Al-Hilah (Legal Trick) and Al-Makhraj (Legal Exit): The Difference between the Two and their Application in Islamic Finance

Transcription

1. Al-Hilah (Legal Trick) and Al-Makhraj (Legal Exit): The Difference between the Two and their Application in Islamic Finance‫٭‬ Abubakar Muhammad Musa & Edib Smolo‫٭٭‬ Abstract The purpose of this article is to highlight the issue of al-hilah (ruse or legal trick) and al-makhraj (legal exit) in light of the contemporary application of Islamic financial products. A line has to be drawn, the article argues, between the genuine need to apply it and artificial trick to defeat Sharicah. Al-hilah and almakhraj remain two contemporary controversial issues in Islamic law in general, and in Islamic finance in particular. Scholars unanimously accept the application of al-makhraj (legal exit) because of its enormous benefit to humanity especially during hard times, but are heavily torn apart into two camps on the application of al-hilah (ruse or legal trick). However, these controversies over the application of al-hilah and al-makhraj are indeed contemporary phenomenon. Given the sensitivity of reputational risk to Islamic banking and finance; there exist a substantial need to comprehend fully the boundaries between halāl and haram. As such understanding the mechanics of both terms (al-hilah and al-makhraj) is vital to wellbeing of Islamic finance and its reputation. Moreover, the paper discusses the validity of BBA and overviews its practices in light of al-hilah. In addition, the paper identifies the serious difficulty in product development. As a result, it clearly demonstrates the need to proactively employ al-makhraj on innovating Islamic financial products and proffering effective solutions. The paper finds that the difference in perception and application of al-hilah and almakhraj, as argued by some scholars, can be identified broadly in the following aspects: knowledge, motive, and intention before any act is perpetrated. Therefore, having the knowledge (on the legal Sharicah ruling) and yet willing to violate it upfront is a typical characteristic of al-hilah. On the contrary lack of pre-knowledge and the desire and readiness to apply a Sharicah ruling is a typical characteristics of al-makhraj. The paper concludes that intention carries a significant stake in Islamic law and hence rewards and punishments will be based on this and Islam lays emphasis on the substance over the form. Key words: al-hilah (legal trick), al-makhraj (legal exit), Islamic finance, Bayc Bithaman Ājil (BBA), ‫٭‬ Paper presented at the International Seminar on “Muamalat, Islamic Economics and Finance (SMEKI 09),” October 20-21, 2009, Faculty of Islamic Studies, University Kebangsaan Malaysia, Malaysia. ‫٭٭‬ Abubakar Muhammad Musa and Edib Smolo are Associate Researchers at International Shari’ah Research Academy for Islamic Finance (ISRA). Abubakar can be contacted at abubakar@isra.my and Edib can be contacted at edib@isra.my or hfz.edib@gmail.com. 1
2. 1 .0 Introduction Al-hilah and al-makhraj remain two contemporary controversial issues in Islamic law in general, and in Islamic finance in particular because of the overriding meaning of both concepts. During the glorious era of the companions of the Prophet (s.a.w.s), the application of al-hilah and al-makhraj recorded no controversies (Al-Faqih, 2009) as the Prophet (s.a.w.s.) resolved issues arising thereof. Likewise, ulama (Muslim scholars) accept unanimously the application of al-makhraj (legal exit) since it helps in meeting Sharicah requirements. Nevertheless, they differ on the application of al-hilah (legal trick). One camp strongly opposes the application of al-hilah while the other is very cautious and thus shows little tacit approval to the practice. Hanafis employed it although not at the scale seen today (Al-Faqih, 2009). The overall concerns of the scholars are in the unwarranted application of al-hilah for defeating the maqāsid al-Sharicah (objectives of Sharicah). Scholars who oppose the application of al-hilah opine that it demeans the religious rules and makes a mockery of the divine objective of the laws. On the contrary, those who gave tacit approval did so with careful caution. They looked at al-hilah from the angle of the applicant’s end objective. Thus, the five fundamental rules apply to the objective sought after by the application. Since the major controversy is on al-hilah, it therefore attracts the five fundamental rulings or ahkām in Islam: harām, wājib, mandūb, makrūh, and mubāh. The application can be halāl or haram depending on the objective of the applicant as mentioned earlier. For instance, if A wants to apply al-hilah in order to commit harām but through halāl activity, applying the al-hilah becomes harām. On the other hand, if A wants to apply al-hilah in order to carry out halāl, then his application of al-hilah becomes halāl, etc. In the end, since al-hilah and al-makhraj are inner motives, actions are judged according to one’s intentions. Therefore, Islam emphasizes more on substance over form. In other words, the substance supersedes the form. This paper explores the concepts of al-hilah and al-makhraj from classical point of view as well as its contemporary application in light of recent Islamic financial product innovations. In addition, it evaluates current practices and product applications in the Islamic banking and finance industry, drawing some existing examples and analyzing them through the filter of Sharicah principles. Following the introduction, which provides 2
3. the context for subsequent discussions on the topic , section II examines the definition of the concepts, literal as well as the technical meaning, alongside a web of classical scholarly comments on them. Next, section III argues for the necessity of incorporating Sharicah requirements through the application of al-makhraj and the realities of doing that. Furthermore, section IV traces the historic dimension with attested authorities on the concepts. In section V illustrates al-hilah and al-makhraj using examples. In this section we linked al-makhraj with BBA financing. Section VI illustrates a discussion on the heated differences between the two concepts and their legal implications. Finally, section VII is left for a conclusion. 2.0 Definition, Concept and Legal Authorities 2.1 Literal Meaning of Al-hilah and Al-makhraj Briefly, al-hilah may be defined literally as a trick (Abu Jib, 1988-1408AH; Cowan, 1980) or stratagem, while al-makhraj may be defined as a legal exit or relief (Abu Jib, 1988-1408AH). In the context of Sharicah, the application of the former facilitates in eluding a Sharicah ruling (Abu Jib, 1988-1408AH), but the later assists in executing a Sharicah requirement. The word al-hilah originates from ‫والح َول‬ ِ ‫ال يحول حوال ال َح ْول وال َحيْل‬ َّ َّ ‫والحيلة وال َح ِويل وال َمحالة واالحتيال والت َح ُّول والت َحيُّل‬ ِ (A-Misri, 1996): it means to deceive, or to trick someone while knowing it is wrong. However, a Muslim may apply al-makhraj in order to exit or to get a relief out of a difficult situation or a dilemma confronting him. The root word comes from the Arabic verb ‘kha-ra-ja’ (‫ )يقال خ ََر َج َم ْخ َرجا‬which means: to go out or to exit. Although some Schools of Thought see no difference between the two words, others have outlined clearly that there are indeed stack differences between the two concepts (Al-Faqih, 2009). They argued that al-hilah1 is a passage or legal conduit leading into committing a harām and al-makharaj is relief leading into a halāl activity. The legal maxim in relation to al-hilah: ‫التحيل على الحرام حرام‬ “altahayul cala al-harām, harām” which means “trick leading to harām is harām”. ‫وسائل الحرام حرام‬ 2.2 Legal Authorities on al-Hilah and al-Makhraj The following verses in the Holy al-Qur’an 2:65 and 7:163, respectively, are some of the basis on al-hilah: 1 Ibn al-Qayim has extensively dealt with the various matters related to al-hilah. He concludes that al-hilah is haraam citing from a number of evidences. He argues that because it conflicts with the objectives of the Shariah, al-hilah is undoubtedly prohibited. Ibn al-Qayim, ‘Ilm al-Muwaqeen, vol.3 p. 309. 3
4. َ‫ت فَقُ ْلنَا لَ ُه ْم ُكونُواْ قِ َردَة خَا ِسئِين‬ ِ ‫س ْب‬ َّ ‫ع ِل ْمت ُ ُم الَّذِينَ ا ْعتَدَواْ ِمن ُك ْم فِي ال‬ َ ‫َولَقَ ْد‬ And well ye knew those amongst you who transgressed in the matter of the Sabbath: We said to them: "Be ye apes, despised and rejected." ْ ‫ع ِن ْالقَ ْريَ ِة الَّتِي َكان‬ ‫ت إِ ْذ ت َأْتِي ِه ْم ِحيت َانُ ُه ْم يَ ْو َم‬ ِ ‫س ْب‬ َّ ‫اض َرة َ ْالبَحْ ِر إِ ْذ يَ ْعد ُونَ فِي ال‬ َ ‫واَسْأ َ ْل ُه ْم‬ ِ ‫َت َح‬ ُ ‫س ْبتِ ِه ْم‬ َ‫سقُون‬ ُ ‫ش َّرعا َويَ ْو َم الَ يَ ْس ِبتُونَ الَ ت َأْتِي ِه ْم َكذَ ِل َك نَ ْبلُو ُهم ِب َما َكانُوا يَ ْف‬ َ “Ask them concerning the town standing close by the sea. Behold! they transgressed in the matter of the Sabbath. For on the day of their Sabbath their fish did come to them, openly holding up their heads, but on the day they had no Sabbath, they came not: thus did We make a trial of them, for they were given to transgression.” On the other hand, a reference to al-makhraj can be found in the following sūrah alTalāq (65), verse 2: ‫ع ْد ٍل ِمن ُك ْم‬ َ ‫ي‬ ْ ‫ارقُو ُه َّن بِ َم ْع ُروفٍ َوأ َ ْش ِهدُوا ذَ َو‬ ِ َ‫فَإِذَا بَلَ ْغنَ أ َ َجلَ ُه َّن فَأ َ ْم ِس ُكو ُه َّن بِ َم ْع ُروفٍ أ َ ْو ف‬ ُ ‫ع‬ َّ ‫َوأَقِي ُموا ال‬ َّ ‫ق‬ ُ‫َّللاَ يَجْ عَل لَّه‬ ِ َّ ‫ظ ِب ِه َمن َكانَ يُؤْ ِم ُن ِب‬ َ ‫ش َهادَة َ ِ َّّلِلِ ذَ ِل ُك ْم يُو‬ ِ َّ ‫اّلِل َو ْاليَ ْو ِم ْاْل ِخ ِر َو َمن يَت‬ ‫َم ْخ َرجا‬ “Thus when they fulfill their term appointed, either take them back on equitable terms or part with them on equitable terms; and take for witness two persons from among you, endued with justice, and establish the evidence (as) before Allah. Such is the admonition given to him who believes in Allah and the Last Day. And for those who fear Allah, He (ever) prepares a way out.” Ibn Taymiyyah said that there are a huge number of authorities in the Qur’an, Sunnah, Ijmac and logic on the prohibition of al-hilah (Ibn Taymiyyah, 19871408AH). The scholars who subscribe to its permissibility cling to the story of the prophet Ayyub (a.s), the hadith which mentions the sale of dates. Generally, intentions play a very prominent role in Sharicah (Al-Nadawi, 20001421AH; Al-Shatibi, 1997-1417AH). For example, it differentiates between mandatory prayers from discretionary. Based on intentions coupled with the level of sincerity, one gets rewarded on his or her deed accordingly. Therefore, Allah (s.w.t.) judges all acts based on one’s intention and objective. This is the reason for more emphasis from the scholars on maqāsid al- Sharicah. Again, the ulama have argued 4
5. that the intention of the contracting parties , for instance, in a trade agreement gives validity to the sales or actions. Therefore the legal maxim says ‫العبرة في العقود بالمقاصد والمباني ال باأللفاظ والمباني‬ This means that in transactions the substance supersedes the form. However, understanding the literal and technical meaning of these concepts helps in demarcating the boundaries of al-hilah and al-makhraj. 2.3 Technical Meaning and Scholarly Opinions on al-Hilah and al-Makhraj Scholars, both mainstream as well as the others, have advocated a number of technical meanings and definitions to al-hilah and al-makhraj. They have demonstrated this to conceptualize al-hilah and al-makhraj differently. In the following extracts we will illustrate some of definitions. Al-hilah signifies the perfect understanding and the utilization of one’s mental reasoning and acting thereof with precision in times of taking tough decision. When he was discussing maqāsid al-Sharicah (Ibn Ashur, 2001-1421AH) outlining examples on “sad adhara’i” as part of enforcing the Sharicah objectives, Shaykh Muhammad ibn Ashur said that blocking certain avenues has strong link with al-hilah and he defines al-hilah as: one’s ability to intelligently portray or disguise an unlawful act and make it appear lawful in the eyes of Sharicah without being noticed. Yet, others consider al-hilah a tactic adopted to evade a Sharicah requirement while al-makhraj is way out to meet up a Sharicah requirement or an exit meant to avoid Sharicah infringement. Al-Asfahani defines al-hilah as an instrument used to achieve a goal secretly. Technically, according to him, al-hilah refers to a trick, being smart, intelligent insight, and the ability to act in situations perfectly or the ability to push through or exit cunningly from an enigma or difficult puzzles while appearing ostensibly 5
6. ‘innocent’ from breaching the religious restrictions. Others say it is a bad maneuver with added sin because not only one commits the prohibited act in the first place, but also goes a long way in cunningly evading the Sharicah so playing fool of the Sharicah or demeaning it. Interestingly, prominent scholars across ages have had divergent views on the technical meaning of al-hilah and they seemed to all agree that al-makhraj is usually an exit from an already committed mistake while al-hilah is a gateway into harām. Further, they maintained that al-hilah usually could be recognized when a religious restriction is been smartly bypassed and relegated. In the era of the companions of the prophet, generally, al-hilah was non-existent As such, much attention was not given to the issue and was not deliberated either. Since the followers usually do not associate or would not attempt to it for the fear of Allah (s.w.t.) and integrity of Islam. For this reason, some scholars argue that the Prophet (s.a.w.s.) already warned his followers and the strict adherence to his words by his companions led to the non-existence of al-hilah during their era. Among the prominent scholars who have written extensible on al-hilah, Ibn AlQayim argues that in the traditionally accepted decorum, and the widely customary uses and practices of al-hilah, the al-hilah has predominantly being attributed to character tainted with a witty manner to outmaneuver the Sharicah restrictions or injunctions, so as to achieve an aim cleverly without breaching the Sharicah rulings openly. Moreover, he stressed that motives and objectives play a crucial role in determining the lawful or the unlawful use of al-hilah. At this junction, the legal maxim states that: actions are judged according to their motives or intentions and not according to the applied cosmetics to the words. In any case, the inner motives are not usually apparent and it can hardly be discovered (except somebody with a deeper understanding, intelligence, far sightedness, and acumen). Nevertheless, it does not matter whether it is used in permissible act or the 6
7. prohibited ; al-hilah is always associated with unseen motives or desires prominently to escape the grip of the Sharicah through a lawful path. While al-makhraj can be seen clearly as being a way or solution to exit out of a difficult trouble and attune for the clearly violated Sharicah injunction. To this end, al-hilah is mostly attributed to committing prohibited issues in the religion while employing undisputable permissible means in disguise which maybe utterly accepted to the human reasoning or customs. Consequently, this is what alhilah is mostly known for within the general human understanding. For example they would say: “such and such is a popular man in trickery or in al-hilah; so do not associate with him or her for hi is tricky and insincere.” At this point, the past scholars have invested considerable interest into the issue of alhilah in most of their books. Moreover, some have gone to the arms length in building libraries dedicated to the collection of books on the topic of al-hilah. Here, intelligence and smartness are fundamental. Again, others have also written chapters on al-hilah in their write-ups. In his opinion, al-Imam al-Shatibi (Al-Shatibi, 1997-1417AH) argues that the technical meaning of al-hilah is “doing an act outwardly permissible but inwardly meant to relax or refute a religious obligatory or non-reachable act and subsequently expending enormous effort to turn this act to another opinion or ruling.” For centuries, the Islamic Jurists have dedicated significant importance to the topic of al-hilah. Combing through their collections, one would impeccably see tens of thousands of written works on al-hilah (Al-Faqih, 2009). Some have dedicated books on the issue of al-hilah while others have kept back separate chapters on it; all in their effort to portray the seriousness of al-hilah in which Sharicah could be breached. Since al-hilah and makhraj are critical to Islamic finance, in what follows, the origin of al-hilah practice will be identified. 7
8. 3 .0 Incorporating Sharicah Requirements through the Application of Al-makhraj & Realities In order to incorporate Sharicah requirements, in current ever increasing and changing complex financial landscape, Muslim practitioners will have to understand thoroughly the application of al-makhraj, its parameters, and the suitable methods of arriving at Sharicah-compliant solutions in light of the ease it gives. To this end, it is not only incumbent on the Muftīs and practitioners to fully possess higher level of understanding of the Islamic law of jurisprudence and legal dictum to be able to use al-makhraj efficiently but also to comprehend the fabrics of conventional finance. This urge increases alongside with the spiral speed of the development in the industry seen recently. Furthermore, fresh interpretation of the scripts in the light of the contemporary condition will aid the Islamic finance to meet the Sharicah requirements. Any passive attitude towards today’s complex financial landscape does not help the course of Islamic financial institutions. In fact they need help in product development to catch up with the rock-speed technological advancement. It is not enough to identify a non-Sharicah-compliant product as practitioners simply do and remain mute but the daring need to come up with alternatives is the major pressing issue and the most imperative. In this regard, active attitude to this seemingly plethora of changes flaring relentlessly is extremely relevant. The idea of clinging to flimsy excuses of Sharicah interpretation differences is irrelevant. Islamic financial institutions must be proactive and adaptive by properly applying almakhārij (plural of al-makhraj) when the need arises. Analysts observe that the lack of expertise in the industry is a major hurdle confronting the niche market. Since the Islamic finance practitioners have taken the stride to create Sharicah-compliant products and services, their stride and the reality demand more pro-active approach and therefore, failure is not an option. As Sharicah guided industry, compliant product innovation is excruciatingly difficult for the practitioners due to different requirements, such as the local regulatory requirement, Sharicah requirement, and the international standard setting bodies on Islamic banking activities. To further compound issues, the conventional 8
9. counterpart is exponentially flaring up in product innovations by minutes . Consequently, if the Islamic players choose to remain stagnant, such attitude will only help to retard the growth of this nascent promising niche industry. With the rocket-speed changes in the day-to-day conventional practices, the Islamic scholars would do better and be forceful and relevant by being actively responsive in fatwa issuance on real time basis. To achieve the demand at the fastest possible span, almakhraj is the way out for sure. Here, the onus is on the same scholars to ensure quick response but within the purview of the Sharicah requirements. As long as al-makhārij (legal relieves) are properly applied, any concern should not arise and the changes on market pace would be arrested timely. “All transactions are permissible except found non-Sharicah-compliant”. With this guiding dictum, Islamic finance will go forward in product innovations. Since product innovation is one of the most difficult issues startling the Islamic banking and its financial institutions. The difficulty demands the need to understand the parameters fully under which al-hilah and al-makhraj come into play in order to proffer cogent solutions. As a result, the application of al-makhraj is most appropriate. Against this background, the application of al-hilah or al-makhraj to create alternative products for the Muslim consumers is the core issue this article seeks to address. However, one thing is obvious: opinions differ across schools of thoughts and webs of interpretations of our preserved and revered Sharicah legacies. Some opinions approve a particular transaction simply because it fulfills its Sharicah conditions and pillars regardless of the driving intentions or motives underlying it. Others, on the contrary, clearly see intentions as one of the criteria and bedrocks for any recognizable and Sharicah acceptable contractual agreements. For the most part, the differences in opinions are daily phenomenal realities in socially complex life conducts. In Islamic history, unlimited instances of such occasions occurred and remained pristine in the record of the legacies, but the ultimate aim herein these 9
10. occurrences from the parties involved was the search for truth (al-haqq) and the desire to apply it correctly and satisfactorily. As a result, interpreting the scriptures, at individual level varies considerably, due to human depth of comprehension. Therefore, opinions are subject to approval or disapproval. In this situation, the Sharicah goes with opinion closest to the dalil (proof). To find the differences between the al-hilah and al-makhraj, this paper seeks to unravel the salient features in a systematic fashion. Enumerating these differences demand full comprehension of their meaning in the first place. To this end, the literal and technical meaning of both al-hilah and al-makhraj would be very relevant. In this regard, the legal maxim states, “Before passing a judgment on any Islamic issue requires a thorough understanding, and complete conceptualization of all its facets.” ‫الحكم على الشيئ فرع عن تصوره‬ 4.0 Al-hilah and al-makhraj in History It is vital to have an idea where this issue originated from. Knowing the source can help to shape the understanding and possibly the remedy. Therefore, the topic on al-hilah and al-makhraj is as old as history. The people of the book shall be the focus in this part of the paper. Not surprisingly, even after the advent of Islam, the application of al-hilah continues to surface especially when a tactic is devised to outsmart Sharicah instructions or to perpetrate its prohibitions or forbidden acts trickery. Ibn Bata (1996-1417AH) in his book, narrated with a good chain of narrators that Abu Hurairah reported the Prophet (s.a.w.s) said “Do not commit what the Jews committed so that you would make halāl what Allah has prohibited with the slightest hiyal2 (tricks or ruse)3 (Ibn Taymiyyah, 1987-1408AH). Since al-hilah is haram, its application is equally haram especially when maqāsid al-Sharicah (objectives of Sharicah) are violated. 2 3 Hiyal is the plural of hilah, which simply means ruses. Cited from Ibn Kathir :Vol 1, p. 111. 10
11. The Qur ’an reports vividly an instance where al-hilah was resorted to. This al-hilah was a trick to circumvent the prohibition. Ibn Kathir (Al-Damishky, 1999-1420AH) narrated the story of a group of Jews who broke their covenant and maneuvered their way to fish on the prohibited day. This story implies that al-hilah was an act of repugnance even in the teachings of the previous religions before the advent of Islam. In fact, one of the fundamentals of Islamic legal system is the affirmation of previous legal systems as long as they do not violate the Sharicah. This story is equally narrated in surah al-cArāf: 7:163. For full details on this story, the surah gives such detail facts. Nevertheless, the application of al-makhraj has been common in the Islamic history but al-hilah was never practiced during the era of the Prophet (s.a.w.s.) or after his death by his companions because it is the attribute and character of past followers before Islam as cited in the above story. The application of al-hilah came lately after their period. To apply al-hilah to circumvent the Sharicah rulings is harām. To this end; both al-Imam alMalik and Ahmad were very strict about it (Ibn Taymiyyah, 1987-1408AH). Whenever they were in the difficult situation, the Prophet (s.a.w.s.) was available to direct them for an exit or al-makhraj. For instance, when Bilal (r.a.) exchanged his two measures of his bad date with one measure of superior quality and brought them to the Prophet (s.a.w.s.), the Prophet (s.a.w.s.) asked him where he got the superior. In response, Bilal narrated the deal. As result, the Prophet (s.a.w.s.) told him to sell his bad dates and use the proceedings to buy the good ones instead (Al-Suyuti, n.d.).4 On the contrary al-hilah can be employed in various human activities. Take the case of marriage (Ibn al-Qayyim, n.d.), the Sharicah requires a third-time divorced woman, who intends to return to her first husband, to fulfill all the conditions of marriage peculiar to her types, and then after another divorce by her current husband, she could observe her iddah and then return to her first husband having fulfilled the requirements. Sometimes it takes long time or even she may not be divorced by her new groom. To avoid this 4 Reporeted by Ibn Abi Shaybah hadīth no. 27626 and al-Tabarani hadīth no. 10110. 11
12. scenario , al-hilah is applied by conducting the marriage, fulfilling the Sharicah requirement apparently but not genuinely. Another example would be to resort to al-hilah in order to evade zakah payment when due. For instance, when the nisab is complete and taxable, the payer could elude the zakah payment simply by selling a substantial amount from it. This move clearly reduces the nisab therefore it becomes less of the required nisab (quorum). When this situation occurs, the zakah representative cannot ask for payment because currently it is below the Sharicah requirement and therefore the payer becomes short to pay out the zakah. Here al-hilah has been applied only to manoeuvre or exit away from the Sharicah requirement knowingly and intently. As mentioned earlier, al-hilah can be associated with motives and thus it is sometimes applied in marital affairs. In this case, the hidden motive is only to legalize a return of a divorced woman to her first husband after separation. When they increasingly long for each other again, they will do certainly resort to application of al-hilah in order to reunite again (Ibn al-Qayyim, n.d.). Here, the ‘original’ husband would act as a go-between with another fake man so that this appointed man would marry his divorced wife but on the condition that he would not have any carnal relationship with her whatsoever. Moreover, after solemnizing the marriage, it is expected of him (the fake husband) to immediately divorce her. By doing so, she observes her iddah period, and then becomes permissible for the first husband. This practice has been condemned by the Prophet (s.a.w.s.). The players are caused by him (Ibn Taymiyyah, 1987-1408AH). The companions of the Prophet (s.a.w.s.) were entirely against the practice of al-hilah when it is to be used to manipulate the Sharicah for personal objectives. Issuing a fatwa on the use of al-hilah has not been observed during the era of these companions as recorded according Imam Ibn Taymiyyah. It only surfaced during the late period of the Tabicīn. Some scholars strongly argue that the real appearance of the practices of al-hilah in the Sharicah actually started in Bagdad and was extensible allowed by some Hanafi 12
13. jurists . As result, the Hanafi school of thought has been popular in the application of permissible al-hilah or al-makhraj, in some situations. It was reported that they were the first to issue a fatwa on using it. Equally important, the books of Hanafi hold many instances of al-hilah application. It was reported that Imam Abu Hanīfah had applied (Al-Faqih, 2009), with his intelligence, permissible al-hilah to help the distress exit without necessarily committing some sins. Imam Abu Hanīfah was much known of his intelligence and comprehension (Al-Faqih, 2009). However, the Imam was actually transforming the present difficult situation to meet with Sharicah requirement and not to avoid it. Furthermore, he has never loosely used al-hilah the way it is been observed in today’s contemporary way of life. While the application of al-makhraj is vital in day to day activities in order to attune for wrong done, knowing the difference can help better comprehension of these words. 5.0 Al-Hilah and Al-Makhraj: Innovation and Product Development 5.1 Examples of the Application of al-Makhraj i. Example One Abu-Umamah narrated (Al-Jaruud, 2009) that: “one of the companions (from the al-Ansārīs) emaciated profoundly and became extremely fragile. So, one of the maids in his neighborhood visited him, he became extremely elated however he had carnal knowledge with her. This companion complained of an excruciating pain, when his other fellows asked him to speak the truth about his ailment. By revealing to the others the truth, he admitted fornicating with one of their female clans in their neighborhood. As his condition increasingly deteriorated, he pushed harder for a Fatwa. The Prophet (s.a.w.s.) ordered he should be brought to him for punishment. Because he was frail, they were neither able to bring him, nor meet the prescribed punishment. Then the Prophet (s.a.w.s.) ordered his companions to thrash the man using a stalk with date cluster made of hundred tiny proportions. Bearing in mind that a legal justified exit or relief from such punishable sin is required as the offender will be unable to handle the prescribed punishment. This 13
14. example is adequately suitable to depict the application of al-makhraj . It is a situation where one attempts to exit an unlawful act and atone it. By implication, al-makhraj aims to bring relief and solution to difficult times or situations. ii. Example Two Sa’ad bin Musayyib (r.a.) narrated5 that: “The Prophet (s.a.w.s.) employed a man to administer Khaibar. On a later day, he brought some beautiful dates of Khaibar: He asked: “Are all Khaibar dates of the same quality? The man replied: No... Indeed, we do exchange two measures of bad quality date of ours for one measure of this superior quality.” Afterwards, the Prophet (s.a.w.s.) said “Don’t do this again. Sell yours and then buy this.” (Al-Bayhaqi, 1994, p. 285) In his order to the companion to sell his low quality dates first, and not to exchange the two measures of low quality of dates with one measure of high quality ones, and subsequently buy the high quality is an example of exiting (al-makhraj) from a forbidden practice to an acceptable and permissible act. By applying al-makhraj, in reality, we egress away from sinful activity prohibited by the Sharicah into a more acceptable one. On the contrary, in case of al-hilah, the driving motive is to do the forbidden act but through a lawful conduit. iii. Example Three As already mentioned, Bilal (r.a.) brought some dates as a gift to the Prophet (s.a.w.s.). When the Prophet (s.a.w.s.) inquired how he got those dates, Bilal simply told him that he exchanged his less superior dates with more superior. To give him the most appropriate relief, the Prophet (s.a.w.s.) taught him how he could go about in similar condition. This incidence was considered as an example of al-makhraj. Bilal’s story sums up a clear consent for generations to come. From a difficult unacceptable venture, an exit can be reached to craft a product as a Sharicahcompliant and naturally acceptable. 5 Sunnan al-ma’thur an al-Shafie vol.1, p.219 cited from al-maktabah al-Shamilah 3rd Edition 14
15. The philosophy behind this action creates an avenue for reasoning to the market players . They can exit out of this current difficult non-compliant liquidity management financial products, which are interest based centric into a more acceptable Sharicah products. Here comes the true relevance of the application of al-makhraj. 5.2 Al-Hilah in Contemporary Financial Products: Al-Bayc Bithaman Ājil (BBA) as a legal trick (al-hilah) Al-Bayc Bithaman Ājil (BBA) also known as Bayc Mu'ajjal, which means credit sale or sale with delayed payment (Abu-Ghuddah, 2003, p. 15), is a type of sale that is the most widely used by Islamic banks and financial institutions, at least in case of Malaysia. BBA is also known as bayc muajjal and murābahah in Pakistan and the Middle Eastern countries. BBA originates from a contract known as murābahah. It is a sale and not a loan, but this is the sale with deferred payment (Abu-Ghuddah, 2003, p. 15; Chapra, 1985, p. 169; Rosly, 2005, p. 88). Muhammad Taqi Usmani defines it as, “[a] sale in which the parties agree that the payment of price shall be deferred…” (Usmani, 2002, p. 40). According to Mustafa Omar, “BBA is a branch of Murābahah where the payment of Murābahah is deferred to a certain date agreed upon by both parties” (Mohamed, 2005, p. 4). It is important to mention that BBA in its original, theoretical form is fully valid contract. However, it seems that the theory and practices of BBA do not go hand in hand, as will be discussed shortly. Addressing the issue of murābahah and BBA, M. Umer Chapra says: This is a perfectly legitimate transaction according to the Shari'ah, provided that the risk for the transaction is borne by the financier until the possession has been passed to the customer. For such a transaction to be legal, the bank would have to sign two separate contracts, one with the supplier and the other with the customer. It would not be lawful for the bank to have only one 15
16. contract with the purchaser , the only service rendered by it being the remittance of the amount to the supplier on behalf of the purchaser. In this case the transaction would not be different from an interest-based arrangement. In addition to the dual contract, the bank would have to continue to be responsible until the goods were actually delivered to the customer, not necessarily by the bank, according with specifications and other terms of the contract. (Chapra, 1985, p. 170) 5.2.1 How Does It Work? – Modus Operandi of BBA Since ribā is prohibited by the Holy Qur’an, Islamic banks in Malaysia have introduced al-bayc bithaman ājil (BBA) to cater the needs of Muslim clients. Islamic banks are not supposed to provide ordinary offering loans. Instead Islamic bank “…theoretically purchases the house from the developer at market price (i.e. cost price) and sells it to the customer at a mark-up price” (Rosly, 2005, p. 122)6 However, as the citation says, this is done only “theoretically” while it is in fact done using buyback (bayc al-cinah) transaction. Now let us see what happens under the conventional banking. Let us assume that a customer, Ahmad, wants to buy a house which costs RM200,000. He would approach the developer and sign a sale and purchase agreement (S&P) and pay, let's say, 20 percent of the whole amount, i.e. RM40,000 as a down payment. Then he would approach a bank, say bank A, for the financing of the rest. If the bank A approves the loan, Ahmad would get RM160,000 loan and pay monthly instalment of RM1,544.037 for next 20 years (i.e. 240 instalments assuming that annual interest rate is 10%) to the bank. The very same house will be used as collateral. This will be done through the contract called deeds of assignment/charge. Final amount payable to the bank would be RM275,109.60.8 Therefore, the profit to the bank would be RM210,567.20.9 In short, under the conventional banking system the financing consists of two contracts: 6 Here, the italics is ours for emphasis. 7 Computed using the standard formula for present value of annuities, i.e. which gives Pmt 8 = i (1 + i ) n PV . (1 + i ) n − 1 Found by RM1544.03 x 240 = RM370,567.20. 16 PV = Pmt  1  1 −  i  (1 + i ) n 
17. a ) Contract of loan between the bank and Mr. Ahmad, and b) Deeds of Assignment/Charge (Rosly, 2005, p. 89) However, the case with Islamic banks is a bit complicated. Mr. Ahmad is required to buy the property from a developer, i.e. to pay down payment. By doing so he becomes a beneficiary owner of that property. Now the question arises: How can Islamic bank sell that product to Mr. Ahmad when it does not possess it at the first place? The original or the pure BBA is presented in the Figure 1 below. This figure shows how BBA should be implemented. Firstly, Mr. Ahmad identifies the property he wishes to buy. Then he approaches the bank and informs it about his intention. Secondly, the bank purchases the property from developer. Thirdly, the bank sells the property to Mr. Ahmad who gets delivery of the property on the spot. Finally, Mr. Ahmad repays the deferred price to the bank on the instalment basis throughout the agreed period. The Figure 1 above shows how BBA financing should look like. However, this is not the way it is done in Malaysian Islamic banks currently. Instead, BBA financing is implemented in the following way. Mr. Ahmad, as is the case in conventional banking, will pay down payment (i.e. RM40,000 or 20 percent) and sign sales and purchase (S&P) agreement. Now, the bank, in order to secure the ownership (milkiyyah), will purchase that asset from Mr. Ahmad through the Property Purchase Agreement (PPA). 9 Found by RM370,567.20 – RM160,000 = RM210,567.20. 17
18. In fact , this purchase takes place only on the papers since there is no real transfer of the ownership as there is no evidence registration and stamp duty. Now, note that the bank will purchase that asset from Mr. Ahmad for the remaining amount of money needed to buy whole house (i.e. RM160,000). Through the introduction of PPA the bank gets the rights over the asset and becomes the legal owner of it. Once the PPA is executed, the bank will sell the asset back to Mr. Ahmad at the deferred price. This deferred price or the selling price would be the cost price plus profit margin. For calculating profit margin, Islamic banks, without mentioning it, use some interest rate benchmark such as LIBOR. Therefore, the annual profit rate (APR) of Islamic banks would be very much close (if not the same) to the annual interest rate of conventional banks. If the APR and contracting period are the same as the annual interest rate and period in the above example of conventional loan (i.e. 10%), then the monthly instalment will be the same as well, i.e. RM1,544.03. This is illustrated in the Figure 2 bellow. In brief, BBA sale contract consist of the followings: a) Property Purchase Agreement (PPA): Bank purchases the asset from customer. b) Property Sale Agreement (PSA): Bank sells the asset to the customer at BBA price, i.e. cost plus profit margin. c) Deeds of Assignment/Charge: The asset is withheld as collateral by the bank (Rosly, 2005, p. 91). 18
19. As mentioned earlier in this paper , the bank uses the Property Purchase Agreement (PPA) and the Property Sale Agreement (PSA) simultaneously. The aforementioned agreement, PPA and PSA, are 'only legal devices' since real transfer of ownership is not taking place. In addition to this artificial mechanism, the bank, as a seller, does not hold any liability to the goods sold. As result, the customer or the buyer cannot claim anything if any defects, shrinkage or faults occur. Applying this modus operandi Islamic banks deviate from the objectives of Sharīcah – says Mahmood Sanusi (2006, p. 13). To see the real effects of the above scenario refer to the Table 1 below: Table 1 Comparison between conventional loan & BBA Price of House = RM200,000 Monthly Payment Total Payment in 20 years Total Interest/ Profit to Bank APR Balance after 10 years Customer RM40,000 Bank RM160,000 APR = 10% Conventional Loan RM1544.03 APR = 10% RM370,567.20 RM370,567.20 RM210,567.20 RM210,567.20 10% RM116,838.55 10% RM185,283.60 BBA RM1544.03 The distinguished feature of BBA, when compared with conventional loan, is with regard to the balance of financing before the stipulated date in the contract. For example, if Ahmad wants to settle his debt after 10 years, he would still owe the bank the remaining 120 instalment payments; in this case it is RM185,283.60. This amount represents the interest-cum-profit paid for a loan over the 20-year period under the conventional mortgage plan. It is also clear from this figure that the amount due by Ahmad after 10 years is still higher than the original amount borrowed by him, i.e. RM160,000. It is obvious that Islamic bank creates extra burden upon the client and has negative socio-economic consequences. It is believed that, following the fractional reserve system, Islamic banks are “very damaging to the economy” (Meera & Dzuljastri, 2005). It is also believed that under this fractional reserve banking system, 19
20. a customer using Islamic facilities through BBA owes more money to the bank than by using conventional modes of finance , at any point prior to the end of the period. It is for this reason that Islamic banking attracted even conventional banks to provide Islamic financing (Meera & Dzuljastri, 2005). Now, the question can be raised: Why do Islamic banks prefer BBA financing to other modes of finance? The answer to this question is quite simple. Islamic banks prefer this mode of finance since this technique is relatively simple to implement and it allows the banks to earn positive profits without really bearing the risk of loss, except in case of default and/or bankruptcy (Bendjilali, 1996, p. 43). 5.2.2 Recent rulings on BBA Recent legal rulings in Malaysia regarding the validity of BBA are a wake-up call for the development of Islamic financial products. Initially, the High Court of Malaysia ruled out that ten Bank Islam Malaysia Bhd (Bank Islam) contracts were structurally faulty and that defaulters did not have to pay more than the original financing amount, thus depriving Bank Islam of the profit arising from the transaction. Following the appeal filed by Bank Islam, the Court of Appeal held that the BBA facility offered by Islamic financial institutions is valid and legally binding. The said decision reaffirmed that Bank Islam’s practices in relation to BBA contracts are Shari‘ah-compliant and valid. Although the Court of Appeal approved the practice of BBA, this practice is still overshadowed with a lot of issues, the most important being its application of bay‘ ‘inah (buy-back) contract. From everything we have said so far it can be concluded that BBA as a mode of finance, even though being allowed by Sharīcah scholars, is of a questionable validity because of the modus operandi implemented in Malaysian Islamic banks. The extensive use of BBA contracts and overdependence of Islamic banks on this mode of finance will result in convergence of Islamic bank into conventional, interest-based, banks (Smolo, 2007). Criticizing this type of contract even further, Chapra says that, 20
21. "[t]he danger will, however, always remain that the mu'ajjal and murābahah forms of sales may deteriorate into purely financing arrangements with the agreed profit margin being no more than a camouflage for interest" (Chapra, 1985, p. 171) The Council of Islamic Ideology of Pakistan accepted BBA as a financial instrument, but with some reservations. This reservation is expressed in the following lines: ... this system commends itself for its relative simplicity as well as the possibility of some profit for the banks without the risk of having to share in the possible losses, except in the case of bankruptcy or default on the part of the buyer. However, although this mode of financing is understood to be permissible under the Sharī'ah, it would not be advisable to use it widely or indiscriminately in view of the danger attached to it of opening a back door for dealing on the basis of interest. (Ahmad, 1993, p. 40) Therefore, until and unless Islamic banks and financial institutions change this approach, they will remain in the shadows of the conventional financial system. In this regard Muhammad Anwar says: Proper application of the Islamic modes would have set Islamic Banks apart from the conventional banks, but this did not happen in reality because the Islamic banks manipulated the trading modes in ways that retained their identity as lenders rather than traders and entrepreneurs. Therefore, there ought to be some measures to ensure that Islamic banks are transformed from the traditional lenders to the Islamic entrepreneurs. Otherwise, the question regarding the Islamicity of their operation…would continue to confuse the Muslim mind. (Anwar, 2006, p. 357) Consequently, it is important for us to mention the rule, put forward by Islamic scholars, which says that there should be no profit without risk. In this regard Saleh Kamel (1998, pp. 13-14) says: Lack of emphasis, from the theoretical aspect, on the rule that there is no gain without risks, neglecting it totally in most operations of the Islamic banks and expanded use of guaranteed patterns of principal and return has brought confusion among the public. This loophole may provide an opportunity for skeptics to sow the seeds of confusion and deceit among people and may even pave the way for using a number of apparently logical 21
22. reasons to justify and make lawful bank interest . I strongly believe that if we continue along this line, Islamic banks will lose the theoretical as well as practical basis for their establishment and continuity. 6.0 Illustrations on al-Hilah Application and Sharicah Implications 6.1 Knowledge of al-Ahkām (Legal Rulings) In case al-hilah, the Sharicah ruling on the subject matter is clearly known to either be a permissible act or prohibited one in Sharicah. There is a pre-knowledge of the act to be embarked upon. To illustrate that usually knowledge precedes the application of al-hilah. The story of the Jews shows that they had a warning and a pre-knowledge not to fish on Saturday. Similarly, to remarry one’s divorced wife requires a true marriage by another fellow. After his demise or divorce, the first husband is allowed to remarry her. The knowledge of these prohibited acts is known. To bypass the Sharicah, al-hilah would be a way forward. On the contrary, al-makhraj seeks to comply with the Sharicah omitted requirement. The hadith of Bilal (r.a.) is a living example. The act has already been committed, so he was asked to sell the bad dates after which he would use the proceeds to buy the good dates. Bilal (r.a.) has no knowledge whatsoever about this requirement earlier. Therefore al-makhraj shows no pre-knowledge of the act committed. 6.2 Intentions In case of al-hilah, the intention usually is to commit the prohibited act through, sometimes a legitimate route or a law conduct. For example, a loan should not attract a reward or benefit because it is a benevolent act. Benefits would be branded as gifts. Here, al-hilah has been applied to disguise interest as gifts. For the reason that one’s intention and objective are possibly two barometers in measuring the noticeable behavior, al-hilah has been accorded the five types of Islamic rulings: al-hilah could be obligatory, permissible, recommended or allowable and finally reprehensible (makrūh), all of which depends wholly on the intentions. In any case, the intention subjects the action to various categories of ruling. If the driving intention is to execute a safety conduit out of death; the al-hilah is permissible 22
23. or even w ājib. Take the case of a gun threat in which if the victim does not denounce his faith, he would be minute distance to death. Here the scholars make it wājib (compulsory) for this victim to outwardly denounce but inwardly solidifies his imān (faith) in Allah. This is the permissible al-hilah, accepted by the scholars. 6.3 Objectives In case of al-hilah, the end objective of the activity is to violate a Sharicah requirement or Sharicah ruling. For example, in pre-arranged tawarruq transaction, the actual aim is to raise cash or what is called liquidity management. While in al-makhraj, the end motive or outcome is to meet a requirement legitimate in all aspect. The classical tawarruq is the best example for al-makhraj. For instance the trader has no cash available to lend it to his friend who badly needs it. This friend will buy from the trader the commodity not just to use but to sell it in order to have the necessary needed cash to a third person. In essence, the primary motive of al-hilah application is to violate the Sharicah legal ruling but with a mild approach. 7.0 Conclusion and Remarks This paper discussed the concept of al-hilah (legal trick) and al-makhraj (legal exit), the difference between the two, and their potential application in Islamic financial transactions. The paper, in addition, attempts to address the application of al-hilah as well as al-makhraj in light of the development of Islamic banking and finance industry and their products. In viewing of the importance of al-makhraj, which means legal relief or legal exit, Sharicah-compliant products may have been developed through the application of this concept. However, some difficult areas have witnessed the application of al-hilah and hence the burning desires to put a stop to it. Any convergence towards the mimicking conventional products hook line and sinker cannot be accepted. The application of alhilah has its own repercussions on the reputation of the industry. It becomes necessary to 23
24. highlight the importance of putting a demarcation between the genuine need of almakhraj and not the fake need to resort to al-hilah . Certainly, al-hilah is not in line with the values and morals, which Islamic finance is expected to disseminate based on its fundamental core business of full trust and ethical standards. Furthermore, the topic on al-hilah and al-makhraj is truly interesting though controversial Ibn al-Qayim has exhaustively dealt with the topic in his book ‘ilam alMuwaqeen but this paper is specific on Islamic Financial products. Its relevance to Islamic finance today cannot be overlooked. In order to come up with important hard solutions to the current Islamic finance travails, the forward thinking is simply to apply the al-makhraj techniques and cautiously avoid al-hilah during the process. While it is evident from Sharicah books that most controversies are centered on al-hilah because of its repugnant nature right from the historical perspective, some scholars do consent to the use of al-hilah but the outcome or end objective is subject to the fundamental five ahkām (rules) in Sharicah. This objective can be harām, halāl, madūb (recommended), makrūh (reprehensive) and wājib (mandatory). All seems to agree that the application of almakhraj on daily difficulties and challenges that a Muslim may face is accepted unanimously. In order to recognize and differentiate al-hilah from al-makhraj, scholars judge the end objective in the application of al-hilah. For instance, if the end objective is simply to commit a heinous crime or act (harām), without any hard rocket science, it simply means that the al-hilah is harām. However, if the objective is halāl, it means that the al-hilah is halāl. So the inner intention is the benchmark in evaluating any application of al-hilah or al-makhraj. Usually al-makhraj is applied to achieve and buttress the maqāsid alSharicah whereas the al-hilah is often applied to naturally evade the maqāsid. Some contemporary applications of al-hilah have been identified in some products, namely BBA, and the authors think that the industry should come out clean of these alien practices. Although some may argue it to be incorrect assessment, the responsibility on 24
25. the Islamic banking and finance industry to educate and remain transparent cannot be overemphasized . 25
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