THE DOCTRINE OF BA’Y AL’ARABUN (EARNEST MONEY)
MOHAMMAD MAS’UM BILLAH
The doctrine of Al Ba’y Al-‘Arabun (Earnest Money) has been followed in the commercial world for some time, but is has its origin in the history of commercial activities performed under the Shari’ah. It is seen in the practice of Suftaja (Bills of Exchange), by which merchants used to advance the whole or part of the cost of goods to a bank or financial trustee in cases where the goods were not in existence at the time of the agreement.
Recently, especially in the late twentieth century, it has been observed that quite a number of commercial transactions, including those of banking, insurance, the stock exchange, hiring, loans and securities, have been carried out under Shari’ah sanctions in both Muslim and non-Muslim countries.
In today’s commercial practice, especially in buying stock or particular properties of which the existence is not ascertainable at the time of the contract, the buyer is required to advance a part of the total agreed price as a guarantee against default in concluding the contract. This provides security for both parties. This practice is known in Islam as Al Ba’y Al-‘Arabun, or Earnest Money.
This article attempts to develop further some specific aspects of the doctrine of Earnest Money to make it suitable for use in contemporary commercial transactions in accordance with the Shari’ah.
The Central Idea
The idea of the doctrine of Earnest Money is that once the parties agree on the sale of some particular goods which are not yet in existence, the buyer is required to pay the seller a nominal advance against the price of the goods, with the condition that if the transaction is concluded, the advance will be adjusted in the final payment, but if the contract is cancelled, the seller is under no obligation to refund the advance to the buyer. Because of the advance, the buyer is under no liability to buy the goods when they become available, but may opt to refrain from buying it if he does not find it advantageous to do so.
Mohamad Hashim Kamali, discussing this doctrine, shows that Earnest Money is what the seller gains from the buyer on the understanding that the money is a partial payment of the total price of the goods in the event that the sale is ratified, but will be retained by the seller should the buyer fail to perform his part of the agreement.
Wahbah Zuhaili, however, defines the doctrine of Earnest Money as an advance of the cost. He further illustrates the nature of the doctrine by the example of a buyer agreeing to buy a particular thing for which he advances a nominal part of the actual cost of the goods to the seller, on the understanding that if the buyer concludes the contract, the advance will be adjusted, otherwise the advance will be forfeited as a gift (hiba) in favour of the seller. However, the decision whether to conclude the contract lies in the option of the buyer.
This method may be used in the sale of a property such as a house, car or piece of land, where the buyer and seller agree on a price and the buyer is required to advance a particular amount of money out of the total price of the property in order to reserve the property for future possession. But in this situation, if the buyer fails to conclude the contract, the seller will not be under any liability to return the advance. The seller appropriates the advance against the risk of non-conclusion of the contract by the buyer.
This doctrine is also widely practised on the stock exchange, where the buyer of an option contract is required to pay a nominal amount of money for the agreed lots as a part payment of the total cost. If the buyer, at or before the maturity date, wishes to withdraw the contract, the advance will be forfeited, but if he does not withdraw the contract, the advance will be adjusted.
To sum up, it may be said that the doctrine of Earnest Money ensures that the contracting parties abide by the divine sanction of mutual co-operation, while both parties in the transaction have security, as given in the Quranic sanction: “Help ye one another in righteousness and piety, but help ye not one another in sin and rancour.
Misconceptions
Despite the fact that the doctrine of Earnest Money provides advantages, especially in upholding mutual co-operation and giving security against risk, particularly to the seller, there are misconceptions in the minds of some Islamic scholars about the application of the doctrine. Some misconceptions are as follows:
1. The doctrine of Earnest Money revolves around the element of gharar (uncertainty). Transactions containing uncertainty are strictly prohibited by the Holy Prophet (PBUH), viz.: “The Holy Prophet forbade any sale with uncertainty in it.” A1 Muwatta, No. 31-34.
2. Except for the Hanbali and Maliki schools, all other schools of Islamic jurisprudence opposed the idea of the doctrine of Earnest Money. Their justification is that the Earnest Money paid by the buyer is, on a de jure basis, the legitimate estate of the buyer and that therefore, the seller, in no situation, has the right to keep the Earnest Money, even for non-conclusion of the contract by the buyer.
3. The Federal Supreme Court of Abu Dhabi, in early 1995, overruled the decision of the Court of Cassation on the issue of currency futures trading on the stock exchange. The Supreme Court ruled that currency futures trading should be held unenforceable in the light of Islamic law, because the parties involved in such a contract do not intend to conclude the exchange contract (in that what is being sold is never actually materially delivered, but rather intended for speculation).
4. There is a difference of opinion among Islamic scholars about the validity of Earnest Money. The Jamhur scholars held that the doctrine of earnest money is unlawful (batil), but, according to the Hanafi school of jurisprudence, it is invalid (fasid). They rely for their justification on the hadith: “Verily, the Holy Prophet (SAW) prohibited Earnest Money.”
The specific reasons for the Jamhur disagreeing with the doctrine of Earnest Money are that it contains the element of uncertainty (Gharar), while the seller appropriates the Earnest Money with no consideration to the buyer if the latter fails to carry out his part of the contract.
Refuting the Misconception
1. In buying or selling goods, which are not at the time of contract in existence, these goods are not, in fact, uncertain. In other words, there is no element of Gharar in such a transaction. This is because the parties to the contract agree about the specification of the goods, which are the subject of the contract, even though they are not in existence at the time. That is, the origin of the goods is certain. Examples are transactions of Ba’y Salara, Istisna’ and Ijara. Similarly, in modern practices such as reserving a house, car or any other property, or buying options on the stock market, the buyer is required to pay a lump sum as an advance on the actual cost of the goods. In such situations, the buyer and the seller can feel certain of the goods, even though they may not exist at the time of the making of the contract. In keeping with the Quranic statement: “Allah intends every facility for you. He does not want to put you to any trouble” (2:185).
It may be said that contracts using Earnest Money provide a simple procedure without much difficulty giving security to both parties.
3. It may be logical, on the face of it, to say that Earnest Money originates from the buyer’s legitimate estate. But looking deeper into it, the Earnest Money is paid in a mutual transaction against particular goods in a contractual obligation in which both parties are obliged to perform the contract for the benefit of both. If the buyer later refuses to conclude the contract and asks for his deposit back, is this justified by the divine doctrine of natural justice? What happens to the goods if the seller has to keep them and simultaneously pay the Earnest Money back to the buyer? If the law allowed that, then the buyer has had no risk while the seller has taken all the risk. Would this be in accordance with the divine sanction of mutual co-operation? “Help ye one another in righteousness and piety, but help ye not one another in sin and rancour.”
Thus, it may be concluded that the Hanbali and Maliki opinions as regards the validity of Earnest Money are quite practical and justified. Imam Maliki rules to the effect that: “For instance, a man … rents an animal and then says to the person from whom he … leased the animal, ‘I will give you a dinar or a dirham on the condition that if I actually … hire the animal I have rented from you, then what I have given you already goes towards payment for … the hire of the animal. If I do not … hire the animal, then what I have given you is yours without liability on your part.”
Similarly, Imam Ahmad bin Hanbal relied for his justification on the basis of the Prophet’s sanction: “Reported by Said bin Aslam (RA) that the Holy Prophet (SAW) was asked about the validity of Al-‘Arabun. He (SAW) legalised it.” (Nail al-Awtar, as cited in al-Zuhaili)
4. The Federal Supreme Court of Abu Dhabi declared that currency futures trading is null and void on the ground that in such a transaction the subject matter of the contract has not been intended to be exchanged, which may be logically rebuttable. It is not necessary that the subject matter of every contract must exist at the time of the conclusion of the contract; so long as the subject matter is certain, that is sufficient to justify a valid contract. Therefore, the decision given by the Dubai Court of Cassation in favour of futures trading is more practical and is certainly justified by the practices of the doctrine of Ba’y Salam, Istisna’a, Ijara and so on.
Ba’y al-‘Arabun: Its Contribution to Contemporary Commercial Activities
In contemporary commercial activities several products revolve around the doctrine of Al-‘Arabun (Earnest Money). It is not always possible in commercial situations for the buyer to pay a lump sum in cash in advance for particular goods or for the seller to be able to deliver the goods to the buyer immediately after the conclusion of the contract. For instance, in the case of a house or other property, car, stock, or manufactured articles, the contracting parties often agree to conclude the contract before the subject matter is delivered into the possession of the buyer. In such cases, the buyer is required to pay a nominal sum in advance at the time of the contract in order to reserve the subject matter of the contract for his future possession within an agreed period of time.
This advancement or “booking” cost will be adjusted against the actual price that is required to be paid at the actual time of the delivery of the goods to the buyer. If the buyer later refuses to accept the agreed goods, the sum paid earlier is deemed to be forfeited in favour of the seller in order to provide security for the seller against the risk of non-acceptance of the goods by the buyer.
The chief objects in such transactions are to provide certainty for the buyer that the goods will not be disposed of to anyone else and at the same time cover the seller against the risk of the buyer not accepting the goods. Altogether, this dealing procedure contributes to mutual co-operation between the buyer and the seller against risk and in favour of security. This shows that the doctrine of Earnest Money greatly contributes to contemporary commercial activities, especially in those cases where the goods concerned are subject to future delivery or possession.
Further Prospects and Possible Recommendations
It is suggested that the doctrine of Earnest Money contributes inter-alia to a convenient way of ensuring security for both seller and buyer, or even for the consumer, in the commodity, capital and financial markets. The existing practice provides the buyer with the option of rejecting the goods, albeit with the loss of his advance payment, but the seller does not have the option to revoke the offer of the goods. To provide a wider scope for the doctrine of Earnest Money in the contemporary commercial world, the following recommendations are made:
1. The practice of the doctrine of Earnest Money should not be confined to existing specific dealings or transactions, but should be extended to any form of commercial transaction which will enable the buyer or consumer to increase his purchasing power, while providing both the buyer and seller with security against risk.
2. The right of the seller should not be limited to obtaining the forfeit of the buyer’s deposit should the latter fail to conclude the contract. The seller should have equal rights with the buyer to revoke the contract before the goods are delivered to the buyer, but with the necessary compensation for the buyer that he may buy similar goods in the current market with no liability.
The doctrine of Earnest Money, having been used in commercial practices in many eras under the Shari’ah discipline, has been shown to provide a significant opportunity for both seller and buyer or consumer, especially in the capital, commodity and financial markets, to create purchasing power with a reasonable security against risk. It is hoped, therefore, that this doctrine may be adapted to wider use in today’s commercial activities under the Shari’ah, thus contributing to the economic stability and security of today’s Islamic societies and those to come.
Edited By Asma Siddiqi
Institute Of Islamic Banking And Insurance London
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