10. PUTTING UP COLLATERAL
PUTTING UP COLLATERAL (RAHN)
(In Sacred Law collaterals a piece of saleable property put up as security for a financial obligation to cover the amount if it should prove impossible to repay.)
CONDITIONS FOR THE VALIDITY OF PUTTING UP COLLATERAL
Putting up collateral is only valid when done by someone with full disposal over his own property, as security for a financial obligation (dayn) that is currently due, such as the price (due for merchandise after its delivery), or a personal loan, or for a financial obligation that is currently becoming due (such as something’s price) during the option to cancel period. (The collateral’s being security for a financial obligation is one restriction on its validity, and for one that is currently due is another. It is not valid to put up collateral for a particular individual article (‘ayn) or the use of an article, since (the obligation to deliver) a particular article is not a financial obligation (dayn), as the selfsame article cannot be obtained by selling the collateral.)
Putting up collateral is not valid in cases in which the financial obligation is not yet due, such as collateral accepted (by a lender) as security for a loan that he will make (in the future).
It is necessary (for the validity of putting up collateral) that there be a spoken offer (by the person putting up the collateral) and spoken acceptance (from the person accepting it, just as it is necessary for sales, the conditions mentioned in connection with sales applying equally here).
The agreement is not legally binding until the collateral has been taken possession of with the permission of the person putting it up, who is entitled to cancel the agreement (at any point) before the collateral has been taken possession of When the agreement has been effected, if the two parties (the collateral’s giver and receiver) agree that the collateral should be kept with either of them, or with a third party, this is done. If not (if they do not agree), the Islamic magistrate has it kept with an upright person (to end the disagreement. But the magistrate is not entitled to place it with either of the two parties without the other’s permission).
GENERAL PROVISIONS CONCERNING COLLATERAL
The collateral must be an article that is permissible to sell.
None of the collateral may be separated from the rest of it until the financial obligation has been entirely paid off.
The person who put up the collateral is not entitled to dispose of it in any way which infringes upon the right of the person who has received it as collateral (such as transferring its ownership to another) by selling it or giving it away (or putting it up as collateral for another person), or to dispose of it in any way that diminishes its value, such as wearing (a garment put up that would depreciate by being worn), though he may use it in ways that do not harm (the interests of the person who has received it) such as riding it, or living (in a house that has been put up as collateral).
An article put up as collateral for a financial obligation may not (at the same time) be put up as collateral for a second financial obligation, even when the second obligation is with the same person who has accepted the article (for the firestone).
The expenses for maintaining an article put up as collateral (such as fodder for livestock, or the wages of a person watering trees) are the responsibility of the person who put it up, and he may be compelled to pay them to protect the rights of the person receiving it (lest it be destroyed). The person who put it up is entitled to the increments produced by it (that are separable from it) such as milk or fruit.
If the article is destroyed while in the possession of the person who received it as collateral without negligence on his part (meaning he took the precautions normal for similar articles), then he is not obliged to pay anything for its loss. But if destroyed because of his negligence, then he is obliged to pay the article’s value to the person who put it up, though its destruction does not eliminate any of the original financial obligation for which the destroyed collateral was put up. (When the collateral has been destroyed and the two parties are at a disagreement,) the final word as to how much the article was worth (when there is no proof belongs to the person who received it as collateral (provided he swears an oath as to how much it was). But the final word as to whether the collateral has been returned (to its owner after his financial obligation has been paid) belongs to the person who put it up (when there is no proof, and he swears).
The benefit of collateral is that the article is sold (by the person who put it up) when there is need to pay the amount which is due. If the person who put it up refuses (to sell the article when the person who has received it as collateral asks him to), then the Islamic magistrate has him either pay the original obligation or else sell the article. (He is given a choice between the two alternatives.) If he continues to refuse (to sell), then the Islamic magistrate sells it for him. (If the person who put it up is absent, then this is established by proof to the magistrate, who sells it for him and gives the person who accepted the collateral his due. If there is no Islamic magistrate and no proof (that there is a financial obligation for which the collateral has been put up), then the person who accepted it as collateral is entitled to sell it himself.)
(Source: The reliance of the traveller, revised edition, Edited and Translated by Nuh Ha Mim Keller)
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