PIONEERING THOUGHTS ON COMMODITY AWÓLAH: FACILITATING THE TRADING OF DEBT?

Transcription

1 RESEARCH PAPER (No: 26/2011) PIONEERING THOUGHTS ON COMMODITY AWÓLAH: FACILITATING THE TRADING OF DEBT? PROF. DR. ASHRAF MD HASHIM EQHWAN MOKHZANEE MUHAMMAD

2 PIONEERING THOUGHTS ON COMMODITY AWÓLAH: FACILITATING THE TRADING OF DEBT? Prof. Dr. Ashraf Md Hashim * Eqhwan Mokhzanee Muhammad ** ABSTRACT One of the major contentious areas within the Islamic finance industry is the sale or tradability of debt and debt-based instruments, the issue revolving around the principle of bayñ al-dayn. Jurisdictions which permit bayñ al-dayn have experienced tremendous growth, particularly with regards to transactions involving financing assets, and liquidity management and debt capital market instruments such as commodity murébaíah ÎukËk. In other jurisdictions, the prohibition of bayñ al-dayn has inevitably somewhat constrained the development of their Islamic finance industries. This paper seeks to bridge the gap between the two contrasting views by introducing the pioneering concept of commodity ÍawÉlah. The proposed commodity ÍawÉlah mechanism is a combination of debt and commodity trading, which are underpinned by the principle of ÍawÉlah al-íaqq (i.e., transfer of the rights to a debt). It is hoped that the proposed commodity ÍawÉlah mechanism could set the foundation or benchmark for the trading of debt and debt-based instruments across all Islamic jurisdictions. Keyword : Debt trading, ÍawÉlah, ribé, qabì (control and ownership of assets), taslêm al-mabê (deliverability of the sold item). * Prof. Dr. Ashraf Md Hashim is a Senior Researcher at the International SharÊÑah Research Academy for Islamic Finance (ISRA), a Professor at the International Centre of Education in Islamic Finance (INCEIF) & a Member of Bank Negara Malaysia SharÊÑah Advisory Council. He can be contacted at: [email protected]. ** Eqhwan Mokhzanee Muhammad is a Director of Investment Banking at an investment bank in Malaysia and was previously the Head of Global Markets at an international Islamic bank based in the Middle East. He can be contacted at: [email protected].

3 2 ISRA RESEARCH PAPER (NO. 26/2011) Ashraf Md Hashim & Eqhwan Mokhzanee Muhammad 1. OBJECTIVE The objective of this paper is to introduce the concept of commodity ÍawÉlah which, in essence, is the sale or transfer of debt from the original lender or beneficiary (i.e., original creditor) to another party (i.e., new creditor) by using commodities, as opposed to cash, as consideration to settle the said sale or transfer of debt. In this regard, debt could effectively be sold or traded at a discount, par or premium by using commodities rather than cash as consideration to settle or pay for the said sale or trading of debt. In this paper, debt also includes receivables, financing assets and other financial or intangible assets, and may be used interchangeably as the context dictates. The proposed commodity ÍawÉlah is underpinned by the combination of the principle of ÍawÉlah (specifically ÍawÉlah al-íaqq) and the use of commodities as consideration, and may prove relevant in light of the prohibition of bayñ al-dayn (debt trading) in certain Islamic jurisdictions. 2. THE PRINCIPLE OF AWÓLAH Literally, ÍawÉlah is derived from the word taíwêl, which means shifting from one place to another (intiqél). It is also correct to pronounce the word ÍawÉlah as ÍiwÉlah. There are broadly two (2) types of ÍawÉlah: (a) ÍawÉlah al-dayn (i.e., transfer of the obligation of the debt or debt obligation); and (b) ÍawÉlah al-íaqq (i.e., transfer of the rights to the debt). According to the majority of Muslim scholars, ÍawÉlah al-dayn entails the transfer of the debt obligation from the original borrower or obligor (i.e., original debtor) to another party (i.e., new debtor). 1 This definition is also adopted by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) which defines ÍawÉlah al-dayn in its SharÊÑah Standard No. 7, Clause 2, as the transfer of debt from the transferor (muíêl) to the payer (muíél Ñalayh). The key participants are the original debtor, the creditor and the new debtor. The principle of ÍawÉlah al-dayn can be adopted in a contract whereby the debt obligation of the original debtor is assumed by another person (i.e., new debtor) who becomes responsible for the debt obligation. Through the transfer of a claim of a debt, the responsibility for the debt s settlement is shifted from one person to another. When a valid ÍawÉlah al-dayn is concluded, 1 Al-ZaylaÑÊ, TabyÊn al- aqé iq, 4/171, al-mawéq, al-téj wa al-iklêl, 7/21, al-haytamê, TuÍfat al-muítéj, 5/226, al-buhëtê, KashshÉf al-qinéñ, 3/382.

4 PIONEERING THOUGHTS ON COMMODITY AWÓLAH: FACILITATING THE TRADING OF DEBT? 3 the debt is no longer demanded from the original debtor since the debt obligation has been transferred from the original debtor to the new debtor. The principle of ÍawÉlah al-dayn also creates a right for the creditor to demand the settlement of the debt from the new debtor. Meanwhile, ÍawÉlah al-íaqq entails the transfer of the debt rights from the original lender or beneficiary (i.e., original creditor) to another party (i.e., new creditor). AAOIFI, in its SharÊÑah Standard No. 7, Clause 2, defines ÍawÉlah al-íaqq as the replacement of a creditor with another creditor. The three key participants are the original creditor, the debtor and the new creditor. Adopting the principle of ÍawÉlah al-íaqq in a contract allows the debt rights of the original creditor to be assumed by another person (i.e., new creditor), who thereby gains the rights to the debt. Through the transfer of the debt rights, the entitlement to the debt s settlement is shifted from one person to another. When a valid ÍawÉlah al-íaqq is concluded, the debt is not paid to the original creditor since the debt rights have been transferred from the original creditor to the new creditor. Furthermore, the principle of ÍawÉlah al-íaqq establishes the right of the new creditor to demand the settlement of debt from the debtor. Most literature on and references to ÍawÉlah pertain to ÍawÉlah al-dayn. This paper meanwhile seeks to adopt the less commonly discussed principle of ÍawÉlah al- Íaqq for the purposes of facilitating the trading of debt between the original lender or beneficiary (i.e., original creditor) with another party (i.e., new creditor) via the proposed concept of commodity ÍawÉlah, as a differentiation from bayñ al-dayn. Recognising the differing SharÊÑah views prevalent in the Islamic finance industry, it is hoped that this paper is able to provide the basis to spur healthy debate and discussions amongst SharÊÑah scholars and other Islamic finance stakeholders with regards to ÍawÉlah, bayñ al-dayn and the use of commodities in bridging the sophistication gap between Islamic finance and its conventional counterpart. 3. BACKGROUND ON BAYÑ AL-DAYN From the Islamic jurisprudence point of view, dayn (debt) includes payment for products, qarì (loan) payment, mahr payment before or after cohabitation 2 (i.e., if it was not given after the marriage solemnisation), rental, compensation for crime committed (arsh), compensation for damages, money to be paid for divorce requested by the wife (khuluñ) and for purchase orders which have yet to arrive (muslam fêh). 3 In 2 Mahr is a dowry given by the husband to his wife. It is one of the legal effects of a marriage. 3 Al-ZuÍaylÊ, al-fiqh al-islémê wa Adillatuh, 4:432.

5 4 ISRA RESEARCH PAPER (NO. 26/2011) Ashraf Md Hashim & Eqhwan Mokhzanee Muhammad the context of Islamic finance, bayñ al-dayn is the principle of selling the debt which resulted from the exchange of contracts such as murébaíah, bayñ bi thaman Éjil, ijérah, ijérah muntahiyah bi tamlêk and istiînéñ. There are divergent views in respect of bayñ al-dayn; some SharÊÑah scholars permit debt trading, whilst other SharÊÑah scholars, particularly from some parts of the Middle East, have adopted the opposite stance. It is worth emphasising at this juncture that this paper is neither alluding nor concluding that bayñ al-dayn is conclusively in contravention to SharÊÑah. This is because the differing SharÊÑah opinions on bayñ al-dayn are based on different yet sound reasoning offered by the respective SharÊÑah scholars and, as such, should be duly respected regardless of the opinions which any party subscribes to. Currently, Islamic finance transactions underpinned by the trading of debt either directly (e.g., Islamic debt factoring, sale of Islamic financing assets) or indirectly (e.g., commodity murébaíah ÎukËk) have flourished in jurisdictions such as Malaysia which permit bayñ al-dayn. In other jurisdictions, the prohibition of bayñ al-dayn has inevitably somewhat constrained the development of their Islamic finance industries. Permissibility of BayÑ al-dayn The MÉlikÊ madhhab allows debt sale to a third party, subject to the following conditions, to facilitate the use of bayñ al-dayn in the market: (a) Payment for the purchase should be immediate; (b) The debtor should be present at the point of sale; (c) The debtor must confirm the debt; (d) Payment cannot be of the same type as the debt, and if it is so, the rate should be the same to avoid ribé (usury); (e) The debt cannot be created from the sale of currency (or gold or silver) to be delivered in the future; (f) The debt should be goods that are saleable even before they are received. This is to ensure that the debt is not owed in food, which cannot be traded before the occurrence of qabì (control and ownership of the asset); and

6 PIONEERING THOUGHTS ON COMMODITY AWÓLAH: FACILITATING THE TRADING OF DEBT? 5 (g) There should be no enmity between the debt purchaser and debt vendor, which could create difficulties for the debtor. The conditions set by the MÉlikÊ madhhab 4 are primarily to achieve the following objectives: (a) To protect the rights of the debt purchaser; (b) To avoid sale of debt before qabì (control and ownership of assets); and (c) To avoid ribé. The ShÉfiÑÊ madhhab is of the opinion that selling debt to a third party is allowed if the debt is mustaqirr (legally established) and is sold in exchange for goods that must be delivered immediately. When the debt is sold, it should be paid in cash or tangible assets as agreed. 5 Ibn al-qayyim was of the opinion that bayñ al-dayn is permissible because there is no general text (naîî) or consensus (ijméñ) that prohibits it. What has been stated is the prohibition of bayñ al-kéli bi al-kéli (i.e., a sale in which both counter-values are to be delivered in the future). 6 In the Malaysian context, it can be argued that the debt securities instruments based on the principle of bayñ al-dayn are regulated by Bank Negara Malaysia and the Securities Commission Malaysia to safeguard the rights of the parties involved in the contract. Therefore, the conditions set by the MÉlikÊ madhhab and the fears of the anafê madhhab (see discussion in the later part of this paper) can be overcome by regulation and surveillance. Thus, it can be concluded that although there are differences of opinion on bayñ al-dayn between the anafê madhhab and MÉlikÊ madhhab, there is a point of convergence, that bayñ al-dayn can be used if there is a regulatory system that protects the buyer s maîlaíah (interest). The fourth condition set by the MÉlikÊ madhhab relates to the exchange of ribawê items. In the context of the sale of securitised debt, the characteristics of securities differentiate them from currency, and hence, such a sale is not bound by the conditions for exchanging ribawê goods. 7 4 See: al-dusëqê, Éshiyat al-dusëqê ÑalÉ al-sharí al-kabêr, 3:63. 5 Al-ShirÉzÊ, Al-Muhadhdhab, l: Ibn Qayyim, IÑlÉm al-muwaqqiñên, 1: Resolutions of the Securities Commission of Malaysia SharÊÑah Advisory Council, 19.

7 6 ISRA RESEARCH PAPER (NO. 26/2011) Ashraf Md Hashim & Eqhwan Mokhzanee Muhammad Prohibition of BayÑ al-dayn The anafê madhhab looks at bayñ al-dayn from the aspects of potential risks to the debt purchaser, debtor, and the nature of the debt itself. They are unanimous in not permitting bayñ al-dayn because the risks cannot be overcome in the context of debt selling. This is because the debt is in the form of mél ÍukmÊ (intangible assets), which potentially results in the debt purchaser taking on significant risks because the debt purchaser cannot own the item (i.e., debt) bought and the debt vendor cannot deliver the item (i.e., debt) sold. 8 In light of this, the Islamic Fiqh Academy has issued a resolution that it is unlawful to sell a deferred debt to someone other than the debtor for a spot payment in the same or a different [currency] because it can lead to ribé. It is, likewise, unlawful to sell the debt for deferred payment of the same or a different [currency] because it comes under the rubric of the sale of a debt for a debt, which is prohibited by the SharÊÑah. There is no difference in that rule, whether the debt originates from a loan or from a deferred payment sale. 9 In addition, AAOIFI s SharÊÑah Standard No. 17, on the issue of investment ÎukËk, has affirmed that decision in Article 5/2/15: Trading of murébaíah ÎukËk is unlawful. It is not the intention of this paper to discuss in length the different views on debt trading and their evidence. Nevertheless, it can be observed from the various SharÊÑah views espoused that the prohibition of bayñ al-dayn stems from two main issues, namely: (a) ribé (usury); and (b) the deliverability of the sold item (i.e., the debt) by the debt vendor (i.e., original creditor) to the debt purchaser (i.e., new creditor). The trading of debt which is settled with cash could lead to ribé because such a sale will involve the exchange of the same category of ribawê items (i.e., currencies in the form of debt and the price of the debt or cash), and may occur in the following forms: (a) At a discount or premium. This violates the generally accepted rule that requires the exchange of two ribawê items of the same category to be done at par; and/or 8 Al-KÉsÉnÊ, BadÉ iñ al-øané iñ, 5: Resolution No. 101(11/4) from Majallat MajmaÑ al-fiqh al-islémê, 350.

8 PIONEERING THOUGHTS ON COMMODITY AWÓLAH: FACILITATING THE TRADING OF DEBT? 7 (b) Payment on a deferred basis. This violates the generally accepted rule that requires the exchange of two ribawê items of the same category to be concluded on a spot basis. With regards to the deliverability of the sold item (i.e., the debt) by the debt vendor to the debt purchaser, there could be uncertainties particularly in respect of the transfer of the rights of the debt to the debt purchaser and the ability of the borrower or obligor (i.e., debtor) to settle the debt in a timely manner. Incomplete transfer of the rights of the debt to the debt purchaser or the debtor defaulting on the debt obligations would render the debt, which is the item being sold or traded, not being delivered to the debt purchaser. It is hoped that the proposed commodity ÍawÉlah mechanism will be able to address the above two concerns, which could result in the trading of debt instruments becoming more amenable, particularly from a SharÊÑah standpoint. 4. THE FUNDAMENTALS OF COMMODITY AWÓLAH Realising the necessity for the Islamic finance industry particularly in jurisdictions which prohibit bayñ al-dayn to constantly evolve in striving to reach the competitiveness of its conventional counterpart, the authors wish to propose a mechanism to facilitate the trading of debt whereby the purchaser of the debt uses commodities, as opposed to cash, to settle or pay for the said trading of debt. The commodity ÍawÉlah mechanism could eliminate the issue of ribé because cash is not used to settle the trading of the debt; instead, consideration is in the form of a commodity that is not of the same category of wealth as the debt. In addressing the concern about the deliverability of the sold item (i.e., the debt) by the debt vendor to the debt purchaser, the anafê fear that the debt purchaser will have to bear great risks is valid in the absence of supervision and control. But with adequate supervision and legal framework, the debt purchaser s interest shall be safeguarded because the debt purchaser is the party that has to bear the risks of acquiring the right to the debt in making the sale contract. In this regard, it is worth reiterating that the deliverability of the debt by the debt vendor to the debt purchaser and minimisation of future disputes are paramount for the proposed commodity ÍawÉlah mechanism.

9 8 ISRA RESEARCH PAPER (NO. 26/2011) Ashraf Md Hashim & Eqhwan Mokhzanee Muhammad While an adequate legal framework is an integral component to ensure seamless implementation of commodity ÍawÉlah, the debt purchaser must be fully versed with the risks of acquiring the debt via proper assessment, due diligence, full disclosure and transparency. The proposed mechanism is a combination of debt and commodity trading underpinned by the principle of ÍawÉlah al-íaqq (i.e., transfer of the rights to the debt), which the authors propose to term as commodity ÍawÉlah. In a nutshell, commodity ÍawÉlah shall be implemented as follows: 5 Pursuant to the Commodity Hawalah mechanism whereby the rights of the Debt has been transferred from the Debt Vendor (i.e. Original Creditor) to the Debt Purchaser (i.e. New Creditor), the Debt Obligor (i.e. Debtor) now owes the obligation of the Debt to the Debt Purchaser (i.e. New Creditor) 0 1 Debt Obligor (Debtor) The Debt Obligor (i.e. Debtor) owes the obligation of the Debt to the Debt Vendor (i.e. Original Creditor) 4a Sells Commodities on Spot amounting to the Sale Price of the Debt Debt Vendor (Original Creditor) 4b Receives Cash 3 Sells Debt / rights of the Debt (i.e. total outstanding Principal and Profit) for a Sale Price (e.g. Principal amount) Settlement with Commodities which are mutually valued to be the total outstanding Principal and Profit of the Debt 2b Pays Cash Debt Purchaser (New Creditor) 2a Acquires Commodities on Spot amounting to the Sale Price of the Debt Party B Party A Stage Original Obligation of the Debtor Step 0. The Debt Obligor (i.e., Debtor) owes the obligation of the Debt to the Debt Vendor (i.e., Original Creditor). Sale of Debt 1. The Debt Vendor (i.e., Original Creditor) sells the Debt (i.e., rights to the Debt) comprising both the outstanding Principal and Profit amounts for a Sale Price (e.g., the Principal amount) to the Debt Purchaser (i.e., New Creditor).

10 PIONEERING THOUGHTS ON COMMODITY AWÓLAH: FACILITATING THE TRADING OF DEBT? 9 Stage Commodity Acquisition Settlement for the Sale of Debt Commodity Sale Transfer of the Rights to the Debt Step 2a. The Debt Purchaser acquires Commodities amounting to the Sale Price of the Debt for cash. 2b. The Debt Purchaser pays cash as consideration for the commodity acquisition. 3. The Debt Purchaser uses the Commodities which are mutually valued by both Parties to be the total outstanding Principal and Profit amounts of the Debt to settle the Sale of the Debt carried out in step 1. 4a. The Debt Vendor sells the Commodities amounting to the Sale Price of the Debt for cash. 4b. The Debt Vendor receives cash as consideration for the commodity sale. 5. Since the rights of the Debt have been transferred from the Debt Vendor (i.e., Original Creditor) to the Debt Purchaser (i.e., New Creditor) pursuant to the commodity ÍawÉlah mechanism, the Debt Obligor (i.e., Debtor) now owes the obligation of the Debt to the Debt Purchaser (i.e., New Creditor). Practical Adoption of Commodity awélah Potentially, the most common uses for commodity ÍawÉlah instead of bayñ al-dayn are in the areas of: (i) Trading of debt- or receivables-based ÎukËk (ii) Sale of financing assets or receivables

11 10 ISRA RESEARCH PAPER (NO. 26/2011) Ashraf Md Hashim & Eqhwan Mokhzanee Muhammad Trading of Debt- or Receivables-based ØukËk Currently, ÎukËk that have underlying assets in the form of debt or receivables, such as commodity murébaíah ÎukËk, are freely tradable in Islamic jurisdictions which permit bayñ al-dayn. Notwithstanding, the authors are of the view that such jurisdictions should also consider commodity ÍawÉlah as an alternative to facilitate the trading of debt- or receivables-based ÎukËk as part of their continuous development and to appeal to a wider market. The authors opine that Islamic jurisdictions such as Malaysia with an existing infrastructure are well placed to implement commodity ÍawÉlah to facilitate the trading of debt- or receivables-based ÎukËk. In Malaysia, ÎukËk are maintained and traded in scripless form via the Bank Negara Malaysia Scripless Securities Trading System (SSTS). Meanwhile, Bursa Malaysia Suq Al-Sila (Bursa Suq Al-Sila) is internationally recognised as an exchange to conduct commodities trading for the purposes of, inter alia, providing Islamic financing. The creation of an interface between these two platforms and, if required, certain modifications to their respective systems, could ensure the seamless trading of debt- or receivables-based ÎukËk via commodity ÍawÉlah in a manner consistent with market practices. Adopting the commodity ÍawÉlah mechanism, the trading of debt- or receivablesbased ÎukËk can be depicted as follows: 1 Sells Sukuk via SSTS BNM SSTS 1 Sells Sukuk via SSTS 6 Notification to SSTS re Sukuk payment 2 Notification to Bursa Suq Al-Sila re Sukuk sale Sukuk Vendor (Original Creditor) 4 Settlement with Commodities via Bursa Suq Al-Sila Bursa Suq Al- Sila 4 Settlement with Commodities via Bursa Suq Al-Sila Sukuk Purchaser (New Creditor) 5a Sells Commodities on Spot 3a Acquires Commodities on Spot 5b Receives Cash 3b Pays Cash

12 PIONEERING THOUGHTS ON COMMODITY AWÓLAH: FACILITATING THE TRADING OF DEBT? 11 Stage Step Sale of ØukËk 1. The ØukËk Vendor sells the ØukËk comprising both the outstanding Principal and Profit amounts for a Sale Price to the ØukËk Purchaser via BNM SSTS. Notification to Bursa Suq Al-Sila Commodity Acquisition Settlement for the Sale of ØukËk via Bursa Suq Al-Sila Commodity Sale Notification to BNM SSTS 2. BNM SSTS notifies Bursa Suq Al-Sila on the details of the Sale of the ØukËk. 3a. The ØukËk Purchaser acquires Commodities amounting to the Sale Price via Bursa Suq Al-Sila for cash. 3b. The ØukËk Purchaser pays cash as consideration for the commodity acquisition. 4. The ØukËk Purchaser uses the Commodities which are mutually valued by both Parties to be the total outstanding Principal and Profit amounts of the ØukËk to settle the Sale of the ØukËk carried out in step 1 via Bursa Suq Al-Sila. 5a. The ØukËk Vendor sells the Commodities amounting to the Sale Price via Bursa Suq Al-Sila for cash. 5b. The ØukËk Vendor receives cash as consideration for the commodity sale. 6. Bursa Suq Al-Sila notifies BNM SSTS that payment for the Sale of the ØukËk has been completed to allow delivery of the ØukËk to the ØukËk Purchaser in line with the Delivery vs. Payment basis within BNM SSTS. Note: The Debt Obligor (i.e., Debtor) is excluded from the diagram and table for simplicity.

13 12 ISRA RESEARCH PAPER (NO. 26/2011) Ashraf Md Hashim & Eqhwan Mokhzanee Muhammad Sale of Financing Assets or Receivables Financial institutions or corporations may sell their financing assets or receivables to meet immediate cash flow requirements or for effective balance sheet and capital management. In Malaysia, it may be possible to leverage on Bursa Suq Al-Sila to effect this transaction via commodity ÍawÉlah as illustrated below: 1 Sells Financing Assets or Receivables 3 Settlement with Commodities Debt Vendor (Original Creditor) 4a Sells Commodities on Spot Bursa Suq Al- Sila 2a Acquires Commodities on Spot Debt Purchaser (New Creditor) 4b Receives Cash 2b Pays Cash

14 PIONEERING THOUGHTS ON COMMODITY AWÓLAH: FACILITATING THE TRADING OF DEBT? 13 Stage Sale of Financing Assets or Receivables Commodity Acquisition Settlement for the Sale of Financing Assets or Receivables Commodity Sale Step 1. The Debt Vendor sells the Financing Assets or Receivables comprising both the outstanding Principal and Profit amounts for a Sale Price to the Debt Purchaser. 2a. The Debt Purchaser acquires Commodities amounting to the Sale Price via Bursa Suq Al-Sila for cash. 2b. The Debt Purchaser pays cash as consideration for the commodity acquisition. 3. The Debt Purchaser uses the Commodities which are mutually valued by both Parties to be the total outstanding Principal and Profit amounts of the Financing Assets or Receivables to settle the Sale of the Financing Assets or Receivables carried out in step 1. 4a. The Debt Vendor sells the Commodities amounting to the Sale Price via Bursa Suq Al-Sila for cash. 4b. The Debt Vendor receives cash as consideration for the commodity sale. Note: The Debt Obligor (i.e., Debtor) is excluded from the diagram and table for simplicity.

15 14 ISRA RESEARCH PAPER (NO. 26/2011) Ashraf Md Hashim & Eqhwan Mokhzanee Muhammad 5. CONCLUSION To the best of the authors knowledge, while the concept of ÍawÉlah and the use of commodities as a means to facilitate Islamic transactions (e.g., in tawarruq, which are commonly referred to as commodity murébaíah transactions) are already part of Islamic finance, the proposed concept of commodity ÍawÉlah, which combines the two for the purposes of facilitating the trading of debt whereby commodities, as opposed to cash, are used as consideration to complete a ÍawÉlah transaction (i.e., transfer of debt) which effectively permits the trading of debt without being tantamount to bayñ al-dayn may be deemed as pioneering. It is also important to highlight here that the use of commodities that neither the seller nor the buyer of the debt requires can be categorised as Íiyal-based 10 contracts. This is because one of the features of Íiyal is to include something unnecessary in a contract as a counter-value or subject matter. iyal-based products, even though permissible, should only be employed temporarily while, at the same time, effort must be expended in search of alternatives, particularly when the difficulty for which they were initiated has come to an end. In this respect, the authors welcome comments, feedback or suggestions from regulators, financial institutions and other Islamic finance practitioners on the proposed concept of commodity ÍawÉlah which may benefit their respective institutions or the industry as a whole. 10 iyal is a juristic term defined as the use of profound wisdom and ingenuity to avoid difficulty in one s commitment to SharÊÑah rulings, especially in financial and economic matters.

16 PIONEERING THOUGHTS ON COMMODITY AWÓLAH: FACILITATING THE TRADING OF DEBT? 15 REFERENCES Al-BuhËtÊ, ManÎËr bin YËnus, KashshÉf al-qinéñ Ñan Matan al-iqnéñ, Beirut: DÉr al- Kutub al-ñilmiyyah. Al-DusËqÊ, AÍmad bin ÑArafah, Éshiyat al-dusëqê ÑalÉ al-sharí al-kabêr, Beirut: DÉr IÍyÉ al-turéth al-ñarabê. Al-HaytamÊ, AÍmad bin MuÍammad bin ÑAlÊ bin ajar, TuÍfat al-muítéj fê SharÍ al- MinhÉj, Beirut: DÉr IÍyÉ al-turéth al-ñarabê. Al-KÉsÉnÊ, AbË Bakr MasÑËd bin AÍmad, BadÉ iñ al-øané iñ fê TartÊb al-sharé iñ, Beirut: DÉr al-kutub al-ñilmiyyah. Al-MawÉq, MuÍammad bin YËsuf, al-téj wa al-iklêl li MukhtaÎar al-khalêl, Beirut: DÉr al-kutub al-ñilmiyyah. Al-ShirÉzÊ, Al-Muhadhdhab, Beirut: DÉr al-fikr. Al-ZaylaÑÊ, ÑUthmÉn bin ÑAlÊ, TabyÊn al- aqé iq SharÍ Kanz al-daqé iq, Beirut: DÉr al-kitéb al-islémê. Al-ZuÍaylÊ, Wahbah, (1985) al-fiqh al-islémê wa Adillatuh, Damascus: Dar al-fikr. Ibn Qayyim al-jawziyyah, MuÍammad bin AbË Bakr, (1991) IÑlÉm al-muwaqqiñên Ñan Rabb al-ñólamên, Beirut: DÉr al-kutub al-ñilmiyyah. DISCLAIMER This paper and the idea of commodity ÍawÉlah represent the personal thoughts of the authors and under no circumstance shall be construed as being endorsed from a SharÊÑah or other perspectives by the respective entities which the authors are/ were attached to. The authors also wish to reiterate that this paper does not intend to criticise any party, given that the authors fully respect the views of earlier and other SharÊÑah scholars, industry practitioners and regulators. Last but not least, the authors would like to pay tribute to them for laying the foundation upon which the Islamic finance industry has flourished on a global scale. This paper is published in August 2011.

17 Notes

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