Abstract

The need for risk management is an every day business. The success and failure of every business is largely affected by the ability to manage the risks associated with it and to minimize them as much as possible. A wide range of instruments have been designed in the conventional system of finance to address the issue. The need for risk management in Islamic finance is not an exception. However, due to its own structure and objectives, the Islamic system of finance may reject some of these tools of risk management due to their involvement in riba, gharar or excessive speculation. However, this will not stand in the way of the formulation of Islamically acceptable instruments for risk management. 'Arbbun may play an important role in that direction. The present study will address the legality of 'arbbun, its relation with the clause of liquidated damages and penalties and the possibility of using it in currency exchange, commodity and services, shares trading, murabahah, salam and 'istisna'. The paper will also address the possibility of using 'arbbun as an alternative to call and put options.

Introduction

The rapid expansion and growth of Islamic banking and finance is a clear indication of the viability of the system and its ability to face the modern challenges of business. The issue of risk management, especially price risk, is one of the problems that need to be addressed by Muslim jurists and economists in order to maintain the competitiveness of the Islamic financial system. A range of tools such as forward, futures, swap and options contracts is already in use in the conventional system of finance to manage such risk. The design of an Islamically acceptable formula is a must. 'Arbbun may play an important role in the formulation of the Islamic alternative. Although it is only recognized by the Hanbali School as a legal transaction, the general principles of Islamic commercial law as well as the specific evidence advanced by the Hanbalis show the rightfulness of their stand. The legality of 'arbbun has also been endorsed by the recent decision of the Islamic Fiqh Academy which considers it as a legal contract despite the reservations of some scholars. However, the modern application of 'arbbun may need a fresh interpretation. The present study will address the legality of 'arbbun from the classical sources and its similarities and differences with the clause of liquidated damages and penalties. It will also discuss its possible use in currency exchange, commodities and services, shares trading, murahabah, salam and 'istisna'.

Moreover, it will discuss the possibility of using 'arbbun as an alternative to a call option if it is stipulated by the buyer or the possibility of using it as a put option through the reverse 'arbbun, by rendering a service by one party to another in exchange for a fee or through the concept of third party guarantee.

Definition and Concept

'Arbbun refers to a sale in which the buyer deposits earnest money with the seller as part payment of the price in advance, but agrees that if he fails to ratify the contract, he will forfeit the deposit money, which the seller can keep. It is also defined as "a transaction whereby the buyer pays only a small part of the price of a commodity (for instance two dirham), on the understanding that the seller' will retain this amount if the sale is not finally concluded due to withdrawal of the buyer."

However, Imam Malik gives a somewhat more general definition of 'arbbun. "It is when a person buys a slave or rents an animal and says to the seller or the owner; of the animal," "I will give you one dinar or one- dirham or more or less and if I ratify the sale or the rent contract, the amount I gave will be t1art of the total price. And if I cancel the deal, then what I gave-will be for you without any exchange." The above definition of Imam Malik shows that 'arbbun is not only possible in a sale contract but also in a rent or leasing contract. This will widen the use of 'arbbun as we will see later. However, there is disagreement among the classical schools of Islamic law about the legality of arbbun.

The Majority held that it is an invalid contract and considered it to be a in to misappropriating the property of others. Moreover, it involves an unknown option or condition, which amounts to gharar. The Hanbali School, on the other hand, considers it as a legal contract. Umar (R.A.) the second caliph and his son 'Abd Allah Ibn Umar' held a similar position. Among the followers certain prominent figures including Mujahid, Sa'id Ibn al-Musayyib, Ibn Sirin, Nafi' Ibn al-Harith, and laid Ibn Aslam have also held it to be lawful. The source of this difference lies in the authenticity of two hadiths reported on the issue, which seem to contradict each other.

Thus, the majority relied on a hadith reported by Imam Malik in al-Muwatta' as well as by Imam Ahmad al Nasa'i Abu Dawud, and Ibn Maja and to the effect that the Prophet (PBUH) prohibited the sale of 'arbbun. However, the hadith is considered to be weak (munqati').

On the other hand, the Hanbali School relied on a hadith reported by Abd al-Razak to the effect that the Prophet was asked about 'arbbun sale and he declared it permissible. But this hadith is also declared to be weak (mursal). In addition, the Hanbalis rely on the report of Nafi's lbn al-Harith, the officer of the caliph Umar (R.A) in Makkah to the effect thought from Safwan Ibn Umayyah a prison house for the caliph 'Umar (R.A.) for four thousand dirham on condition that if the caliph approved of it, the deal would be final, otherwise Safwan would be given four hundred dirham.

On the other hand, much other evidence could be invoked in support of the legality of bay' al-'arbbun such as the hadith: "Muslims are bound by their stipulations unless it be a stipulation which declares unlawful what is permissible or permits what is unlawful".

Also it is reported in al-Bukhari and narrated by Ibn Sirin that "a man said to a hirer of animals, 'prepare your traveling animals and if l do not go with you on such and such a day, I shall pay you a hundred dirhams'. But he did not go on that day. Shuraih said: If anyone puts a condition on himself of his own free will without being under duress, he has to abide by it. Also it is narrated by Ayyub from Ibn Sirin that "A man sold food, and the buyer told the seller that if he did not come to him on Wednesday, his deal would be cancelled, and he did not turn up on that day". Shuraih said to the buyer. "You have broken your promise" and gave the verdict against him. Ibn Hajar said, Sayid Ibn, Mansur has completed this transmission by the chain of Sufyan from Ayyub. The conclusion from this hadith is that Shuriah in both cases - had given the verdict against the person who makes the condition against himself without duress.

A number of contemporary Muslim jurists opted for the admission of 'arbbun Thus, al-Qaradawi, in his analysis and comparison of the evidence for and against the sale of 'arbbun, stated that the opponents of 'arbbun have relied on a hadith and the argument that it is premised on a condition, which entails appropriation by the seller of the buyer's property without any exchange. As for the hadith, it is unreliable. But since the hadith upon which the proponents of bay' al-'arbbun rely is also weak, al- Qardhawi that the issue should consequently be determined on rational grounds and here we note that Imam Ahmad relied on the precedent of Umar Ibn al-Khattab and has considered 'arbbun to fall into the category of lawful appropriation. This ruling: al-Qardhawi adds, is more suitable to our own time and in greater harmony with the spirit of shari'ah, which seeks to remove hardship and facilitate convenience for the people.

Meanwhile, al Zuhaili rejected al-Shawkani's argument that since the two hadith contradict each other in that one prohibits 'arbun while the other legalizes it, we should opt for the prohibition because, as it is well-known in Islamic jurisprudence, if there are two conflicting commands on prohibition and permissibility. Al-Zuhaili said the evidence of the two parties, in this case, is not equal. The proponents relied on the precedent of Umar Ibn al-Khattab which could be considered as an ijma, because he was not opposed by any of the companions.

A number of contemporary Muslim jurists opted for the admission of 'arbbun Thus, al-Qaradawi, in his analysis and comparison of the evidence for and against the sale of 'arbbun, stated that the opponents of 'arbbun have relied on a hadith and the argument that it is premised on a condition, which entails appropriation by the seller of the buyer's property without any exchange. As for the hadith, it is unreliable. But since the hadith upon which the proponents of bay' al-'arbbun rely is also weak, al- Qardhawi that the issue should consequently be determined on rational grounds and here we note that Imam Ahmad relied on the precedent of Umar Ibn al-Khattab and has considered 'arbbun to fall into the category of lawful appropriation. This ruling: al-Qardhawi adds, is more suitable to our own time and in greater harmony with the spirit of shari'ah, which seeks to remove hardship and facilitate convenience for the people.

Meanwhile, al Zuhaili rejected al-Shawkani's argument that since the two hadith contradict each other in that one prohibits 'arbun while the other legalizes it, we should opt for the prohibition because, as it is well-known in Islamic jurisprudence, if there are two conflicting commands on prohibition and permissibility. Al-Zuhaili said the evidence of the two parties, in this case, is not equal. The proponents relied on the precedent of Umar Ibn al-Khattab which could be considered as an ijma, because he was not opposed by any of the companions.

Mustafa al-Zarqa, highlighted the utility of 'arbbun in modern commerce and the support it has received in general custom and legislation. 'Arbbun provides a useful formula, which can be utilized to facilitate a credible commitment, or a surety that the buyer will not change his mind after finalizing a sale. However, if he does, the seller can be compensated for possible loss that has been caused as a result. The need for such assurance is more evident in modern times when large orders have to be entertained by making elaborate preparations that involve a chain of other subsidiary transactions that incur additional expenditure. It is likely that the seller who reserves his goods or manufactures them for the purpose, and waits until the buyer ratifies the sale may lose the opportunity of selling his goods or may fail to sell them for a food price, in which case he should be entitled to compensation, and 'arbbun responds to this need.

Abd Allah Ibn Mani', in his rejection of the opponents' argument that there is gharar in 'arbbun since in such a contract there is no time limit for the exercise of the right of cancellation of the contract said, "We agree that there should be a time limit for the exercise of this right, otherwise the possibility of gharar may have some grounds". Yet, it should be noted that some sources of the Hanbali School did not mention a time frame for the exercise of this right. But Abd Allah al- Bassam argues that the Hanbalis, as a matter of principle, reject all conditions of unlimited time in a contract, therefore, even if sometimes, some Hanbali scholars did not mention explicitly this limitation in their works, they are considering it. Moreover, some other Hanbali scholars, such as al-Maqdisi, have mentioned it. In addition, it could be argued that the issue of time limitation in this case is similar to that of khiyar al-shari. Some other contemporary scholars such as Majid Abu Ruqayyah and Lashin Mohammad Nunus al-Qayyati have also opted for the legality of 'arbbun.

Considering the fact that some contemporary scholars have opposed bay'ai-'arbbun on one of these grounds, namely there is gharar in 'arbbun since in such a contract there is no time limit for the exercise of the right of cancellation of the contract, the participants in the Islamic Fiqh Academy discussion on 'arbbun opted for the inclusion of this condition in every 'arbbun contract in order to solve the problem. It is worth noting that the opponents of 'arbbun have objected to it also on other grounds. AI-Darir, for instance, opposed 'arbbun also on the ground that it has connotations of a conventional option and it may be used for speculative purposes.

On the other hand, it should be noted that the legislation of several Arab countries has opted for the legality of arbbun as an indication that both parties in the contract have the right to cancel the contract during the agreed period except for the civil law of Iraq, which, considers 'arbbun as an indication that the contract is final and conclusive. Thus, Article 103 of the Egyptian civil code, Article 74 of the Kuwaiti civil code, Article 103 of the Jordanian civil code and Article 104 of the Syrian civil code state that 'arbbun is an indication tha1 both parties have the right to cancel the contract during the agreed period.

The Legal Status of Bay'al- 'Arbbun