Bay al-dayn is a unique Islamic financial instrument which was developed and currently practised in Malaysia. Studying issues on Bay al dayn critically is one of the ways which we will be able to determine whether the Islamic financial institutions in Malaysia are leaning more towards the Islamic principles or more towards the conventional method of banking and finance. Bay al dayn has create d many doubts amongst the countries practising Islamic Banking as to its permissibility as an Islamic financial instrument. If this instrument is impermissible then, this instrument may lead to disastrous consequences such as instability to the Islamic financial system.
Debt trading, or in other words, buying and selling debt is widely used in the conventional banking system. It is a transfer of debt from a cli ent with the bank to a third party. Normally, the seller is a bank lender seeking to get rid of its loan to another party in exchange for instant cash. This usually happens at the debt market that brings together the buyers and sellers known as brokers. The bank sells the debt to the third party at a cheaper price, ie a discount, than the actual debt.
The significance of debt trading is that it provid es the cash flow for the secondary market. The secondary market claims that it helps in reducing the r isk of investment and in maintaining the liquidity in financial system. This is the reason why banking regulators are very concern about liquidity position of financial institutions and keen to the strengthening of liquidity framework. It also aids the banking institutions in managing the need to have liquidity to meet any mismatch o f the ter m structure of assets and liabilities.
Debt trading in Islamic banking
Debt trading or more recognised as ‘bay al dayn’ is the concept introduced by Malaysia. It claims that it is the Islamic mode or instrument to trade debt. The instrument is being developed to compete with the conventional banking to create a flow in the secondary market. It is also understood to create large capital by attracting investors to invest in Malaysia. It is widely used in the import, export sales and bonds.
Banking institutions in Malaysia are concern about maintaining the liquidity in the financial system therefore has developed this concept. It is claimed that this financial instrument follows the principal of Shari’a and yet the only country using this concept is Malaysia. Other Islamic countries are reluctant to use this concept because it does not seem permissible and there is a possibility that this concept handles interest or riba which is prohibited in Islam. Is this concept being misunderstood or is Malaysia permitting the prohibited?
What has been said by the scholars?
Most Hambalis, Hanafis and Shafi’es do not allow the transaction of bay al-dayn to non debtor or third party at all. However Malikis, and some Hanafis and Shafi’es allow bay al-dayn transaction to third party with some conditions :-
The ability of the seller to deliver the debts
- The debt must be mustaqir or confirmed and the contract must be performed on the spot.
- The debt cannot be created from the sale of currency (gold and silver) to be delivered in the future and the payment is not of the same type as debt, and if it is so, the rate should be the same to avoid riba.
- The debt should be goods that are saleable, ev en before they are received. This is to ensure that the debt is not of the food type which cannot be traded to the debtor.
- Must be at the face value.
The seller is responsible in delivering or transferring the debts to the third party as it is the only linkage between the third party and debtor.
To eliminate uncertainty or ‘gharar’, they have to confirm the existence of the debt.
Any sale of currency (gold and silver) or money cannot be deferred because of the Prophet which claims that gold and silver has to be done on the spot and hand to hand. The goods should not be perishable goods. If all conditions are met, the debt must be transferred or sell at the face value because practising discounting is another form o f riba.
The scholars from Malaysia claims that debts ca n be sold because the original transaction is a debt created with an underlying contract of sale. They claim that it is legitimate to derive profit from the debt because the original transaction is legitimate. Deriving profit is usually being associated with risk ‘Al-Kharaj bi al-Dhaman’ . What risk does the third party holds to earn the profit?
“The secondary market is a mechanism that allo ws lenders to obtain liquidity to make additional loans. Through the secondary market the lender receives the benefits which may then be passed on to the borrower in the form of lower interest rates and longer fixed rate terms”. During the financial crisis in 1998 which was experienced by Malaysia, “the exchange rate essentially was affected by the flight of foreign funds while the stock market was being additionally pulled down b y the herd behaviour of the local speculators”. Therefore, a flow to the secondary market does not necessarily be beneficial as it creates a flow to derivatives and speculators.
Secondary market also encourages debt-creation as experienced in the financial crisis which has created too much debt for a nation to hold and therefore lead to the downfall of the economy.
The ownership of the commodity has been transferred to the debtor; therefore the bank does not own anything. It is the obligation of the debtor to pay its debt to the financier. Hence, the financier is actually selling the obligation of payment from the debtor to another party. A problem will be raised in this transaction if the debtor does not recognise the other party to make its payment as the sale of debt may go on to more than one party and therefore creating a hassle for the debtor to know who should it pays its debt to. Therefore whose obligation or responsibility in recognising the who bought the debt and why is there an extra responsibility on this party The ownership of the commodity was from the financier to the debtor, the third party has nothing to do with the ownership of the commodity therefore the legal maxim ‘Al kharaj bi al-dhaman’(no gain/reward without risk) is not being used here. The third party does not bear any risk so it is not entitled to any gains or reward. The profit charged in the original transaction is based on the commodity which is in the contract of sale in between the financier and the debtor. The third party is not entitled to that profit because it buys the bill after the ownership of the commodity has been transferred to the debtor. The financier is selling a profit which was calculated in the sale of contract, to another party which is the equivalent of selling money for money. Money for money is considered haram according to the Prophet’s hadith that the same commodity cannot be traded in different amount. Therefore the financier has conducted a misconduct of a sale which the seller does not possess according to the Prophet’s hadith is impermissible. The third party has earned riba because of not bearing risk and just relying on time value of money. The debtor has also done misconduct to contributing to riba. Debt trading will only lead to much confusion and it will be best to avoid such transaction.
Recently Malaysia have been exposing themselves to the world as becoming the hub of Islamic Banking in the near future. My personal opinion is that Malaysia still have a lot of ground to cover to become the hub of Islamic Banking. Permitting the prohibited is a serious error and it shows that they still have quite a distance from achieving to be the center or hub of Islamic Banking. They probably should admit that they are becoming the hub of non-Islamic banking.