In business, we often hear the terms so-called receivable and payable. Receivable refers to the financial right that a company deserves from other parties. In other words, receivable is a debt of a company or individual to others. Is it permissible from a shariah perspective to trade receivable that represents a kind of debt? Such a transaction likely happens once the holder of receivables needs liquidity while its due is still waiting. The article attempts to elaborate simply on the sale of debt, its types, and the divergence between the Middle East and Malaysia for its Sharia ruling. In the end, we conclude what investors might consider deciding whether to invest in the debt-related instrument.
What is the sale of debt?
In conventional finance, especially in banking practice, the bank sells outstanding advance accounts (customer debt to the bank) to a third party at a discount price. The buyer will deserve 100% par value of the debt at the due date. For example, a bank has 1 million USD advances from their clients due within 30 days. However, on day 15, the bank needed liquidity and decided to sell its advances to buyers at 960,000 USD (or a 4% discount). The holders of the advances accounts will claim 1 million USD on day 30 later.
Shariah Advisory Council of Bank Negara Malaysia (SAC BNM) defines the sale of debt in Arabic as Bay’ al-Dayn. It refers to selling debt established by exchange contracts such as Murabaha, bai’ bithaman ajil, ijarah, and istisna’. These contracts distinguish the practice of selling debt in Islamic finance from its conventional counterpart.
How many types are the sale of debt?
Sometimes, the term the sale of debt is interchangeable with al-Kaali’ (debt for debt). Hence, to avoid biased perception, we compare the type of the sale of debt as below:
- Bay al-Kali bil al-Kali (Purchasing goods on a deferred basis, and payment at deferment as well). Such a sale occurs in the Salam contract, where the purchaser (al-Muslim ilaihi) pays the ordered goods (al-Muslim fihi) on a deferred basis. Nothing is being transferred at the time of contract is concluded. For example, Hamid orders 1 ton of oats from Mahmud with a delivery date of 15 days from the concluded agreement; Hamid should pay 10,000 USD to Mahmud on a spot basis. If Hamid will transfer 10,000 USD on day 15, it is the exact Bay al-Kali bil al-Kali. Sharia prohibits such a transaction from preventing potential disputes between counterparties.
- Bay’ al-Dain for the debtor. It happens when a creditor sells his receivables to his debtor. For example, Hamid owes 10,000 USD to Mahmud for 30 days. Because of some reason, Mahmud wants Hamid to buy his receivables (10,000 USD) in exchange for a motorcycle worth 9,500 USD.
- Bay’ al-Dain for the third party. This happens when the creditor sells his receivables to another person instead of his debtor. For instance, with the same scenario above, Mahmud wants to sell his receivables to David (third party) with the same exchange value of a motorcycle worth 9,500 USD. At the maturity date (day 30), Hamid will pay 10,000 USD, not to Mahmud but David.
Contemporary majority shariah legal opinion on the sale of debt.
Islamic Fiqh Academy of Jeddah, with Mufti Taqi Usmani as the prominent scholar from this school, prohibits the sale of debt in Islamic Finance. He mentions that the classical Muslim jurists (fuqaha) are unanimous that Bai’-al-dain with discount is prohibited in Shari’ah. Furthermore, he argues that the prohibition of Bai’-al-dain has the same logical consequence as the prohibition of riba or interest. A ‘debt’ receivable in monetary terms corresponds to money, and for every transaction where money is exchanged for the same denomination of money, the price must be at par value. Any increase or decrease from one side is similar to riba and can never be allowed in Shari’ah.
On the other hand, SAC BNM resolved that the sale of debt is permissible with the condition that obligation should exist. In this regard, numerous fiqh schools have permitted flexibility in debt trading between creditor and debtor. Most scholars from the Hanafi, Maliki, Syafii, and Hanbali schools permit debt trading to the debtor because no issue of non-delivery of the contract’s object exists. After all, the sold debt is already in the creditor’s hands.
The issue of debt sale in Islamic finance concerns fixed-income instrument holders, such as Sukuk and NICD. Investors inclined to adopt the Islamic Fiqh Academy’s point of view will not exchange Sukuk or NICD in the secondary market at a discount or premium price. This is a prudent attitude for Muslim investors. However, the SAC BNM resolution is also applicable for other kin of Muslim investors who are more convenient with such sharia ruling due to their liquidity needs. We cannot say that SAC BNM is not a scrutiny attitude because they base the resolution on major classical scholars’ opinions. From this, sharia rulings provide easiness for all Muslims relative to their unique needs and conditions.
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