Guarantees - Appendix B (The Shariah Basis For The Standard)

Transcription

1. Shari ’ah Standard No. (5): Guarantees Appendix (B) The Shari’ah Basis for the Standard Permissibility of Guarantees and Its Relevance to Contracts The basis of the permissibility of stipulating guarantees in contracts is that it protects property, which is one of the objectives of Shari’ah. The other authorities mentioned in the standard in support of each kind of guarantee can be cited as authority for the permissibility of guarantees in contracts. Guarantees in Trust Contracts Assets held on trust must be returned to their owners in the manner in which they were received and in their original physical state promptly after the owners demand their return. Allah, the Almighty, says: {“Allah doth command you to render back your trusts to those to whom they are due”}.(2) Since such assets are not subject to exchange, they are purposely meant either for custody with permission to use them, such as assets on deposit, or for charitable acts, such as a loan of tangible assets. Therefore, the persons holding such assets are considered by the owners from the beginning as capable of returning them to their owners on demand, making them trustees, and as a principle of Shari’ah, a trustee is not held liable (for loss of, or damage to, an asset held on trust), except in circumstances of misconduct, negligence or violation of the conditions agreed upon, because in other circumstances it is inconsistent with the fundamental principle of trusts for a trustee to be held liable. Written Documentation and Attestation Written documentation is recommended by Shari’ah. This is the opinion of the majority of Fuqaha, in contrast to Ibn Hazm who argued that written documentation is an obligation (i.e. if one did not put his financial (2) [Al-Nisa` (Women): 58]. 138
2. Shari ’ah Standard No. (5): Guarantees transactions in writing he has committed a sin) relying on the literal meaning of the Qura`nic verse: {“O ye who believe! When you deal with each other, in transactions involving future obligations in a fixed period time, reduce them to writing”}(3) and the Quranic Verse: {“Disdain not to reduce to writing your contract for a future period, whether it be small or big”.(4) The majority of Fuqaha have also inferred that this verse itself excluded written documentation in the cases of trustworthiness, as the last part of the following verse says: {“And if one of you deposits a thing on trust with another, let the trustee (faithfully) discharge his trust and left him fear Allah his Lord.”} It must be noted that customary practice is the basis in determining the form and evidential value of written documentation, because Shari’ah did not specify a particular manner of writing to be considered. As for the permissibility of attestation as documentation, the authority for that is the following Qura`nic verse: {“And get out two witnesses, out of your own men. And if there are not two men, then a man and two women, such as ye choose, for witnesses, so that if one of them errs, the other can remind her”}.(5) The evidential value of attestation according to traditional Fuqaha is stronger than that of written documentation. But in modern times, things have changed so that some laws rely on witnesses only in a very limited number of cases and paramount importance is given to written documentary evidence. Personal Guarantees Permissibility of personal guarantees Personal guarantees derive their permissibility from the Qura`n, Sunnah, consensus and reasoning. In the Qura`n, Allah, the Almighty, says: {“They said: ‘We miss the great beaker of the king; for him who produces it, is (the reward of) a camel load; I will be bound by it’”}.(6) In Sunnah, there is the Hadith narrated by Salamah Ibn Al-Akwa’, who said: “We were with the (3) [Al Baqarah (The Cow): 282]. (4) [Al Baqarah (The Cow): 282]. (5) [Al Baqarah (The Cow): 282]. (6) [Yusuf (Joseph): 72]. 139
3. Shari ’ah Standard No. (5): Guarantees Prophet (peace be upon him) when a deceased person was brought. They said, ‘O Prophet of Allah, perform prayers on him.’ He (peace be upon him) said, ‘Has the deceased left anything?’ They said, ‘No.’ He (peace be upon him) said, ‘Is he in debt?’ They said, ‘Three dinars.’ He said, ‘Perform prayers on your companion.’ Abu Qatadah said, ‘O Messenger of Allah, perform prayer on him, and I am responsible for his debt.’ Then the Prophet (peace be upon him) performed prayers on him.”(7) In another text of the Hadith, he (Qatadah) said: “I guarantee (to pay) his debt.”(8) The Fuqaha are unanimous on the permissibility of personal guarantees. Moreover, the need of people for personal guarantees to facilitate dealings with each other had also made them legitimate, particularly in the case of customers who lack a good credit record. In addition, personal guarantees encourage performance and prevent the contract from being breached and this security also justifies their permissibility. The objection to taking consideration for personal guarantees is that giving a guarantee is one of the charitable acts that should be offered without consideration, and this ruling has generated consensus among the Fuqaha. Moreover, a personal guarantee indicates a readiness to give away the amount of a loan, which means that the guarantor will pay the loan (if the principal debtor fails to pay) and have recourse to the guaranteed person for fulfilment. Hence, it is not permissible to take consideration for a guarantee, because it is not permissible to take consideration for giving away the amount of the loan itself, since such consideration is considered to be Riba. Guaranteeing unknown and future debts The Shari’ah basis for the permissibility of guaranteeing the unknown is the general meaning of the Hadith: “The guarantor is liable.”(9) because (7) Related by Al-Bukhari in his “Sahih” [2: 800], Dar Ibn Kathir and Yamamah. (8) “Sunan Al-Nasa`i” [7: 317]; “Sunan Ibn Majah”, Majah”, [2: 804]; and Al-Bayhaqi in “Al-Sunan Al-Kubra” [4: 95]. (9) The Hadith has been related by Ahmad, Abu Dawud, and Al-Tirmidhi: “Al-Darari AlMudiyyah” [1: 399], Dar Al-Jil; Ibn Majah in his “Sunan Ibn Majah” [2: 804], Dar AlFikr; and Al-Bayhaqi in “Al-Sunan Al-Kubra” [6: 72], Maktabat Dar Al-Baz. 140
4. Shari ’ah Standard No. (5): Guarantees this Hadith makes no distinction between guaranteeing the known and the unknown since there is no harm or element of dispute arising due to uncertainty here, because the unknown transaction guaranteed will become certain and known, and the guarantor will know, after the debt is incurred, the actual obligation he undertakes. Another authority for the permissibility of guaranteeing what is not known is the Quranic verse: {“...for him who produces it, is (the reward of) a camel load and I will be bound by it”.(10) Here, the guarantor guaranteed a camel load although it was not yet a debt. The evidence for the creditor’s right to demand payment from either the debtor or the guarantor is that the debt is established as liability of both of them, hence the right to demand payment from either of them. The permissibility for stipulating that the creditor has first to ask for payment from the principal debtor and that he may ask the guarantor for payment only if the debtor fails to pay, is based on an opinion in the Maliki school of law(11) and it is also an opinion of the Hanafis.(12) These opinions argued that if the debtor is solvent then demanding payment from the guarantor is pointless, unless the debtor refuses to pay. So, the requirement that payment be first sought from the debtor has a Shari’ah basis as well as being a case of adherence to a principle of natural justice. Bringing Forward Future Instalments in Case of Default in Payment The basis for this condition is the Hadith of the Prophet (peace be upon him): “Muslims are bound by the conditions they made,”(13) and because payment on a deferred basis is the right of the debtor, and the debtor may choose to pay before time and relinquish the deferral of the date of payment entirely. If this is the case, the date of payment may also be based on default so as to strengthen the collectibility of the debt and secure payment on time. The basis of the rule enabling the creditor to demand payment of all instalments in the event of default, instead of waiting until each instalment (10) (11) (12) (13) [Yusuf (Joseph): 72]. “I will be bound by it” means being a guarantor. Ibn Rushd, “Al-Bayan Wa Al-Tahsil” [11: 291]. “Bada`i’ Al-Sana`i’” [7: 2423]. Related by Al-Bayhaqi in “Al-Sunan Al-Kubra” [6: 79], Maktabat Dar Al-Baz; AlDaraqutni in his “Sunan Al-Daraqutni” [10: 27], Dar Al-Ma’rifah; Ibn Abu Shaybah in his “Musannaf ” [4: 450], Maktabat Al-Rushd; and Al-Tahawi in “Sharh Ma’ani AlAthar” [4: 90], Dar Al-Kutub Al-’Ilmiyyah. 141
5. Shari ’ah Standard No. (5): Guarantees is due, is the possibility that during the period of delay in payment the debtor may find a means to conceal his assets and claim insolvency. The permissibility of this condition is confirmed by the Resolution No. (51) issued by the International Islamic Fiqh Academy. Termination of a Sale on Deferred Payment Terms in Case of Failure to Pa The basis for this is that the seller has consented to deferred payment only if it will not lead to a loss of what is due to him. This is the opinion of the majority of Fuqaha, as opposed to the Hanafis who have confined the creditor’s right to litigation, unless he has stipulated the right to terminate the contract and “Muslims are bound by conditions they made.” Guarantees and Their Modern Applications Letters of Guarantee The basis of the rule that no remuneration may be taken for a guarantee per se is that it is a surety, and as such it is one of the contracts of charity since it involves a readiness to give away the amount of a loan for no consideration. The majority of Fuqaha agree that it is prohibited to take consideration for guarantee. However, issuing the letter of guarantee is a service that justifies charging fees. The prohibition of issuing a letter of guarantee for unlawful acts is analogous to the prohibition of giving assistance in committing a sin. The Hadith: “Allah curses the one who gives Riba and the one who takes it and the one who writes its contract and the two witnesses involved”(14) also supports this ruling, because the personal guarantor has a stronger role in establishing and recovering a debt than the writer of the contract and the witness mentioned in the Hadith. Documentary credits The basis for the permissibility of charging fees for a documentary credit is that issuing a documentary credit is a service performed in the interest of the applicant for the documentary credit, for which the Bank has the right to charge fees. (14) Related by Muslim in his “Sahih” [3: 1219], Dar Ihya` Al-Turath Al-’Arabi; and the five compilers of Hadith, and see: Al-Shawkani “Nayl Al-Awtar” [5: 296], Dar Al-Jil. 142
6. Shari ’ah Standard No. (5): Guarantees Use of cheques or promissory notes The Shari’ah basis for obtaining cheques or promissory notes from the debtor as a guarantee is the general sources on the permissibility of guarantees in general. Insurance for debts Islamic insurance is based on the principle of donation, and Gharar is tolerable in such conditions. In Islamic insurance, the instalments that are paid are provided within a framework of donations organised for the mutual benefit of the contributors to the insurance fund. The permissibility of Islamic insurance is confirmed by the resolutions issued by the Islamic Fiqh Academy of the World Muslim League (15) and the International Islamic Fiqh Academy of the Organisation of Islamic Conference.(16) Although this form of insurance falls within the meaning of a guarantee, the guarantee here is not provided in return for conditional consideration as such, hence the permissibility of subscribing to an Islamic insurance coverage as security for doubtful or bad debts. Freezing cash deposits The basis for the permissibility of stipulating a right to freeze acustomer’s investment account is the permissibility of pledging funds, in addition to the fact that the purpose behind such freezing is to be able to agree on a set-off if it appears that the pledgor of the balance is in debt to the bank. It is a form of mortgage to secure a possible future debt. The basis for the prohibition of stipulating a right to freeze a customer’s current account is that such a right would be tantamount to a combination of a sale on deferred payment terms and a loan transaction; i.e., it amounts to a deferred sale with a condition to provide a loan, which is prohibited by Shari’ah. Third party guarantees The basis for third party guarantees is that they are a promise to volunteer to remedy a loss of capital under an investment contract with a party other (15) The First Session, Resolution No. (5). (16) Resolution No. 9 (9/2). 143
7. Shari ’ah Standard No. (5): Guarantees than the volunteer. This is a permissible act as a volunteer, as is evidenced in the Holy Qura`n: {“No ground (of complaint) can there be against such as do right,”}.(17) A resolution passed by the International Islamic Fiqh Academy states as follows: “There is no Shari’ah objection to mention in the prospectus of the issue or in the documents of Muqaradah (Mudarabah) bonds the promise of a third party, who is independent personally and in terms of financial liability from the two parties to the contract, to volunteer an amount of money for no consideration to be allocated to make good a loss on a particular project. However, this is circumscribed with a condition that such a promise should be an obligation independent from the Mudarabah contract. In other words, the third party’s performance of his obligation should not be a condition for the enforcement of the contract and the conditions and liabilities of the parties to the contract. As such, holders of the bonds or the manager of the Mudarabah are not entitled to claim that they may fail to honour their obligations relating to their contracts because the volunteer failed to fulfil his promise because the performance of their obligations takes into consideration the promise to volunteer.”(18) Underwriting the subscription of shares issued If such underwriting is offered without consideration, it is considered as a personal guarantee for no consideration, and this is permissible in Shari’ah. However, if it is for consideration, the basis for its prohibition is what we have mentioned in respect to taking a commission for a guarantee. [see item 4/1] Guarantees in tenders, security deposits in Murabahah transactions and ’Arboun (Earnest Money) The basis for the permissibility of guarantees in tenders and earnest money is the afore-mentioned authority for guarantees in general. Both guarantees in tenders and security deposits are permissible because they facilitate obtaining compensation for actual damages in case of breach of contract. The basis for obtaining the earnest money to secure performance (17) [Al-Tawbah (Repentance): 91]. (18) Resolution No. 30 (5/4) 144
8. Shari ’ah Standard No. (5): Guarantees is the practice of Umar Ibn Al-Khattab (may Allah be pleased with him) in the presence of some companions of the Prophet (peace be upon him), which has been permitted by Imam Ahmad. A resolution has been issued in connection with the permissibility of ’Arboun (Earnest Money) by the International Islamic Fiqh Academy.(19) Priority right of recovery and the right to follow up The basis for the permissibility of the priority of certain rights, such as those of liquidators, is that these rights are considerations that are determined by the judiciary on the basis of public interest. The basis for giving priority to a person whose assets per se have contributed to the increase of the bankrupt’s assets, and have been located and identified, is the Hadith of the Prophet (peace be upon him): “If one sells a commodity, and the owner thereof becomes bankrupt, and then he finds it without being altered, he has more right over it than the other creditors.”(20) A resolution in connection with the permissibility of preference was issued by the Second Fiqh Seminar hosted by Kuwait Finance House, based on a number of Fiqh rulings determining certain preferences that include priority in the recovery of debts. The right of following up the subject of a mortgage is based on the fact that the aim of the mortgage is to facilitate recovery of the amount of the debt and leaving the debtor without a right of follow-up will defeat this objective. (19) Resolution No. 72 (3/8) in respect of ’Arboun (Earnest Money). (20) Related by Al-Bukhari and Muslim with different texts as follows: “If one finds his property without being altered in the possession of a bankrupt, he has more right over it than the other creditors” creditors”:: “Sahih Al-Bukhari” (H: 2402); and “Sahih Muslim” (H: 1559). 145