inesglobal.org
Working Group C3, INES Conference, Stockholm, Friday, 16th June, 2000.
EQUITY IN TRADING
AN ISLAMIC PERSPECTIVE
Fazlun Khalid
Founder Director
Islamic Foundation for Ecology and Environmental Sciences
93 Court Rd, Birmingham B12 9LQ, UK.
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PRINCIPLES
Fair trading in the market place is based on trust. The establishment of healthy trade is an act of worship modelled on the trading practices of the Prophet Muhammad. As a principle any exchange of goods is permitted as long as it does not involve -
 Forbidden commodities - eg. wine, pig.
 Usury – any increase without corresponding counter value.
 Uncertainty – e.g. sale of wheat before it is harvested or fish before they are caught.
 Fraud – e.g. charging higher prices to travellers unaware of local prices.
 Extortion – e.g. manipulation of market conditions, monopoly, monopsomy.
CUSTOMARY PRACTICE
Fair trading is also based on a community’s understanding of the local value of things based on their customary practice; the local community determines its own prices of goods and not an evaluation imposed from outside.
USURY
Usury destroys the equity in the market place and leads the way to social imbalance, oppression and the proliferation of other malpractices. However innocuous an usurious transaction may seem there is always an underlying element of gain for one party at the expense of another. Ibn Rusd, a twelfth century Islamic scholar and jurist, referred to usurers as those who “pay out money and receive more back without performing any deed or assuming any liability”. He said of the social importance of this question, “It is obvious from the shariah that the reason for prohibiting usury is to prevent the fraud that it entails. Justice in transactions consists in close approximation and equivalance (between the goods exchanged)”
MEANS OF EXCHANGE
Ibn Rushd said, “Since it is difficult to equate the value of things whose natures are different dinars and dirhams are used to price them”. He refers here to gold and silver, respectively and also to other non-perishable, easily quantifiable commodities with intrinsic value. Not bank notes, bonds and promisary notes.
It is acceptable for those in authority to standardise currency to ensure its reliability, e.g. by issuing assayed and weighed gold and silver coins. It is against market equity for the state or any cartel such as the banks to monopolise the means of exchange. This enables those in control to debase the currency and thus impose a hidden tax on the people which is usurious, because those responsible for these acts can contract debts at one value in real terms and pay them back at other debased values.
The creation of a monopoly in the means of exchange also allows the appearance of fiat money. This is a currency with no intrinsic value based on a politically imposed consensus such as paper money and electronic credits. This enables the fraudulent exchange of real assets for worthless tokens and facilitates the usurious manipulation of currency values (usually by the state) through devices such as devaluation, inflation and deflation.
THE SALE OF COMMODITIES
In order to prevent usury the exchange of commodities is only permitted through the use of weights and measures. That is staple food or gold for the same type of commodity. The folowing examples serve as a datum: good dates for poor dates, minted gold for unminted gold, when equal weight for equal weight or equal measure for equal measure is exchanged without deferral of payment. Ibn Rushd explains this as follows; “Given that there are no radical differences between specimens of the same type, when their uses are approximately the same, and that the possessor of one type has no pressing need to exchange it for another of the same type, except by way of extravagance, equity is obtainable only on the basis of equivalance in terms of weight and measure”.
FORBIDDEN TYPES OF SALES IN COMMODITIES
Ibn Rushd lists eight examples of sales each one of which demonstrates how usury enters into sales of commodities.
1. Buying time – asking for deferred payment on a purchase with the offer to pay more.
2. Disparity – refers to staple, storable food, gold and silver, which cannot be exchanged with each other with disparity. For example the exchange of two kilos of poor quality dates for one kilo of good dates is not permitted. If good quality dates are required the poor quality dates must be sold and good quality dates bought with the proceeds.
3. Delayed payment – refers to gold in exchange for silver, dates in exchange for raisins or wheat, which although of different types cannot be exchanged with each other when payment is not immediate.
4. A sale combined with a loan – all contracts which are composed of more than one transaction are forbidden.
5. A sale of gold and merchandise for gold – in this case gold is being sold for gold with disparity; the other merchandise obscuring the transaction.
6. Reducing the amount in return for immediate settlement – an inherently usurious transaction in which the purchaser who has agreed to pay back money by a certain date offers to pay a smaller amount by this date. This practice is now known as discounting and factoring.
7. The sale of foodstuffs not actually in the possession of the seller – a merchant must have actual possession of the goods for resale.
8. A sale combined with a money change – similar to 5 above and is also two transactions in one contract.
All these transactions are prohibited in keeping with the definition of usury above. Furthermore Ibn Rushd cites Imam Malik (an early Muslim jurist) who defines these prohibitions as “the protection of wealth and prevention of squandering”. The term “usury” in Islam has a much wider definition than its current understanding. It can occur in almost any transaction where there are hidden or unjustified increases which one of the party’s to transaction will have to bear.
PARASITICAL THIRD PARTIES
State interference and commercial taxes have no place in the Muslim trading world. So has money lenders, bankers, speculators, stock exchanges, promissory notes, bonds and lotteries. Traders must be free to operate within a basically healthy arena in which the pillars of sound trade are in place. These are access to gold and silver currencies and the right to chose any means of exchange unfettered by illusory paper, plastic and computerised money free of the monopoly of the banking system which governs all financial and political transactions today.
Ibn Rushd points out that the underlying rationale of all transactions regulated by the shariah is the establishment and maintenance of human virtues, in this case justice.
TRADE
Traders expend energy in going out to find suitable goods, in securing a reasonable price for them, in transporting and guarding them safely and finally selling them to a second party. Usurers rent out money and merely wait for its return with increase. They produce nothing, do not contribute any work and do not incur any risk. They are parasitical third parties who borrow from one source at one rate and lend to another at a higher rate thus intervening in a direct relationship between investors and entrepreneurs. The most sophisticated form of usury practised today is by the banking system.
Trade is generated by one to one transactions between buyer and seller where prices are determined without hidden costs. The major determinant in these transactions is trust.
CONTRACTS
Written contracts are drawn up whenever the exchange of goods or payment is delayed and the two parties see this to be mutually beneficial. In general a contract is binding upon the parties when the buyer accepts the seller’s offer before the two parties separate. When the buyer takes possession of the goods he usually accepts liability for them. There are warranty periods during which the buyer may return the goods to the seller in case the goods are defective and recover his payment. But a buyer could agree to waive his rights of recovery at the contract stage. The seller may not impose any restrictions on the buyer with regard to the ownership of the goods.
FORMS OF CONTRACTS
QIRAD
An investor entrusts a sum of money to an agent for a trading venture. If successful the agent repays the capital to the investor plus a percentage of the profits agreed in advance. If unsuccessful the investor will share the loss. This is opposite to the methods practiced by the banks today.
PARTNERSHIPS
Two or more parties come together and contribute money, goods, equipment and work and share profits in proportion to their inputs.
SHIRKA FIL BA’Y
A transaction whereby a second party contracts to sell goods owned by another. In this kind of contract the merchandise is transferred to the second party without payment and is made a partner with first party. The first party sets the minimum price and when the merchandise is sold the second party pays back the owner half the value of the goods plus half the profits.
MURABAHA
This kind of sale entails the trader announcing his cost price and the price he expects for his goods.
SALAAM
A contract of advance payment for goods to be delivered at a later date which will be stipulated. This enables contracts to be made for goods which have to be transferred from one location to another or goods that may be ready on a specific market day.
NASIA
Similar to Salaam but payment is delayed. In both cases ownership of goods is transferred to the first party immediately on completion of the contract.
IJARA
A form of rental contract for the use of a house, beast or equipment. There are also contracts for the hire of labour on a time or job basis.
The underlying principle in all these contracts is that it is one to one with no third party involvement and it is free from hidden costs which could be categorised as usurious.
MARKETS
An Islamic market is an open area set aside by the Amir (leader of a community) for people who have things to sell and come into contact with people who want to buy them. There are no reserved shop areas and allocation of space is on a first come first serve basis. Monopoly trading and hoarding are prohibited in these markets and producers and merchants are treated equally.
Fazlun Khalid
This is an edited and abridged version of FAIR TRADING a Murabitun publication. The Murabitun are a European Muslim group who specialise in the Islamic aspects of trade and economics. |
