Literally, Bai‘ means
exchange of one thing with another; one thing being the subject matter (Mabi‘)
and the other being price (Thaman). The Majallah, a code of Islamic commercial law
based on the Hanafi Fiqh, defines a sale as “the exchange of property for
property”, and in the language of the law, it signifies an exchange of property
for property with mutual consent of the parties, which is completed by
declaration and acceptance.3 Legally, Bai‘ refers to giving
ownership of a commodity to another person in compensation of the other commodity.
The seller gives ownership of the commodity to the buyer on a permanent basis in
exchange for the price.
The word Bai‘ in its
widest meaning stands for any bilateral contract. In that sense, a simple word
for Bai‘ would be “exchange”. This may involve all types of business and any
exchange. But all exchanges that lead to Riba are unanimously prohibited. This
is why, contracts for interest-based loans are excluded from the definition of
valid Bai‘ according to the jurists.4 Similarly,
exchanges based on Gharar or absolute uncertainties are void. The literature of
Hadith and Fiqh contains mention of many types of Bai‘ that have been prohibited
by the holy Prophet (pbuh). The common factor of all such prohibited types is that
they contained the elements of Riba, deception and/or Gharar. A sale, to become
valid, must be free from all false and prohibited practices.
Different exchanges
involve different rules in respect of the liabilities and benefits for the
parties to exchange, ownership rights, etc. Exchange in the form of trading
involves the reciprocal exchange of property rights along with usufruct. In
Ijarah, which is termed the sale of usufruct, the lessor gives usufruct against
rental but retains ownership along with the liabilities relating to ownership.
In loans, there is a temporary but complete transfer of ownership (along with
usufruct) to the borrower, who can use the loaned item like his other
possessions, but he has to give it back. Shirkah involves sharing of ownership
and benefit/loss among the partners.
(Image courtesy:
AIMS Institute of Islamic banking and finance taken from the books of Islamic
finance course and diploma in Islamic banking and finance)
In trade, as soon as a
sale agreement takes place, ownership of the subject matter is transferred to
the buyer, irrespective of whether he has made a cash payment or has to pay in
the future according to an agreed schedule. In the latter case, the buyer is
liable to pay the agreed price and not the commodity. In a loan, the
item/commodity of loan is transferred to the borrower and he gets ownership of
the item with full discretion about its use. But he has to repay a similar
item/commodity or the money.
While Riba-based loaning
involves the definite right of return, Bai yields risk-based return. In other
words, “risk and reward” is an essential ingredient of trade, which is inherent
in all trading activities. A transaction becomes usurious if it involves an
exchange of two counter values such that ownership in the item exchanged is
passed on to the other party who has to repay it with any excess; e.g. if A
gives $1000 to B for his use and B uses it for consumption or in his business
and then returns $1000 to A, it will be a loan transaction; it will become
usurious if A is required to pay any extra amount, $1050 for example.
Accordingly, rules are
specific to every exchange (these have been explained in Chapter 4). A trade
transaction requires the transfer of complete and instant ownership that is
irreversible once finalized. It means that the seller excludes the commodity
from his ownership and gives it to the buyer on a permanent basis, while in
loans, ownership is transferred for a specified period and exactly its similar
has to be paid back.
When the genera of the
goods to be exchanged in trading are different, delivery of one of the
exchanged items can be delayed, as in a credit sale or as in advance payment
for purchase of wheat through Salam. If gold or any currency is exchanged for
wheat or any other commodity, there is no Riba; if wheat is exchanged for
barley, Riba is found if delivery of one is delayed, because they are species
of the same genus. Loan transactions, on the other hand, have
to be executed on an equal basis for the purpose of repayment. All banking
transactions are covered under this rule and their unequal exchange is
tantamount to Riba. Therefore, as conventional banks deal in money, their transactions
cannot be termed as Bai‘ in the strict sense.
Exchange of values as
define in institute
of Islamic banking and finance is going wrong a bit in most of the Islamic
banking courses or certificate in Islamic finance classes. I personally
read most of the books of Islamic finance certification and diploma
Islamic finance which was giving definition of salam in the heading of Bai’
which is totally different so I decided to clear this point and changed the
definitions in my certificate in Islamic banking and diploma in Islamic finance
books.
In this respect,
renowned Hanafi jurist Sarakhsi says: “Trade is of two kinds: permitted (Halal),
which is called Bai‘ in the law; and prohibited (Haram), which is called Riba.
Both are types of trade. Allah Almighty informs us, through the denial of the
disbelievers, about the rational difference between exchange (Bai‘) and Riba,
and says: ‘That is because they said Bai‘ is like Riba’. Almighty, then,
distinguishes between prohibition and permission by saying: ‘And Allah has
permitted sale and prohibited Riba’.”9 Therefore,
contemporary Muslim scholars also do not include loaning in the meaning of the
term Bai‘, particularly
because present-day
money is fiat money and not bullion money that had intrinsic value and that was
traded in the past in addition to serving as a medium of exchange.
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