description to few words, and really try to take the essential differences. It’s natural that some areas of definition are missed, since you are limiting yourself to a few words, but that’s ok if you can utilize the essence of the meaning.
In Arabic, it’s a much easier task, as many of these pairs are found in articles and books. One can simply Google it by asking: “What is the difference between…?”. Unfortunately this hasn’t yet been transferred fully into English, however some sites do actually have them. So I just tried to ask on Google: “What is the difference between Bai’ and Ijarah?”, and I got lucky and found this at: https://www.investment-and-finance.net/
“What is the Difference Between Ba’I (Bay’) and Ijarah?
Generally, ba’i (or sale) involves the transfer of ownership against payment of the thaman (price), while ijarah is based on the transfer of usufruct (manfa’ah) in return for ujrah (rental).”
Now here in the above example, they could have used the same and simpler words to explain the difference to make it a pair. They could have said for example:
Ba’i is the transfer of ownership against payment.
Ijarah is the transfer of usufruct against payment.
Here’s another one you can find in the AAOIFI Shari’ah Standards, this one is from Standard No. (43) on Insolvency. These two words are also used interchangeably on many occasions although there’s a difference between them. The words are “Iflas” and “Taflees”:
"2. Definitions of Insolvency and the Declaration of Insolvency
Insolvency (Iflas): When the debt due of a person exceeds his assets.
Declaration of insolvency (Taflees): A judge’s declaration that a debtor is insolvent, preventing him from disposing of his assets."
So here it’s fairly easy:
Iflas: When Debt exceeds Assets
Taflees: Legal Declaration that Debt exceeds Assets
This type of pairing can be found in many places, and it’s really an excellent way to teach the commonality and differences between contracts. I hope someday more manuals on Islamic Finance would use such a device to better inform students.