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Selasa, 06 April 2010

Fiqhi Issues In Commodity Futures

Mohammad Hashim Kamali**

Abstract

The debate over the permissibility or otherwise of futures trading in Islamic law continues to invoke responses from basically two opposite camps: the conservative [ulama’, and the modern reformer- and the two still remain far apart. There are many detailed issues that need to be raised and an overall evaluation to be attempted. This is the basic hypothesis of this essay: to review and evaluate the responses from the perspective of Islamic law, and wherever necessary, to attempt a fresh analysis and response. Futures trading proceeds over a variety of commodities and financial products, some of which are interest-bearing, and some which proceed over prohibited substances. These are precluded from the scope of this essay. The only sector of futures that is considered here is futures trading in commodities such food grains, oils and pulses, which are essential foodstuffs and which present a pressing case for reconsideration and review.

I. INTRODUCTORY REMARKS

Ever since the inception of organized futures markets in the early 1970s, new products and trading formulas in various sectors of the derivatives markets have increased and futures contracts are currently available in a large number of commodities, ranging from food grains, oil and oil seeds, sugar, coffee, livestock, eggs, orange juice, cotton, rubber, precious metals, and currencies. In terms of volume, futures’ trading has far exceeded trading levels in conventional stocks and it is now the single most voluminous mode of commerce on the global scale.

What basically prompted the formation of futures market was the fear of the buyers and sellers of commodities over the unwanted movement of prices. The sellers of commodities feared drastic reduction in the prices of their goods whereas the buyers or potential buyers were wary of price hikes at the time they might have needed to buy. The conventional remedy available to them was for the buyer to buy the commodity at the desired price and then keep it until the time he needed to use it. The buyer would in that case incur costs of transportation and storage etc., and would also have to pay for what he bought in full. If the seller wished to keep his goods until a future date, he too would incur costs of carriage. In both cases, the costs of carriage would add to the prices that would most likely be passed on to the consumer. The futures market provided a mechanism that sought to overcome these difficulties by making it possible for buyers and sellers to enter the market when they needed to at considerably lower costs. These costs according to one estimate could be as low as one-tenth to one-twentieth of the cost of carriage of cash market transactions.

Farmers, commodity merchants and factory owners were thus enabled to lock-in a favorable position for the goods they needed in the months ahead or sell their goods well ahead of time at favorable prices. The futures market opened new possibilities for management of risk over production, marketing and investment planning. These benefits are also not confined to individual traders. Developing countries that need sizeable investment capital can considerably improve their prospects of obtaining it from the international market if they provide the investors with effective risk management facilities. Futures and options can thus contribute to the prospects of attracting investment and enhancing the financing capabilities of developing countries.

It is normal for major producers of goods to want to have a greater influence over the pricing of their products. In the case, for example, of palm oil of which Malaysia is the leading producer, until the early 1980s palm oil prices were being determined by traders and speculators in London. Since the inception of a futures market in Kuala Lumpur in 1983, Malaysia has not only become the principal player in the pricing of palm oil but also benefits by the spin-off activity from palm oil futures, such as employment opportunities, training of skilled labor force and so forth.

A similar initiative is long overdue with regard to petroleum products of which the Middle East and Gulf countries are the major producers. Trading in oil products currently takes place in New York, London and Singapore etc., but not in the Middle East itself. The major producers of oil are thus excluded from the benefits that flow from derivatives trading in this sector. One might even say that the establishment of derivatives market for oil and oil products by Muslim countries is a necessity. The majority of the OPEC member countries with the exception of Venezuela are Muslim countries. Since Islamic financial institutions cannot invest in interest-based products, bonds and currencies, it is all the more important for them to open derivatives markets in commodities. This would also help to at least partially alleviate the problem over the flight of capital from the Middle East to the Western markets.

Absence of adequate investment facilities is a major reason for the continued flight of funds from the oil-rich countries of the Middle East to the West. In a Financial Times article, Roula Khalaf wrote that “acceptance of Islamic banking is growing,” but that the Qur’anic prohibition of receiving or paying interest has meant that “about 75 percent of Islamic banking funds are invested in short-term commodity (futures) trades.” To give an indication as to where the money goes, Khalaf wrote that commodity trading is conducted “in return for a fee by a middleman – often a Western bank, like Citibank – that arranges for a trader to buy goods on the Islamic bank’s behalf … and the Western banks have always been happy to oblige.”

Contrary to expectation, and in view of the Shari[ah principle of permissibility (ibahah) that renders all commercial transactions permissible in the absence of a clear prohibition, one is confronted with a rather discouraging form of taqlid (imitation) in the verdict of the Makkah-based Fiqh Academy, its equivalent in Jeddah, and also of many Muslim scholars who have proscribed futures trading and declared it totally forbidden. This body of opinion is founded mainly on the premise that futures trading do not fulfill the requirements of the conventional law of sale as stipulated in the fiqh al-mu[amalat. The fact that futures represent a new phenomenon is totally ignored.

The title of Khalaf’s article, “An Inherent Contradiction,” portrays the concern of Islamic banks and investors to observe the letter of the Qur’an on usury but also underscores their failure to act for the benefit and prosperity of the Muslim masses. Part of the problem is that the Shari[ah advisors to these institutions have limited their understanding of the Shari[ah only to the fiqh textbooks and have not paid much attention to the dismaying economic predicament of the Muslims. In answer to the question whether Islamic banks may invest in futures, Khalaf wrote that “it depends on the bank’s Shari[ah board, whose members are experts in the Koran but less so in the field of bank options …. It is up to each institution to say what is Islamic.”

This essay is presented in nine sections, beginning with a statement of issues in section two, which is followed by a description of the futures contract, and a literature review in the next two sections. “Sell not what is not with you” is a Hadith text, which is analyzed in section five. This is followed, in turn, by an analysis of sale prior to taking possession (qabd) and a similar analysis of sale of debts (bay[ al-dayn) and risk-taking (gharar) in the succeeding two sections. Section eight briefly addresses the off-setting transaction in futures, followed by a review of the Qur’anic verse of mudayanah (2:283), and a conclusion. Scope does not permit addressing other areas of derivatives, such as options and swaps, which is why I confine this analysis only to futures trading in commodities.
II. A STATEMENT OF ISSUES?
The juristic debate over futures revolves around the following five points. The first is that both counter values in such sales are nonexistent at the time of contract, for no goods are delivered at that time and no price is paid. The futures contract is, therefore, only a paper transaction and not a genuine sale. It is also said that futures sales consist merely of an exchange of promises made for the sole purpose of speculative profit making. The Shari[ah considers a sale valid only if at least one of the counter values is present at the time of contract. Either the price or delivery of the sold item may be postponed to a future date – but not both. Second, futures trading is said to be invalid because it consists of short selling, in which the seller does not own nor possess the item he sells. The reason given is that the essence and purpose of sale is to transfer ownership of the sold item to the buyer. However, if the seller does not own the item, its ownership cannot be transferred. Third, it is said that futures sales fall short of meeting the requirements of qabd, or taking possession of the item prior to resale. Nearly all sales and purchases in the futures market take place without physical delivery. This is also the case in off-set transactions that are concluded so as to close out an open position in the market. Fourth, the critics have argued that deferment of both counter values to a future date turns futures sales into the sale of one debt for another (bay[ al-kali bi al-kali), which is said to be forbidden. And, fifth, that futures trading involves speculation that verges on gambling and gharar (uncertainty and risk taking). The gambling element is also said to cause volatility of commodity prices in the cash market.

Most of these issues proceed from a fiqhi perspective concerning the validity of a conventional sale and tend to ignore the operational procedures and rules observed in futures trading. As for the element of gambling, the view recorded in some earlier studies that futures encourage price volatility and destabilize the market has not been confirmed by subsequent studies. More recent research has, in fact, supported the opposite view: Futures trading tends to reduce price volatility and has a stabilizing influence on the market.

There is basically no issue over riba in commodity futures. Excepting the sectors which proceed over interest, namely interest rate futures, foreign currency futures and stock index futures, futures trading in commodities do not partake in riba as there is no giving or taking of interest involved in them. Nor do they proceed over exchange merely of money for money, but consist of sales and purchases of goods that involve transfer of ownership of the goods concerned and their prices between the traders.
III. FUTURES MARKETS AND CONTRACTS
A trader, who enters a futures contract, whether as buyer or seller, is required to pay a margin deposit of about 10 percent of the contract value. The actual price is paid when the buyer wishes to take delivery and the counter values change hands. But actual delivery takes place in only about 2 percent of all contracts, for the rest of the traders usually enter a reverse transaction prior to maturity and settle their accounts with the clearinghouse. A profit or loss might be made, but offsetting transactions prior to maturity is a unique feature of futures trading that facilitate liquidity and enables traders to move in and out of contracts and seize the opportunity to make profits.

A trader who enters a futures contract may be either a genuine hedger who buys or sells a futures contract to protect himself from drastic price fluctuations, or (and more likely) a speculator hoping to profit from those price movements. Upon closer examination, however, one finds that such a distinction is rather conceptual than real, for it is difficult to distinguish between the two in categorical terms – hedgers are also speculators who take a certain risk and speculate over likely price movements. Even if traders enter the market in order to hedge a position, later when the price moves in their favor, they may well decide to sell and then buy again when the prices go down, in which case the traders, for all intents and purposes, have become speculators. Since futures take place on the basis of a low margin deposit of only about 10 percent of the actual price, they remain wide open to financial speculation and excessive risk taking. This is often said to resemble gambling. Yet speculation and hedging are essential to futures markets, which cannot function without the presence of hedgers and speculators.

The risk management function of futures is manifested in its use as a hedging device. Hedging (al-tahawwut) as a risk management tool acquires even greater significance in modern economies in which the movement of goods and capital takes place at a rapid pace, in much larger quantities and at lower costs. There is also greater volatility in the exchange rates of currencies. These have under contemporary conditions made “hedging mechanisms a necessity by which to limit exposure to risk, avoid bankruptcy and intolerable consequences of price changes.” The risks are so high that employing adequate hedging strategies has now become a central feature and theme of financial management. The need for hedging is also underscored by the fact that no reliable forecast and warning mechanism is available in the system, which leaves all market participants vulnerable to the adverse effects of unexpected price changes.
The absence of a risk management mechanism is equally true of the Islamic law of transactions. Volatility of prices and currencies is by and large a modern phenomenon, which is why the scholastic fiqh literature has not addressed the issue. All that one finds is the availability of certain contract varieties such as the advance payment sale of salam, deferred payment sale (bay[ bi-thaman ajil) and the manufacturing contract (al-istisna[) that can be used by buyers and sellers for their particular needs. But the use of these contracts as hedging devices is necessarily limited by the cost factor: using them for hedging purposes would be costly. These contracts can in any case only provide a partial answer, as they were not designed for hedging purposes. And then also contracts tend to contemplate relatively stable markets and prices and may not be that effective in volatile market situation.

Since protection of property is one of the higher objectives (maqasid) of Shari[ah, it may be argued that failure to protect one’s property in the face of risk and bankruptcy is tantamount to neglect of duty which is undesirable from the viewpoint of Islam. As one observer stated “it is a requirement that buyers and sellers take protective measures against actual and potential harm (darar). Risk and darar may not be possible to eliminate but one can reduce them by recourse to risk management strategies and hedging.”

The futures contract is defined as “a legally binding commitment to deliver at a future date, or take delivery of, a given quantity of a commodity, or a financial instrument at an agreed price.” It as a firm legal agreement between a buyer/seller and an established commodity exchange in which the trader agrees to deliver or accept delivery, during a designated period, of a specified amount of a certain commodity. The commodity so traded must adhere to the quality and delivery conditions prescribed by the commodity exchange on which it is traded. The price is competitively determined by “open outcry” on the trading floor or through a computer-based marketplace.

Futures markets perform the economic functions of managing the price risk associated with holding the underlying commodity over a period of time. The futures market is “a risk transfer mechanism whereby those exposed to risk shift them to someone else; the other party may be someone with an opposite physical market risk or a speculator”. Future and options are also known as derivatives in the sense that they are derived from the underlying commodity or instrument.

The contract, if taken to maturity, is fulfilled by a cash payment of price and actual delivery of the item on the delivery date based on the settlement price for that date. The parties do not negotiate the terms of their agreement, as these are all standardized and advertised in advance, except for the actual price, known as the “exercise price,” that is settled on the floor of the exchange. Standardization in respect of contract size, maturity date, product quality, place of delivery etc., enables trading on the market floor to be conducted in large quantities with increased liquidity and lower transaction costs. Upon conclusion of contract, a record of the transaction is made and, following various checks, the contract is registered with the clearinghouse.

The clearinghouse now interposes itself between buyer and seller and effectively becomes the other party to all contracts – buyer to all contracts sold and seller to all contracts bought. The seller has a contract with the clearinghouse to sell his/her commodity and to be paid, just as the buyer has a contract with it to receive delivery of the specified commodity at maturity. This arrangement enables participants to trade freely in the market without having to worry about their counterparts’ creditworthiness. The success and efficiency of futures is due largely to the clearinghouse’s clearance and guarantee functions. All transactions of one day’s trading are thus “cleared” before the start of the next, and timely delivery (if desired) to every buyer and payment upon delivery (if desired) to every seller are guaranteed. The clearinghouse guarantees payment, whenever a net position so warrants, on contracts that are to be closed out by offsetting transactions.

The clearinghouse has always performed as promised, partly because it maintains no futures market position of its own, as its prime concern is to balance out transactions and guarantee performance. It eliminates risk over contract performance partly through its daily settlement procedure and also by ensuring that members provide sufficient collateral to cover potential liabilities. The clearinghouse monitors the size of each trading position daily to ensure that traders do not overextend themselves by building up large positions that they will have difficulty serving. The exchange is responsible to compensate the party who has suffered from a breach of contract and undertakes necessary action to secure damages from the violator.

Initially there has been some disagreement as to the juristic identification of futures within the fiqh format of nominate contracts. There were those who subsumed futures under the salam sale, albeit a variation thereof. It was said to be a salam with a differed payment. Majd al-Din Azzam called it shibh al-salam, or quasi-salam, but added, and rightly so, that the futures contract could not be subsumed under the salam simply because in salam, the price of the goods is paid on spot basis.

Sami Hamoud considered futures to consist of a promise to sell, or exchange of promises (mu[awwadah), which is lawful in all sales except the sale of currencies (al-sarf). The Malikis have considered such a promise binding and the civil law of Jordan has also adopted the Maliki view.

Mustafa al-Zarqa thought that futures did not fit the description either of salam or of deferred sale (bay[ al-mu’ajjal) simply because one of the counter values is present at the time of contract in both of these whereas in futures both of the counter values are deferred to a future date.

Yet it is ironical that many of the prohibitive judgments on futures have subsumed futures under the rubric of salam and declared them prohibited simply because they did not comply with the requirements of salam. It is then added that deferment of the price in salam to a future date renders it into bay[ al-kali bil-kali. The critics have thus ignored the market mechanism of futures, its operational procedures, the clearinghouse guarantees and, the fact that unlike salam futures transactions are not available in the open market. To ignore these and similar other aspects of futures and compare them with salam or bay[ al-mu’ajjal and then declare them prohibited on that basis is tantamount to indiscriminate taqlid. It might have been preferable instead to recognize futures as a new contract.
IV. LITERATURE REVIEW
[Abd al Rahman al-Jaziri’s considered the Egyptian futures contract in cotton as a void able sale (bay[ al-fasid) in which a movable object is resold prior to taking possession. Thus, when a person buys a quantity of cotton or cloth and then resells it to the original owner or a third party before taking delivery, the sale is void able. “This also applies,” al-Jaziri added, “to the well-known sale of (futures) contracts in our time. When someone buys cotton, for example, and then sells it prior to taking delivery from the seller – whether the second sale is at the same price or lower – the sale is void able.” The sale of immovable objects such as houses and gardens, prior to taking possession of them, however, is valid, as there is no fear of their destruction or loss. There are exceptions, of course, such as their being exposed to danger – the house is located on the seashore – in which case the sale would be subject to the same rules that apply to movable objects.

Clearly, the basic rationale behind taking possession prior to selling is to prevent gharar (uncertainly over the seller’s ability to deliver in the event of destruction and loss). If gharar can be effectively removed, then it follows that the requirement of taking the item into possession may be relaxed or totally omitted.

Muhammad Akram Khan made a statement that “futures trading is alien to Islamic law as it involves trading without actual transfer of the commodity or stock to the buyer, which is explicitly prohibited by the Prophet.” The Hadith cited in support addressed a Companion, Hakim ibn Hizam to “sell not what is not with you.” Khan did not take this Hadith to its logical conclusion and has not explored the juristic discourse of the fuqaha’ and commentators on the issues he has raised, and yet he stated categorically that “all the transactions in these chain are unlawful;” and “the Islamic position on futures market is quite clear.” Khan passed the same negative judgment on forward contracts: Futures contracts “have a strong element of speculation” and forward contracts which consist of an exchange of promises “are not legally enforceable.”

In his 1983 publication on the Islamic law of obligations, Subhi Mahmassani stated in passing that “contracts concerning future things (al ashya’ al mustaqbalah) are basically invalid, for such things are non-existent at the time of contract – except for the fact that the majority of jurists have exceptionally permitted certain contracts such as salam (forward sale) and istisna[ (contract of manufacture).” It is stated further that proprietary contracts ([uquūd al tamlik), which seek to postpone the transfer of ownership of the object specified in the contract is a form of gambling, which is why they are prohibited.

In his 1982 article entitled “Ra’y al Tashri[ al Islami fi Masa’il al Bursah” (The Shari[ah Perspective on Bourse-Related Issues, Ahmad Yūsuf Sulayman reviewed the fiqhi rules on such issues as the sale of objects that the seller does not own, sale prior to taking possession, deferred sale, an sale of the nonexistent. He applied the rules of conventional sale on these issues directly to futures and passed prohibitive judgments on almost every case. Sulayman also relied on the earlier quoted Hadith but has not looked into its meaning and rationale, and stated that the Shari[ah has validated salam (forward sale in which only the price is paid at the time of contract, but delivery is postponed to a future date), and that this is the only framework within which a deferred sale involving a future delivery can be validly concluded.

Badr al Mutawalli [Abd al Basit, Shari[ah advisor to the Finance House of Kuwait, also based his views on futures entirely on salam. Since futures do not fulfill all requirements of a salam sale, they are prohibited. This is the extent, according to Sulayman and [Abd al Basit, of the Shari[ah’s flexibility concerning deferment in a sale. In other words, a sale in which both counter values are deferred to a future date is ultra virus and, in their view, the Shari[ah is closed totally to the prospect of validating futures.

This negative stance on futures is also reflected in the views of Muhammad Taqi Usmani, a member of the Islamic Fiqh Academy of Jeddah, who wrote that “futures contracts are unlawful under the Shari[ah they do not serve a good purpose such that would warrant their validation under the Shari[ah. For what happens in the futures market is not genuine trading, the purpose is profit making through sales that are more akin to gambling …we do not therefore need to search for valid alternatives to futures … should there arise any such need, it should be addressed within the framework of salam.”

This is an exceedingly negative position, which is also dismissive of the benefits of futures, especially in its part where Usmani seeks to close the door to further research that might seek to find feasible Islamic alternatives to futures. There is general agreement, moreover, that salam is too restrictive to provide an alternative to futures simply because in salam the price of the salam commodity must be paid in full at the time of contract.

Usmani reiterated his views in an interview where he commented:

It is a well-recognized principle of Shari[ah that sale and purchase cannot be effected for a future date. Therefore, all forward and future transactions are invalid in Shari[ah … no rights and obligation can emanate there from. Futures are totally impermissible regardless of their subject matter. Similarly it makes no difference whether these contracts are entered into for the purpose of speculation or for the purpose of hedging.

The views of Sulayman and [Abd al Basit have been challenged and refuted by two prominent commentators: [Ali [Abd al Qadir and Majd al Din [Azzam. [Abd al Qadir’s commentary, which refutes Sulayman’s contentions, was published in the same volume of the Encyclopedia of Islamic Banks (in Arabic) that carried Sulayman’s article. [Azzam’s response to [Abd al Basit appeared in the same collection of legal verdicts (fatawa) published by the Finance House of Kuwait. Both commentators criticized the basic approach used by Sulayman and [Abd al Basit and emphasized, in turn, that futures trading was a new mode of trading that called for a fresh response formulated in light of the operative procedures of futures markets.

[Abd al Karim al Khatib admitted that futures contracts did not fulfill all the requirements of a conventional contract, but added that they were carefully regulated and satisfied the basic purpose and rationale of those rules. [Azzam, al Khatib and [Abd al Qadir share the view that the registration and clearance procedures, as well as the guarantee functions of the clearinghouse, are precise and that trading futures are conducted by trained professionals in a highly centralized and controlled market. The contract specifications and its related procedures are such that the prospects of uncertainty and gharar were virtually eliminated. Thus, the conclusion is drawn that futures contracts are valid from the Shari[ah perspective.

In its 1985 resolution on stocks and commodities markets, the Makkah-based Fiqh Academy has taken a somewhat ambivalent view of futures. While it acknowledges the benefits of futures to farmers and commodity traders, it fails to reflect that evaluation in its final verdict on the subject. The Fiqh Academy also acknowledged that futures trading has developed into a variety of different transactions, and therefore one ought to look at each individually and evaluate it on that basis, but did not reflect this view in its final resolution, which is prohibitive on futures as a whole and does not attempt to address individual issues. Futures transactions are forbidden, as they involve the sale of things that the seller does not own nor possess and are concluded over things that do not exist at the time of contract. The Academy’s resolution stated that most futures sales were not genuine sales, in that the parties were not interested in making or taking delivery but were seeking to make a profit from commodity price movements. The conclusion was drawn that buying and selling futures contracts was closer to gambling rather than trading.

Abdel-Hamid al-Ghazali, an Islamic economist, stressed the real benefits of futures especially their effects on supply, cost, and business planning, and recommended that these benefits should be taken into consideration. Mukhtar al-Salami, the then Mufti of Tunis, emphasized that “there is a real need for future markets” and called on Muslim jurists to address juridical issues on futures according to modern circumstances. The Fiqh Academy scholars, Salami added, must not limit themselves by quoting what is recorded in fiqh books and avoid passing prohibitive judgments on that basis. Munzir Kahf, also an Islamic economist, is critical of the Fiqh Academy position on futures and commented that the futures market is the only market where large business in commodities is conducted. Kahf added that despite the negative stance of the Fiqh Academy, Islamic alternatives must be found in order to facilitate the real benefits of these markets especially in the commodities sector.
V. “SELL NOT WHAT IS NOT WITH YOU”
This heading is a direct translation of the well-known Hadith la tabi[ ma laysa [indak, which the [ulama’ and commentators have understood to mean that the subject matter of sale must exist and be owned by the seller at the time of contract. Futures trading, which consists of short selling is, therefore, contrary to the requirements of this Hadith.

Several issues have been raised concerning this Hadith, one of which is a certain discrepancy in its chain of transmission. Neither al Bukhari nor Muslim recorded it in their collections, although others, among them Abū Dawūd and al Tirmidhi, did. This discrepancy is as follows: Abū Dawūd, Ahmad ibn Hanbal, and Ibn Hibban state that it was narrated by Ja[far ibn Abi Wahshiyah, from Yūsuf ibn Mahak, from Hakim ibn Hizam, whereas a fourth name, that of [Abd Allah ibn [Ismah, occurs in other Hadith collections between Yūsuf and Hakim. In al Mizan, al Dhahabi states that this intermediate name is totally unknown (la yu[araf). Even the principle narrator of this Hadith, Hakim ibn Hizam, is said to be “obscure” (majhuūl al hal). Only Ibn Hibban includes him among reliable narrators (al thiqqat). While al Nasa’’i has recorded one Hadith narrated by him, others have said that he is “obscure”.

The Hadith’s precise legal value is open to interpretation. Does it convey a total ban (tahrim), abomination (karahiyah), or mere guidance and advice of no legal import? The phrase la tabi[ (do not sell) could sustain any of these interpretations. Specialists in usuūl al fiqh admit all of these meanings within the purview of a prohibition (nahy). Only when a prohibition is espoused with a warning (w[aid) is its meaning reinforced so as to convey a total ban (tahrim). As there is a weakness in its transmission, and it is not accompanied by a warning or words implying emphasis, and it is also open to interpretation (as discussed below), it seems reasonable to say that it conveys abomination and moral opprobrium (karahiyyah) rather than total prohibition. In fact, al Khatib records the view that this Hadith conveys moral guidance (irshad) rather than a prohibition per se.

The full version of the Hadith is as follows:

Ja[far ibn Abi Wahshiyah reported from Yūsuf ibn Mahak, from Hakim ibn Hizam (who said): “I asked the Prophet: ‘O Messenger of God. A man comes to me and asks me to sell him what is not with me. I sell him (what he wants) and then buy the goods for him in the market (and deliver them).’ The Prophet replied: ‘Sell not what is not with you.’”

In an attempt to ascertain the precise meaning of this Hadith, Muslim jurists have advanced three different interpretations.

1. “Sell not what is not with you” means not to sell what you do not own (ya[ni ma laysa fi milkik) at the time of sale. One of the basic requirements of sale, as al-Kasani has stated, is that the seller owns the object of sale when selling it, failing which the sale is not concluded, even if the seller acquires ownership later. The only exception is the salam sale, where ownership is not a prerequisite. Al-San[ani has stated that this phrase implies that it is not permissible to sell something before owning it. Ibn al Humam and Ibn Qudamah have concluded similarly that a sale involving something that the seller does not own is not permissible, even if one buys and delivers it later.

The Hanafis have ruled, however, that the seller’s ownership of the item in question is not a condition of validity (shart al sihah) but of effectiveness (nifadh) of the sale. Hence, they validate a bona fide sale by an unauthorized person (fudūli) who does not own the object but sells it nevertheless. In this case, the sale is valid but not effective. It becomes effective only upon obtaining the owner’s consent.

2. In general, jurists and Hadith scholars hold that this Hadith applies only to the sale of specified objects (a[yan) and not to fungible goods, as these can be substituted and replaced with ease. Al Baghawi and his commentator, Mulla [Ali Qari, al Khattabi, and many others stated that this prohibition is confined to the sale of objects in rem (bay[ al a[yan) and does not apply to the sale of goods by description (bayū al siffah). Hence, when salam is concluded over fungible goods that are readily available in the locality, it is valid even if the seller does not own the object at the time of contract. Imam al Shafi[i has ruled that one may sell what one does not own provided that it is not a specific object, for delivery of a specific item cannot be guaranteed if the seller does not own it. Al Khattabi stated that this Hadith refers to the sale of specific objects, for the Prophet permitted deferred sales of various kinds in which the seller did not have the object of sale at the time of contracting. In essence, this prohibition seeks to prevent gharar in sales that consists of uncertainty over delivery.

Ibn Qayyim al Jawziya, commentator of Sunan Abū Dawūd, and al Mubarakfūri, commentator of Jami[ al Tirmidhi, agreed that this Hadith contemplated the sale of specified objects and not the sale by description of goods that are readily available in the market. This analysis would effectively take futures out of the purview of this Hadith, for futures trading only takes place in fungible commodities and cannot proceed over specific objects having unique qualities.

3. A third position is that sale of “what is not with you” means the sale of what is not present and what the seller cannot deliver. This is Ibn Taymiyya’s view, who stated that the emphasis is on the seller’s inability to deliver, which entails risk taking and uncertainty (mukhatarah wa gharar). If the Hadith were taken at face value, it would proscribe salam and a variety of other sales. But this is obviously not intended. The Prophet forbade Hakim ibn Hizam to sell particular objects either because he did not own them or because of uncertainty over his ability to deliver. The latter reason is the more likely one for the prohibition. The Maliki jurist al Baji has recorded a similar view and stated that “what is not with you” means “a specific object that is not in one’s ownership and one’s power to deliver.” It is quite possible that the seller owns the object but is unable to deliver it, or that the seller possesses the object but does not own it. In either case, the seller would fall within the purview of this Hadith. Therefore, its emphasis is not on ownership or possession, but rather on the seller’s effective control and ability to deliver. And so the prohibition’s effective cause ([illah) is gharar on account of one’s inability to deliver.

Yuūsuf Mūusa, [Ali [Abd al Qadir, and Yuūsuf al Qaradawi have drawn attention to the fact that the marketplace of Madina during the Prophet’s time was so small that it could not guarantee regular supplies at any given time. Therefore, the Hadith only prohibited the sale of items that were not available at the time of sale. This is indicated, perhaps, as Muūsa added, by Hakim ibn Hizam’s statement that people would ask him to sell to them items that he did not have. In other words, they wanted to secure goods that they could not find in the market due to uncertainty over supplies. In contrast, modern markets are regular and extensive, which means that the seller can find the goods at almost any time and make delivery whenever required. With reference to futures trading, Muūsa observes that futures contracts normally operate on a deferred basis, which gives the seller a fair amount of time to buy what is required in order to make delivery, if necessary, within the contract period. When we compare the Madinan market to its modern counterparts, we are faced with a different reality. Given currently available means and facilities, the fear of not being able to find the goods and make delivery is now irrelevant.

Short selling of items that are not owned by the seller takes place in the futures market with the assurance that identical contracts over the item can be bought and sold on an almost instantaneous basis. Even if the short seller does not own the item when selling a futures contract, his/her ability to make delivery is nevertheless assured beyond any doubt.

VI. SALE PRIOR TO TAKING POSSESSION (QABD)
One requirement of a valid sale in fiqh is that the purchaser may not sell the goods purchased until they are in his/her possession. In support of this ruling, Muslim jurists have referred to the authority of the Hadith that I shall presently discuss. The main purpose of this inquiry is to ascertain whether futures trading can be validated within the given terms of the Hadith and whether the concerns of the [ulama’ in conjunction with the conventional contract of sale are equally relevant to futures contracts.

Literally, qabd means taking and holding something in one’s hands. In its juristic sense, qabd implies legal custody and possession in a proprietary capacity, even if it does not involve the physical act of holding. The seller must deliver the goods sold, and the buyer must pay the price. The buyer, however, is not obliged to receive the goods or take possession, as it is his/her right/privilege, which he/she may or may not choose to exercise.

The following three Hadiths need to be reviewed on the subject of qabd.

[Abd Allah ibn [Umar reported that the Prophet said: “He who buys foodstuff should not sell it until he has received it (man ibta[a ta[aman fa la yubi[uhu hatta yaqbidahu).”

According to another report by [Abd Allah ibn [Umar, the Prophet said: “He who buys foodstuff should not sell it unless he is satisfied with the measure with which he has brought it” (man ibta[a ta[aman fa la yabi[hu hatta yastawfih).

Ibn [Abbas has also reported the following Hadith from the Prophet: “He who buys foodstuff should not sell it until he has taken possession of it.” Ibn [Abbas said: “I think it applies to all other things as well” (man ibta[a ta[aman fa la yubi[uhu hatta yaqbidahu wa azunnu kull shay’in mithlahu).

The three Hadiths are substantially concurrent. The only variation in them is concerned with the use of words that may be said to be synonymous: the word yaqbidahu (takes possession) in the first Hadith is substituted with yastawfihi (obtains full measure). This variation does not seem to change the substance of the message, which is conveyed in all three reports. The third Hadith has an added element that is clearly not a part of the original Hadith and represents an addition by Ibn [Abbas. The word ta[am (foodstuff) occurs in precisely the same way in all the three texts.

As for the Hadith’s basic rationale, the Hidayah states that the Prophet prohibited the sale of items, especially perishable ones, that the seller did not possess, because of uncertainty and doubt over their delivery. All leading fuqaha’ have held, consequently, that one cannot sell foodstuff before taking possession of it. According to Imam Shafi[i, one cannot sell anything (e.g., foodstuff, land, or a garden), before taking possession. Imam Abū Hanifah and Ahmad Ibn Hanbal held, however, that possession is not a requirement in the sale of real property, as there is usually no fear of destruction and loss. Possession is not required for the sale either of foodstuffs and real property if ownership of the goods in question had been obtained by way of gift or inheritance, for these involve no financial exchange and the seller is not committed to paying a price to someone else.

A recent resolution of the Fiqh Academy of Jeddah has confirmed “the effective cause ([illah) of the prohibition of sale prior to taking possession is gharar, on account of the possible failure to deliver the goods purchased. The buyer takes the risk of not receiving the goods, as the seller may delay the delivery or wish to revoke the contract.” The resolution added that there was an additional element of gharar in the sale of food grains and agricultural crops – they may perish or be destroyed due to climatic factors and disease. Whereas the Academy has held futures generally impermissible is due to their failure to meet the requirement of qabd, others have held different views. Dallah al-Barakah, the Shari[ah Committee of the Islamic Bank of Sudan, and that of the Kuwait Finance House have held that the prohibition of sale prior to taking possession is confined to foodstuff.

According to the Hanafis, qabd is not an essential requirement (rukn) of sale but rather a subsidiary condition, namely, that of effectiveness (shart al nifadh). This ruling led al-Kasani to point out that a valid sale can be concluded prior to the seller’s taking possession but that it will remain in abeyance until qabd has taken place. To this, al Sarakhsi added that qabd signifies the effect or outcome of the contract that only materializes after its conclusion. Qabd is therefore, not a prerequisite of a valid contract, and it is perfectly lawful to postpone it to a later date. Only in the case of sale of currency for currency (sarf) is qabd elevated to a prerequisite of a valid contract. Imam Malik confined this Hadith’s application to food grains, which means that non-food grain items (e.g., cotton, palm oil) may be sold prior to taking possession. Ibn Rushd confirmed this and stated, “there is no disagreement in the Maliki school that only food grains (mainly wheat and barley) cannot be sold prior to qabd.” Imam Malik also validated the sale of foodstuffs in lump sum (juzafan), that is, without weighing and measuring, prior to taking possession. For liability for loss and destruction (daman) in this case is transferred to the buyer at the moment of contract and not upon taking possession. Ibn Hazm has held that the ruling of these Hadiths is confined only to wheat, simply because the word ta[am that occurs in them means only wheat and nothing else.

Ibn Taymiyah departed from the majority position by opening up the concept of qabd to considerations of prevailing custom. Unlike the majority, which confined the meaning of qabd to holding and retention (habs) and evacuation (takhliya), Ibn Taymiyah stated that neither the Arabic language nor the Shari[ah has given a specific meaning to qabd. Takhliya varies from object to object, and the manner in which it occurs is not always the same. The precise meaning of qabd is, therefore, is to be determined by reference to prevailing custom. Ibn Qudama stated that qabd in all things refers to an appropriate manner of taking possession. The Shari[ah stipulated qabd, but the manner in which it is accomplished is determined by custom. Ibn Qayyim held that sale prior to taking possession is lawful and illustrated this by the sale, for example, of a person of his share in inheritance before taking possession, or what a person might have received by bequest as well as a woman’s sale of her dower.

With the exception perhaps of the Shafi[is, no other school requires qabd prior to resale in the case of immovable objects. In at least two varieties of sale, namely, salam and istisna[, the requirement of qabd has been waived by the express authority of Hadith. Salam and istisna[ were validated on the grounds of utility and convenience for the people.

One can say, perhaps readily, that qabd is not a requirement in futures trading in such non-foodstuff items as cotton, rubber, and tin. In addition, measurement and weighing, the recommended mode of qabd in foodstuff sales was designed to ensure propriety in weighing and to prevent fraud. This is not an issue in futures trading, for such food grain contracts are bought and sold in standardized quantities and packages that are weighed and measured once. After this, the packages are sealed, labeled accordingly, and do not need to be reweighed each time they are sold, as the relevant documents provide sufficient evidence of the total weight. Thus, prevailing commercial customs in futures trading have made personal supervision over weight and measurement unnecessary and unfeasible. It would appear that qabd in such commodities takes place by obtaining the official warehouse receipt, rather than by constant re-measuring and reweighing.

Thus it is clear that customary practice has a role in determining the manner in which the legal requirements of qabd and delivery may be fulfilled. Provided that the processes adopted are free of uncertainty, unwarranted gharar, and potential for dispute, it would be acceptable. It is quite conceivable that modern technology and computerization may bring further changes into the conventional methods of qabd, which may gain popularity and customary approval. This would be acceptable from the Shari[ah viewpoint if it fulfills the basic rationale of qabd, which is to prevent uncertainty and gharar. Even the foodstuffs can now be preserved for a long time due to technological advances. No case of failure of a futures transaction has in fact been noted due to gharar over perishing or destruction of foodstuffs.
This analysis of qabd would apply naturally to futures transactions involving holding the contracts until maturity and physical delivery. As for the bulk of futures contracts, in which the contracting parties close out their positions by entering a reverse transaction, this is another issue that needs to be addressed separately. Since, in principle, the Shari[ah validates the sale of a physical object (bay[ al[ayn) and the sale of debts (bay[ al dayn), delivery and qabd in the latter case are no longer a matter of physical delivery or retention of an actual asset, but one of appointment (ta[in) and computation of a debt established on the person (dhimma) of the debtor. This is the subject to which we now turn.
VII. ISSUES OVER THE SALE OF DEBTS
(BAY[ AL DAYN BIL DAYN ) AND GHARAR
Futures trading may be said to proceed over deferred and unpaid debts. A debt is normally created by a trader who enters the market either as buyer or seller without any physical exchange of values. The debt so originated may subsequently become the subject of an offset or a reverse transaction and a chain of sales and purchases may follow that amount essentially of the sale of debts. The offsetting transaction in futures also consist of sales involving a debt that one party owes to another and settles it through the modality of sale and purchase. Many types of sales have been included under bay[ al duyūun (lit., sale of debts, also known as bay[ al kali bi al kali), and it has been disputed as to whether some of them do in fact qualify as “sale of debts.” It will be noted that the fiqh concept of bay[ al-dayn referred to transactions over debts in the open market without any guarantees. Bay[ al-dayn basically envisaged sale over an unpaid debt involving either two, or in some cases, three parties. The basic rationale of the prohibition of bay[ al-dayn was over uncertainty in its repayment. Bay[ al-dayn could proceed over a bad debt or one in which the debtor simply wanted a further delay due to his inability to pay on time. Subsequent unfavorable price changes also added to that uncertainty. The situation is very different in the futures market now where all transactions are concluded over guaranteed debts. The critics have not hesitated, however, to pass judgments and say: since the buyer in futures does not pay the price to the seller nor does the latter take delivery, they transact over debts and indulge in bay[ al-kali bil-kali, which is prohibited. Some instances of bay[ al-dayn bil-dayn are illustrated as follows:

1. A borrows two tons of wheat for his personal needs from B. This amount is returnable in six months. Prior to the expiration date, B sells the wheat, which is a debt on A, to C in exchange for a ploughing machine to be delivered in one month. This transaction proceeds over an exchange of debts and is considered unlawful due to uncertainty over delivery and the resulting likelihood of gharar.

2. A borrows $2,000 from B for a period of one year, but before repayment is made, B suggests to A that he will rent A’s house in exchange for the sum owed to B. This too involves selling one debt for another without delivery on either side. If the proposed exchange is advantageous to one party, it will also involve unlawful gain amounting to riba.

3. A owes B RM1,000 payable in six months. Upon expiry of six months B asks A to give him a ton of wheat in exchange to be delivered in one year.

4. A sells a garment to B for RM1,000 payable on spot, and then buys from B the same or a similar garment for RM1,200 payable in one year. This transaction ([inah), although validated by the Shafi[is, is invalidated by other schools as it involves riba and, according to others, because it is a sale of debts. The following Hadith is quoted as evidence on the subject: Mūsa ibn [Ubayd reported from [Abd Allah ibn [Umar simply that “the Prophet prohibited bay[ al kali bi al kali.”

This Hadith only appears in some collections, such as al-Darqutni, and al Shawkani reproduced Darqutni’s version in Nayl al Awtar saying that al-Hakim al-Nishapuri considered it to be sound conforming to the conditions of Muslim, but that many prominent scholars consider it unreliable. Its precise meaning is also subject to doubt as kali is somewhat unfamiliar even to native Arab speakers. However, it is generally understood to mean the sale of one debt for another. According to al Shawkani, only Mūsa ibn [Ubayda al Rabdhi reported it and its authenticity is weak. Imam Ahmad Ibn Hanbal said that he knew of no other Hadith transmitted by Ibn [Ubayda; no one else transmitted it and taking it from al-Rabdhi was therefore not advisable. The Imam added, however, that there seemed to be a people’s consensus (ijma[ al-nas) on the prohibition of bay[ al-kali bil-kali. Yet Imam al Shafi[i had commented even earlier that the Hadith scholars considered this Hadith to be weak. Ibn Qudama and Ibn Taymiyah concurred with this and stated that no Hadith prohibiting the transaction at issue had been verified. Ibn Taymiyah stated that no words or statements prohibiting the “sale of one debt for another” had been transmitted from the Prophet and that the Hadith of bay[ al-kali bi l-kali was a broken one (munqati[).

Imam Ibn Hanbal’s reference to “people’s ijma[” on this is vague and it does not meet, as [Azzam noted, the requirement of a conclusive ijma[. For a decisive ruling of ijma[ must meet three conditions: (1) it is explicit and verbal (qawli) as opposed to a tacit (sukuti) ijma[; (2) it has reached us by means of continuous transmission (tawatur); and (3) the transmission conveys positive and indisputable knowledge beyond doubt. Since the said ijma[ does not fulfill these conditions, it is doubtful (zanni) and can only convey a speculative ruling that remains open to ijtihad. It is “therefore permissible for us to question it, based on the evidence that is stronger than the alleged ijma[.” Moreover the claim of an ijma[ in a situation of obvious disagreement is out of place: Evidence shows that the [ulama’ are not in agreement over the definition of this transaction nor on the various forms it can take.

Ibn Qayyim has explained that not all varieties of bay[ al-dayn are prohibited. The prohibited variety is one which involves the sale or exchange of one deferred debt for another. The reason given is that bay[ al-dayn of this kind prolongs the liabilities of the parties for no useful purpose. Ibn Qayyim’s examination of the source evidence on bay[ al-dayn also led him to the conclusion that “there is neither explicit nor implicit text in the Shari[ah on its prohibition. On the contrary the principles of Shari[ah indicate its permissibility.” Ibn Taymiyya has also indicated that bay[ al-kali bi-kali is a particular variety of bay[ al-dayn which basically consists of one deferred counter value for another, neither of which is taken into possession. The Prophet did not prohibit payment of one debt in exchange for another both of which are established and proven, especially if it involves only the debtor and not a third party. For this manner of clearance absolves both sides of their debts, and this is clearly permissible. Many have illustrated bay[ al-kali bi-kali through salam saying that an outstanding debt could not be assigned into the price of a salam contract as this will amount to bay[ al-kali bi-kali.

Nazih Hammad has summarized the argument against bay[ al-kali bil-kali (or ibtida’ al-dayn) in the following five points: (1) there is no valid legal benefit in it; (2) that it becomes a means to riba; (3) it may lead to disagreement and conflict between the parties; (4) it leads to gharar; and (5) the risk in it is excessive.

Both Hammad and his commentator Tijani have discounted three of these to be less than accurate and not relevant to futures, and have discussed only two, namely the absence of a lawful benefit, and excessive risk. Then it is added that modern research has clearly shown that bay[ al-dayn does serve a useful purpose, a conclusion which many have upheld. With regard to the point over excessive risk-taking in bay[ al-dayn and in futures, Hammad and Tijani have held that the careful operational procedures of the clearing house guarantees over fulfillment of contract, daily clearance procedures and margin taking have eliminated or minimized the risk over the parties’ inability to fulfill their obligations.

The Maliki school has also upheld the permissibility of certain types of bay[ al-dayn prior to delivery and qabd when the debts involved therein do not arise from the exchange of foodstuffs and useable goods, and the transaction is also free of gharar.

Siddiq al Darir stated in categorical terms that “in my opinion, bay[ al-dayn is absolutely lawful, whether the sale is to the debtor or to a third party, for cash or for credit, provided that the sale is clear of riba and no textual injunction has declared it forbidden”. He stated further that the claim of uncertainty in delivery is unwarranted if the debt is not disputed by the debtor, who admits his/her obligation and shows readiness to discharge it.

Rafiq al-Misri has argued that there is no extra gharar in deferring both counter values compared to the deferment of one of them only. If one of the counter values has been delivered while the other is deferred to a future date, or when both are so deferred, the level of risk would be the same and no additional gharar is likely when both are deferred. Suppose that the buyer in a deferred payment sale receives the commodity but defers the payment of price, it is possible that the price fluctuates during the interval, and one of the parties suffers the consequences. It could be the seller if the spot price goes up or the buyer if it goes down. This is the likely scenario in the salam sale, but the risk will be about the same even if both counter values were deferred. Of course, in the case of deferment of one counter value one of the parties to the contract will benefit from the receipt of the commodity, in the case of deferred sale, or of receipt of the price, in the case of salam. If both counter values were deferred, both parties will share the risk and the expected gharar would be about the same. Thus there is no ground for the claim that gharar would be greater if both counter values are deferred. This also shows that deferment of both counter values in sale is not devoid of benefit. Misri added that the Hadith of al-kali bil-kali is actually not authentic.

Mukhtar al-Salami has in a similar vein rejected the claim of gharar leading to disputes in the deferment of both counter values. The basic possibility of dispute is admittedly present in nearly all transactions but this did not render them invalid. The claim that the possibility of dispute is greater in the case of deferment of both of the counter values is simply untrue. When the contract clearly specifies the subject, the price, time, delivery, and the agreement is documented, the prospects of dispute are minimized. The history of transactions in the futures markets has shown this.

Tijani has quoted Sami Hamoud who wrote that “in the entire history of the London’s futures exchange over the last 100 years, there has not been a single case in which the broker has fallen back over a transaction.” If the [illa of the alleged prohibition of futures is gharar, then there is no gharar in the futures market given the clearinghouse guarantees and careful regulation of the market.

It may be concluded then that bay[ al-dayn, which is incurred in futures, is in the nature of the fulfillment of outstanding obligations and of debt repayment by the debtor. This is clearly permissible and conforms to the Qur’anic norm on the fulfillment of contracts (cf. al-Ma’ida, 5:1).
VIII. THE OFF-SETTING TRANSACTION
Many commentators have taken the salam framework as the basis of analysis on the validity or otherwise of off-setting trades in futures. Through the offsetting sales and purchases, the futures market enables the traders to close out an open position by entering a matching transaction. The question as to whether this would be lawful in Islamic law has received a negative response from Badr al-Mutawalli al-Basit, Shari[ah Advisor to Kuwait Finance House (al-Mustashar al-Shar[i li-Bayt al-Tamwil al-Kuwait), who responded to a question posed to him on the issue:

Sale of the subject matter of salam prior to taking it into possession is forbidden and I know of no one to have held otherwise. This is the position taken by Ibn Qudama in al-Mughni, which is an authoritative work.

Al-Basit further explained that repeated sale of the same commodity in a chain event wherein none of the participants take possession “adds to the burden of the consumers as profits that are taken by each participant are eventually added to the price and passed on to consumers.”

Mustafa al-Zarqa has recorded a similar view and resembled off-set sales in futures to a chain of inchoate salams in which the buyer sells the goods he has paid for to someone else before taking them into possession, and then this latter sells the same to a third person and so on. What happens here is “a succession of sales and purchases proceeding over one debt. The debt here refers to the undelivered goods by the original seller in this chain. Zarqa then adds that “this manner of trading over the subject matter of salam is unlawful in fiqh as it proceeds over the sale of salam goods prior to maturity, delivery and possession.”

Majd al-Din Azzam has disputed, and rightly so in my view, the point that the profits made in the chain of offsetting trades in futures add to the burden of the consumers. To begin with, it is incorrect to assume that everyone in the chain of sales makes a profit. They may make profits, or some may do, but it is equally possible they may sell at a loss or make no profit. One must also bear in mind that buyers and sellers in futures and in every offsetting transaction buy and sell, not at the price they determine, but at market price, on which they both agree. The price is advertised in advance and implemented by the exchange. Since the exchange quoted price is the market-clearing price arrived at by the interaction of many buyers and sellers, it would by definition be a “fair” price. All traders in the said chain of offsetting trades observe the market price of the day and the question over a chain of profits made at every step to the detriment of the consumer is therefore not relevant. Azzam speaks approvingly of the availability of offsetting trades in futures and illustrates this by saying that some people may need to resort to a reverse transaction before taking delivery. Suppose that a person bought a certain amount of wheat in a remote locality for his son to start a business, but before he takes delivery circumstances change and his son secures a good job. The father may now wish to enter a reverse trade prior to taking possession of the wheat he has purchased. There is no harm in that and if the market provides that facility then, so much the better. One can give many examples of people who may need to sell what they have bought prior to taking delivery and possession, especially in view of the increased range and variety of modern trades and financial services. Then to try to subsume these variations under one or the other of the conventional contracts may neither be beneficial nor justified.

Since it is not certain whether the initial sale was salam, then to subsume the reverse transactions again under salam is even more doubtful. The basic answer over the validity of the offsetting trade should, in my view, be sought under the principle of permissibility (ibahah). To apply ibahah one would need only to ascertain that the reverse trade does not violate any clear textual injunction or principle of the Shari[ah, and if there is none that one could specify, then offset transactions may be said to be lawful.
IX. A REVIEW OF THE QUR’ANIC ĀAYAT AL-MUDAĀYANAH
The Qur’an validated deferred transactions involving future obligations as follows:

O believers! When you deal with each other in transactions involving future obligations for a fixed period of time (idha tadayantum bi daynin ila ajalin musamman) put them in writing. Let a scribe write down faithfully as between the parties (2:282).

The subsequent portion of this text accentuates further the importance of accurate documentation in future transactions. Whether large or small, such transactions must be for a fixed period and all material facts, as well as rights and obligations of the parties concerned, must be certain, written down, and witnessed. The text leaves no doubt as to the validity of future transactions in which the parties’ rights and liabilities are clearly defined and documented. The question is whether “transactions involving future obligations for a fixed period of time” in this verse should also include futures trading.

Dayn and tadayantum, the key terms here, call for some elaboration. First, dayn in this context means a deferred liability arising from a contract involving exchange of values. A typical example is a contract of sale in which one value, either payment or delivery, is deferred to a future date. Any liability arising from this deferment is referred to as dayn. This is different from a liability arising from a straight loan (qard), which is a deferred liability arising from a contract containing no exchange of values. Since the Shari[ah prohibits riba (interest) on loans, qard is a benevolent loan given without interest and without expectation of anything in exchange.

Our information of Arab commercial life at the time of the Prophet indicates that deferred transactions based on seasonal agricultural patterns were common. Some of the well-known contracts of exchange in vogue at that time were bay[ al mu’ajjal or bay[ bi thaman ajil (deferred sale), bay[ al murabahah (cost plus profit sale), ijarah (leasing), salam (advance payment sale), and istisna[ (manufacturing contract). These were contracts of exchange in which delivery of one counter value was deferred to a future date. In general, the deferred liability arising from these transactions was known as dayn. The following Hadith also reflects some of the realities of Arab commercial life in the early days of Islam:

Ibn [Abbas narrated that when the Prophet arrived in Madina, he found that the people had been practicing salam in fruits for one or two years (the sub narrator is not certain whether it was one or two years or two to three years). The Prophet said: “Anyone who pays money in advance for dates (to be delivered later) should pay it for a specified measure, a specified weight, and a specified period.”

The verb tadayantum, a derivative of dayn (the present tense in the plural and reciprocal mood), indicates that dayn was a recurrent phenomenon. Tadayantum suggests reciprocity and exchange of goods and services on a deferred liability basis. The fact that tadayantum in the text is followed immediately by bi daynin implies emphasis, which reinforces the centrality of this theme (i.e., dayn) to the whole of the verse, which is why it is known as ayat al mudayana. Ibn Kathir confirmed this categorically by stating that the verse is concerned exclusively with deferred transactions (mu[amalat mu’ajjala) practiced among people and that the Qur’an regulated the manner in which they were to be concluded.

It is also useful to distinguish between the two concepts of dayn and [ayn. [Ayn refers to an object or commodity that is present at the time of transaction, such as the sale of an object in a spot sale. Dayn, on the other hand, refers to an asset that has no tangible existence but represents a charge or a personal commitment on its bearer’s dhimma. This juristic distinction is important, for only a dayn can be deferred. Future transactions are exclusively concerned with personal liabilities. Transactions involving the exchange of tangible objects can be either in the present and on spot (an exchange of one [ayn for another, as in barter), or in currency exchange (no transaction over dayn). But when there is a deferment either in payment or delivery, a deferred liability or dayn is created. The verse under discussion is concerned only with such transactions.

In contradistinction to transactions involving future obligations for a fixed period, the subsequent portion of the same verse reads, “unless it be a spot trade that you carry on among yourselves” (illa an takūna tijaratan hadiratan tudirūnaha baynakum), which is exempted from the requirement of precise documentation and witnessing. Tijaratan hadiratan here means a contract of exchange that is concluded and completed on the spot and one in which both counter values are delivered upon conclusion.

Having reviewed the principal Qur’anic evidence on deferred transactions, it is interesting that the jurists have confined the general concept of mudayana to deferred sales and salam. According to a report attributed to Ibn [Abbas the verse was revealed regarding the salam contract only. Fakhr al Razi commented that the text under consideration applied to normal sales (i.e., bay[ al [ayn bi al dayn) in which the price of the object sold becomes, upon the conclusion of contract, a debt on the purchaser. It also applies to salam. Barter sales (muqayada), or the sale of one object for another (also known as bay[ al [ayn bi al [ayn), which were common at the time did not fall within the purview of this verse.

Fakhr al Razi commented further that although bay[ al dayn bi al dayn resembles mudayana (a deferred contract of exchange), it is not valid in Shari[ah, for when the text says idha tadayantum bi daynin (when you deal with each other in transactions involving future obligations), it is implied that there is only one dayn. Bay[ al-dayn bil-dayn is therefore excluded. According to this interpretation, the verse applies to two types of sales: a deferred sale in which the price is paid at a later date, and a salam sale, each consisting of a debt on one side of the transaction only.

Imam al Shafi[i maintained that the Qur’anic text under discussion is general and can include all varieties of dayn. This would mean that deferment of any debt is valid, just as it is valid for salam. Ibn [Abbas has specified the meaning of dayn to salam, but by salam or salaf he probably meant any period loan or else that we can extend, through analogy, the Qur’anic ruling to all debts that fall within its purpose (qulna bihi fi kull dayn qiyasan [alayh li annahu fi ma[nah). In effect, Ibn Kathir upheld the same view and commented that the Qur’anic text here permitted Muslims to enter into “deferred transactions” (mu[amalat mu’ajjala) with the stipulation that they be written down.

Thus, it seems that the [ulama’ have interpreted dayn in a variety of ways. While some have confined it to certain types of debts, others have applied it generally to all deferred liability transactions that can fall within its broad meaning. Evidently, the Qur’an has not specified the general meaning of dayn or mudayana, and there is no compelling evidence to warrant departure from this position. Our analysis also concurs with the conclusions of al [Attar in his Nazariyah al Ajal (Theory of Deferment in Shari[ah). The preferred view would appear to be that the text’s language should convey its general and unqualified meaning. Even if we accept Ibn [Abbas’s interpretation, it may be said that his interpretation was based on the occasion of revelation (sha’n al nuzūl) of the ayat al mudayana. According to the rules of usuūl al fiqh, a text’s sha’n al nuzūl may be specific, but that does not necessarily restrict its general purport and ruling. Therefore, it may be concluded that even if the text were revealed for salam, its language is general and applicable to all debts. This would imply the basic legality, in the eyes of the Shari[ah, of all deferred transactions.

On the other hand, there is a clear Qur’anic text on the legality of sale and the prohibition of usury: “God permitted sale and prohibited usury” (2:275). This proclamation is general ([am) and includes all sales, sales without riba and gharar, and sales not forbidden specifically in the Sunnah. All are permissible by virtue of this general proclamation. For a haram can only be established only by an explicit textual injunction. Since the Qur’an validates sale and commerce in general, as well as deferred liability transactions, and since there is no specific prohibition in the Qur’an and Sunnah on futures sales, these may be considered lawful, provided no gharar, usury, or gambling is involved.

Commodity futures do not involve riba, in that they do not operate on the basis of a fixed and predetermined profit without the possibility of loss. All futures trading involve the possibility of both profit or loss. The margin money, being the only sum deposited at the time of contract, does not earn any interest; it is a good-faith deposit with one’s broker and agent and is returnable to the depositor should the transaction conclude without a loss.
X. SPECULATION AND GAMBLING
Many observers regard speculation and gambling as synonymous terms. One hears of “investing in securities” and “gambling in futures”. Others regard them as distinctly different activities. The main difference between them relates to the nature of risk and potential contribution to the social good. Gambling involves creation of risk for the sake of risk. Horseracing and poker, for example, create risks that would not be present otherwise. The gambler chooses to seek out risks that were not there before. Even if they had been there before, they had not concerned him personally and no social good is accomplished by gambling. Investing, on the other hand, consists of committing capital to an enterprise in the hope of earning a profit. The difference between investment and speculation is largely semantic, but most would agree that commitments with time horizons longer than several months qualify as investment regardless of whether the commitment is in securities, real estate, or commodities.

Defining speculation or identifying the speculator is always difficult. Many have stated that no clear definition can be given, for the distinguishing lines between investment, speculation, and gambling are not always clear, and the gray area between them tends to persist regardless of particular definitions. Speculation consists of risks that are necessarily present in the process of marketing goods and services in a free-market economy. For example, as a wheat crop grows and is harvested, concentrated, and dispersed, the obvious risks of price changes must be taken by those who own the wheat or have a commitment to buy it. These risks would be present whether futures markets existed or not. If speculators were unwilling to take them, someone else would have to do. The issue here is whether the winners and losers would be the producers and consumers, or whether the price risks would be shifted to speculators, the government, or diffused through market mechanisms.

The motivation of many individual speculators could well be identical with that of gamblers, with the main difference being that futures speculation reallocates risk from those who do not want it to those who do. Futures speculation, in other words, directs the appetite for risk into an economically productive channel. Futures markets are basically risk-transfer mechanisms that redistribute price risk, and speculators are those who assume it. Without them, there would be no one to whom hedgers could shift their risks. Speculation in the positive sense consists of intelligent and rational forecasting of future price trends on the basis of evidence and knowledge of past and present conditions. Speculators in commodities are not simply gamblers, for the risks are real commercial risks, quite a different matter than the activity of a gambler, who assumes no risk other than that created by the rules of the game.

A common criticism of futures speculation is that it causes volatile price moves that cause considerable hardship to those engaged in more productive pursuits. Wide publicity is given to the relatively rare, but highly dramatic, manipulations that cause many to conclude that speculation is synonymous with gambling. Speculators can point to equally scandalous events throughout history. Some early instances of manipulation by Americans come to mind: Hutchinson, Leiter, and Patten in the late nineteenth century and, in 1980, Bunker Hunt’s foray into the silver market, all of which resulted in price distortions. Since then, however, balance has returned to the market and this, aided by the introduction of regulatory and punitive legislation, has diminished the prospects for such manipulation.

Moreover, existing data do not confirm the suspicion that futures trading is dominated by large speculators. Data may vary from market to market, but, regardless of market, the total holdings of large speculators’ long and short positions are less than 20 percent of the total holdings of small traders. Large speculators probably constitute less than 2 percent of the total futures trading population. Major price movements are usually caused by basic changes in the supply or demand for a given item and only rarely by a group of speculators creating a self-fulfilling prophecy. Evidence obtained from considerable research suggests that “speculation probably does more to smooth price fluctuation than to increase it.” Research on the behavior pattern of such goods as onions and live beef cattle before and after the institution of futures markets have supported, on the whole, the conclusion that futures trading has not increased price fluctuation in the cash market. Statistical analysis shows that the volatility of futures prices is approximately the same as that of equity prices. What makes futures trading more prone to speculative risk taking is the high degree of leverage that results from low margin requirements. This low margin facility is not available in the stock market and is the main factor that is accountable for the high volume of speculative trading in futures.

Ibn Qayyim al-Jawziyya’s description of qimar, maysir and rihan (betting) underscored the element of play in them which is staged for no other purpose but beating the opponent in a game in order to appropriate his assets. Maysir is synonymous with qimar but only the former occurs in the Qur’an. The bottom line of the maysir game is “either of us who wins take the other’s property.” The only difference between maysir and the allied concept of betting (rihan) which also occurs in the Qur’an (cf. Al-Baqarah, 2:283) is that betting involves four parties, two of whom are involved in a game and the other two who are outsiders bet over the outcome thereof. These outsiders are otherwise playing exactly what is involved in maysir.

Gharar is a broad concept and has been given a variety of definitions, which will not be reviewed here. Suffice it for our purposes to highlight an aspect of gharar which coincides with maysir and qimar, and that is the uncertainty over gain and loss, which is in common between gharar and gambling. Although many jurists in the Maliki and Shafi[i schools have defined gharar by this description, it is not an accurate definition as this would also apply to many contracts such as partnership and mudarabah. It is evidently difficult to draw a clear distinction between gharar and maysir. One thing that merits attention though is that maysir is played for its own sake often as a game whereas gharar proceeds over sales and contracts. Gharar is usually not the purpose of a contract but incidental to it whereas maysir is the purpose of the game, which has no other subject matter, or purpose then winning and beating one’s opponent in order to take his property.

In an attempt to ascertain the relationship between gambling and gharar and its bearing on commercial transactions, Ibn Taymiyya pointed out that if a sale contains gharar and devouring of the property of others (akl al mal bi l batil), it is the same as gambling, which is clearly forbidden. Unlawful devouring of the property of others takes two forms: usury (riba) and gambling (maysir). The Qur’an has forbidden both, and the Sunnah has only explained and elaborated upon the Qur’an. He then added that gharar sales, which the Prophet forbade, generally partook in gambling. There were certain types of sales that were common among the Arabs and subsequently forbidden by the Prophet on these grounds.

Ibn Taymiyya thus attempted to establish a common denominator between gharar and gambling: the devouring and unlawful appropriation of the property of others. A commercial transaction cannot be equated with gambling unless it is accompanied by this factor. He based this conclusion on Qur’an 4:29, where unlawful devouring of the property of others is declared forbidden and Muslims are encouraged to conduct “trading by mutual consent.” Unlawful devouring is a broad Qur’anic concept that includes gambling, fraud, usurpation, bribery, and profit gained from unlawful transactions. The text under discussion was revealed concerning the touch-and-throw sales (al mulamasa wa al munabadha), consisting usually of clothes, in which the deal was struck when the buyer touched the material or when it was thrown in his/her direction, and sale of yet-to-be-born animals. Ibn Taymiyya commented that if such sales became final prior to the buyer’s viewing the object, it involved risk taking and gambling (mukhatara wa qimar), for the object may be good and to the buyer’s liking or not. If the buyer is bound by the sale without actually knowing about the object, this would be gambling. But if both parties have seen the cloth and one tells the other that the deal is done (i.e., “if I threw it to you” or “when you took it” or the like), this is a conditional sale that resembles a “give-and-take sale” (bay[ al mu[atat) and contains no element of gambling. If one of the parties involved received its due but the other did not and the latter remained open to risk in a way that frustrated and nullified his right, the sale would contain gharar and gambling simultaneously.

It thus appears that risk taking, which involves unlawful appropriation and the gain of one party at the expense of the other, is central to Ibn Taymiyya’s understanding of the Qur’anic concept of maysir. When this is applied to futures trading, the question is whether financial speculation in futures exposes the other party to risk and, if so, whether it also involves unlawful gain and appropriation of someone else’s property. Evidently, there is no misappropriation of another’s property in futures, for the buyer in such a contract is engaged in a transaction aimed at making profit through trading and not through the dishonest appropriation of another’s property. Speculative risk taking in commerce, which involves investment of assets, labor, and skill, is not forbidden; what is forbidden is excessive gharar and gambling. Financial risk taking is likely to involve gambling if it is staged and created for its own sake, but not if it is incidental to beneficial activity and trade.

Typical descriptions of qimar and maysir also suggest the involvement of two parties in a combative game played for the sole purpose of winning at the expense of one’s opponent. One party’s gain is equivalent to the other’s loss. The gain accruing from such a game is unlawful, as is the act of playing it, for it diverts one’s attention from productive occupation and virtuous conduct. If we apply this description to commercial speculation in stocks and futures, we may be able to identify some common grounds with gambling – but only in the broadest of terms. Speculation in futures does not necessarily involve a combative game played in order to beat an opponent or to acquire his/her property. The speculative risk undertaken in futures bears a greater affinity to commercial risk taking for profit rather than gambling, qimar, and maysir.

The exchange authorities and the government must be vigilant in order to ensure that commercial speculation is genuinely reflective of the natural flow of market forces. Imposing quantitative limits on daily trading volume and position limits, as is normally practiced in futures markets, is one way to contain speculation within acceptable bounds. But this is a matter that can best be dealt with through house rules and operative floor procedures by the exchange authorities. On the other hand, legislative guidelines should seek to regulate contractual relations between the parties, brokerage activities, and disciplinary procedures in serious violations. Legislative and government supervision should not be over imposing, for that would restrict flexibility and initiative on the part of the exchange authorities.
XI. CONCLUSION
My discussion of the Hadith “sell not what is not with you” led to the conclusion that it applies only to sales involving specific objects and not to fungible goods. Since futures, as a rule, only apply to fungible goods, they fall outside the purview of this Hadith. To this, I have added that the above Hadith is concerned not so much with ownership or possession, but with preventing gharar due the seller’s ability to deliver. Since delivery and fulfillment are always guaranteed by the clearinghouse procedures, the seller’s ability to deliver is not a matter of concern in futures trading.

Furthermore, the requirement of qabd in the Hadiths reviewed is confined clearly to foodstuffs, and extending the same requirement to other commodities is not supported by the text. But even in foodstuffs, it is most likely concerned with perishable foodstuffs that are normally not fit for futures transactions. Qabd is related to the question of liability for loss. However, since delivery and qabd are not dominant factors in futures I submit that the question of liability and loss should be determined not by reference to qabd but by reference to the contract.

My analysis of the sale of debts especially of bay[ al kali bi al kali led to the conclusion that there is no conclusive proof in the Sunnah on its prohibition. The manifest text in ayat al mudayana also accommodates an affirmative ruling on futures trading. I have also shown that a direct correlation between futures sales and conventional sales which the critics have attempted is not justified, mainly because trading procedures in futures provide in-built safeguards against gharar that eliminate uncertainty over delivery and payment. And lastly, my analysis of financial speculation indicates that speculation is basically lawful and that the issue over its propensity toward gambling must be tackled through constant supervision and effective position limits that would put a check on speculative risk taking.

Modern commerce has witnessed a large number of new and unprecedented modes of trading which were not known in earlier times. To promote the people’s prosperity through trade is distinctively beneficial and in principle represents an eminent maslaha of our time. For those who take unduly prohibitive views of these varieties of trade simply because a certain mode of trading was not known to the fuqaha’ of earlier times and then pass negative judgments on speculative grounds without clear Shari[ah evidence is tantamount to acting contrary to the objectives (maqasid) of Shari[ah. The basic norm and maxim of Shari[ah is prohibition (al-hazar) in the realm only of [ibadat (worship matters) and it is permissibility (ibahah, idhn) in mu[amalat and commercial transactions. Nothing in this latter area must be declared forbidden without decisive and indisputable evidence. Since there is no decisive evidence on the prohibition of futures, then it’s permissibility in Shari[ah is established. A transaction is valid from the Shari[ah perspective when it does not violate a decisive principle, it is clear of riba, and it does not partake in excessive gharar. When these conditions are met, the transaction in question is valid and may be practiced regardless as to whether or not it agrees with the discourse of the fuqaha’ on transaction and contract. The general guidelines of the Qur’an must surely be applied independently of the time-bound discourses of the fuqaha’ of earlier times. The Qur’an upholds the people’s needs and maslaha at all times and in manners that may be suitable to their conditions, provided that none of its decisive principles are violated. Commodity futures falls under the basic principle of permissibility, with the proviso that we engage ourselves in a continuous process to enhance vigilance and develop more refined safeguards against abuse, excessive speculation, and gharar.

Lastly, I note with a degree of trepidation that our fiqh academies are dominated by conservative [ulama’, a policy which I believe calls for a review. The fiqh academies need to open their doors and their perspectives to fresh influences, different caliber of research and a participatorier attitude. Islam is a participatory religion and advocates consultation and exchange on matters of concern to the community, and it is hoped that our fiqh academies show this in their selection of members, their decisions and their fatwas.

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