Islamic Commercial Law:

An Analysis of Futures

Mohammad Hashim Kamali

Introductory Remarks
The Islamic law of transactions (mu'Gmaht) has often been singled out
as the most important area of contemporary research in Islamic theses, so
much so that, according to some observers, its priority is even higher than
that of research in applied sciences and medicine. This status is due to the
critical importance of commercial transactions in the wealth generation and
productivity prospects of contemporary Muslim countries. New research
on issues of conventionalfiqh a1 mu'dmuhit is essential for the viability and
success of economic development programs in Muslim countries. In recent
decades, research interest infiqh a1 mu'irmakit has been shifting increas-
ingly to specific themes and development of new operative formulas to
stimulate profitable business in the marketplace. Evidently, futures trading
is one such theme where original ijtihad is required to enhance the
prospects of economic success, especially in farming and agro-based indus-
tries in developing Muslim countries.
The futures market is where contracts for future sale and purchase can
be concluded for standardized quantitiesand qualities of commodities, cur-
rencies, bonds, and stocks. Ever since the large-scale inception of futures
markets in the early 1970s, new products and trading formulas in various
trade sectors involving commodities, options, financial futures, and stock
index futures, among others, have increased so much that futures contracts
currently are available in over eighty commodities, ranging from food
grains, oil and oil seeds, sugar, coffee, livestock, eggs, orange juice, cotton,
rubber, precious metals, and currencies. In terms of volume, futures trading
has far exceeded trading levels in conventional stocks and, currently, is the
single most voluminous mode of commerce on the global scale.

Mohammad Hashim Kamali is associated with the International Islamic University,

Malaysia, Selangor, Darul Ehsan, Malaysia.
198 The American Journal of Islamic Social Sciences 132
Fuarres mar&etsallow producers and commercial operators to fix the
price of assets in which they trade well in advance of taking or making
physical delivery. This facilitates better planning in agriculture and a p
based industries and allows companies to protect themselves against dis-
ruptive swings in the key cost and revenue components of their business.
Thus, futures trading is a hedging device against volatile price movements
in commodities over a period of time, as in the case of agriculture’s sea-
sonal pattern from sowing to harvesting time. It is also used by food proces-
sors, merchants, and manufacturers to enswe sales and purchase in advance
without having to face market uncertainties later on, such as after harvest-
ing or production.
Futures trading can also respond to the growing need for trading and
investment vehicles in Muslim countries that can absorb and use surplus
funds in local/regionalmarkets. Absence of such adequate investment facil-
ities is a major reason for the continued flight of funds from the oil-rich
countries of the Middle East to the West, which has become a worrying
phenomenon in recent decades and continues to threaten the vitality and
survival of Muslim economies. In a recent article in The Financial Times
of London, Roula Khalaf wrote that “acceptance of Islamic banking is
growing,” but that the Qur’anic prohibition of receiving or paying inkrest
has meant that “about 75 percent of Islamic banking funds are invested in
short-term commodity (futures) trades.” The same report estimated that
“funds invested in an Islamic way in the Arab world may amount to $50
bn-much of it is used for commodity trades.” To give an indication as to
the place of investment and where the money goes, we read further that
commodity trading is conducted “in return for a fee by a middlem-ften
a western bank,like Citibank-that arranges for a trader to buy goods on
.
the Islamic bank’s behalf. . and the Western banks have always been
happy to oblige.’”
Contrary to all expectation, and in view of the Shari’ahprinciple of per-
missibility (ibdbh)that renders all commercial transactions permissible in
the absence of a clear prohibition, we are confronted with a rather discour-
aging form of tuqtui (imitation)in the verdict of the Makkah-based Fish
Academy and also of many Muslim scholars who have proscribed futures
trading and declared it totally forbidden. This body of opinion is founded
mainly on their determination that futures trading does not fulfill the
requirements of the conventional law of sale-tumm * g a blind eye to the
fact that futures trading is a new phenomena without parallel in conven-
t i d f i q h a1 mu‘cimaliif,and therefore should be governed by a different
set of rules. This imitative approach also falls short of relating the issues at
hand to the normative guidance of the Qur’an and Sunnah, which can sup
port a different caliber of research and an affiitive ruling on the subject.
The title of Khalafs article, “An Inherent Contradiction,”portrays the
concern of Islamic banks and investments to observe the letter of the Qur’an
on usury but also underscores their failure to act for the benefit and pros-
perity of the Muslim masses. part of our problem is that the Shari’ahadvi-
 Kamali:Islamic Commercial Law: An Analysis of Futures 199

sors to these institutionshave limited their understanding of theQur’an only

to the clear text and have not applied juristic caliber and imagination to the
dismaying economic predicament of the Muslims. In answer to the ques-
tion of whether Islamic banks may invest in futures, Khalaf tells us that “it
depends on the bank’s Shaxia board, whose memben are experts in the
Koran but less so in the field of bank options . . ..It is up to each institu-
tion to say what is Islamic.’n ?his is, of course, an expected result of what
Khalaf noted of “the absence of a standard inteptation of the Shari’ah”
and, if allowed to continue, “will dampen hther development of the indus-
try”3as a whole and slow down efforts to enable financial institutionsin the
Muslim world to enhance and diversify their own resources.
Following a brief review of the existing literature, I will advance a dif-
ferent interpretation of the some materials of the Shari’ah as to how an
issue of vital importance to the economic viability of the Muslim world
should be tackled, not through facile reliance on the negative positions of
taqlid, but through bold and yet upright approaches to research on issues of
Islamic commercial law.

What Are the Issues?

I will summarize the juristic debate over futures trading in five points.
The first is that both countervaluesin such sales are nonexistent at the time
of contract, for no goods are delivered at that time and no price is paid. The
concluded contract, therefore, is only a paper transaction and not a genuine
sale. It is also said that futures sales consist merely of an exchange of
promises made for the sole purpose of speculative profit making. The
Shari’ahconsiders a sale valid only if one of the countervalues is present at
the time of contract. Either the price or delivery of the item may be post-
poned to a future date-but not both. Second, futures trading is said to be
invalid because it consists of short-selling,in which the seller does not own
or possess the item being sold. The reason given is that the essence and pur-
pose of sale is to transfer ownership of the item to the buyer. However, if
the seller does not own the item, its ownership cannot be transferred Third,
it is said that futures sales fall short of meeting the requirements of qw,
or taking possession of the item prior to resale. Fourth, an issue has also
been made out of the deferment of both countervalues to a future date,
which effectively turns f u t u ~ ssale into the sale of one debt.for another
(bay‘al Hi’ bi al kli’),which is said to be forbidden. And, fifth, it is said
that futures trading involves speculation and verges on gambling and
gharar (uncertainty and risk taking). The gambling element is also said to
cause volatility in the price of commodities in the cash market.
Most of these issues p e e d entirely from afiqhi perspective concem-
ing the validity of a conventional sale and tend to ignore the operational
procedures and rules observed in fuaues trading. As for the element of
gambling, the view recorded in some earlier studies that f u m e s encourage
200 The American Journal of Islamic Social Sciences 13:2
price volatility and tend to destabilize the market has not been confirmed
by subsequent studies. More recent research, in fact, has supported the
opposite view: Futures trading tends to reduce price volatility and thus has
a stabilizing influence on the market.
A trader who enters a futures contract, whether as a buyer or a seller, is
required to pay a margin deposit of about 10 percent of the contract value.
The actual price is paid when the buyer wishes to take delivery and the
countervalues change hands. But actual delivery takes place in only about
2 percent of all contracts, for the rest of the traders usually enter a reverse
transaction prior to maturity and settle their accounts with the clearing-
house. In this way, the trader terminates the contract. A profit or loss might
be made, but offsetting transactions prior to maturity is a unique feature of
f u t u ~trading
s that enables traders to move in and out of contracts and seize
the opportunity to make a profit.
For example, suppose that a bakery owner feels wheat prices will rise
during the coming months and so decides to lock-in the current market
price of wheat at $2.50 per bushel by purchasing four June contracts of five
thousand bushels each for December delivery. The baker instructs the bro-
ker, who concludes the transaction on the former’s behalf and pays a mar-
gin deposit of $5,000 in a segregated account in hisher own name. The
trader is now long four wheat contracts that are to mature in December.
Such a deal has two possible outcomes: either the buyer remains in the open
position until maturity and takes delivery in December, or he/she eventu-
ally decides to offset hisher position by selling four wheat contracts of the
same quantity and delivery month for $2.55 a bushel and makes a profit of
$l,oOO. In fact, this is what usually happens: The parties to a futures con-
tract generally prefer to offset their positions, as this saves on transaction
costs, storage fees, and administrative difficulties. They also prefer to enter
a reverse transaction if they can.realize a profit. After the reversing trade,
the buyer’s net position is zero. The clearinghouserecognizes this, and the
party concerned is absolved from any further obligation.
A trader who enters a futures contract may be either a genuine hedger,
as in the earlier example, who buys or sells a futures contract to protect
himself/herself from drastic price fluctuations, or (and more likely) a spec-
ulator hoping to profit from those price movements. Upon closer examina-
tion, however, we find that such a distinctionis rather more conceptual than
real, for it is difficult to distinguish between the two in categorical terms-
hedgers are also speculators who take a certain risk and speculate over
likely price movements. Even if traders enter the market in order to hedge
a position, later, when the price moves in their favor, they may well decide
to sell and then buy again when the prices go down, in which case the
traders, for all intents and purposes, have become speculators. Since futures
sales do not involve the physical movement of commodities and trading
takes place on the basis of a low margin deposit of only about 10 percent
of the actual price, they remain wide open to financial speculation and
excessive risk taking. This is often said to resemble gambling.
 Kamali: Islamic Commercial Law:An Analysis of Futures 20 1

The Futures Contract

In SFC Finance Company vs. Marsi, J. Legget defined the futures con-
tract as “a legally binding commitment to deliver at a future date, or take
delivery of, a given quantity of a commodity, or a financial instrument at
an agreed price.’“ Teweles described it as a fm legal agreement between
a buyer/seller and an established commodity exchange/clearinghouse in
which the trader agrees to deliver or accept delivery, during a designated
period, of a specified amount of a certain commodity. The commodity so
traded must adhere to the quality and delivery conditions prescribed by the
commodity exchange on which that commodity is traded?
The contract, if taken to maturity, is fulfilled by a cash payment of price
and actual delivery of the item on the delivery date based on the settlement
price for that date. The parties do not negotiate the terms of their agreement,
as these are all standardized and advertised in advance, except.for the
actual price, known as the “exercise price,” that is settled on the floor of the
exchange. Such standardization enables trading on the market floor to be
conducted through open outcry and a series of shouts and hand signals.
Upon conclusion of contract, a record of the transaction is made and, fol-
lowing various checks, the contract is registered with the clearinghouse.
The clearinghouse now interposes itself between buyer and seller and
effectively becomes the other party to all contracts-buyer to all contracts
sold and seller to all contracts bought. The seller has a contract with the
clearinghouse to sell hisher commodity and to be paid, just as the buyer has
a contract with it to receive delivery of the specified commodity at matu-
rity. This arrangement enables participants to trade freely in the market
without having to worry about their counterparts’ creditworthiness. The
success and efficiency of futures is due largely to the clearinghouse’s clear-
ance and guarantee functions. All transactions of one day’s trading are thus
“cleared” before the start of the next, and timely delivery (if desired) to
every buyer and payment upon delivery (if desired) to every seller are guar-
anteed. The clearinghouse guarantees payment, whenever a net position so
warrants, on contracts that are to be closed out by offsetting transactions.6
The clearinghouse has always performed as promised, partly because it
maintains no futures market position of its own, as its prime concern is to
balance out transactions and guarantee performance. It eliminates risk over
contract performance partly through its daily settlement procedure and also
by ensuring that members provide sufficient collateral to cover potential
liabilities. The clearinghouse monitors the size of each trading position
daily to ensure that traders do not overextend themselves by building up
large positions that they will have difficulty serving.’

Literature Review
Among commentators who have discussed futures, I refer first to ‘Abd
al Ra?miin al Jaws description of a voidable sale (buy‘ aljkid) as one in
202 The American Journal of Islamic Social Sciences 13:2
which a movable object is resold prior to taking position. Thus,when a per-
son buys a quantity of cotton or cloth and then resells it to the original owner
or a third party before taking delivery, the sale is voidable. “This also
applies,” a l added, “to the well-known sale of (futures) contracts in our
time .. . .When someone buys cotton, for example, and then sells it prior to
taking delivery fn>m the seller-whether the second sale is at the same price
or lowa-the sale is voidable.’“ The sale of such immovable objects as
houses and gardens, prior to taking possession of them, however, is valid, as
there is no fear of their destruction or loss. (”here are exceptions, of course,
such as their being exposed to danger-the house is located on the sea
shore-in which case the sale would be subject to the same rules that apply
to movable objects.)
Clearly, the basic rationale behind taking possession prior to selling is
to prevent gharur (uncertainlyover the seller’s ability to deliver in the event
of destruction and loss). If gharur can be effectively removed, then it fol-
lows that the requirement of taking the item into possession may be relaxed
or totally omitted.
Umar Chapra is critical of short-selling stocks and securities primarily
because “it is a kind of speculation which has no beneficial economic pur-
pose.” He adds that this contrasts with short selling in forward and future
sales, which involve “sales of certain agricultural commodities or manu-
factured goods that perform an economic function. ..providing producers
as well as users with the assurance that they can sell or receive the goods
when ready or needed.’* Notwithstanding the “beneficial economic pur-
pose” that Chapra has identified in futures, he does not pursue the theme
and reverts, somewhat unexpectedly, to the stereotypical and prohibitive
opinion of others that “it is generally felt that trading in futures contracts is
for purposes other than the exchange of titles.”’O It seems as if he is not con-
vinced of the soundness of what is “generally felt” However, he does not
explore the issue but raises matters relating to stock market transactions.
This imitative (tuqldz) tendency is seen in Muhammad Akram Khan’s
statement that “futures trading is alien to Islamic law as it involves trading
without actual transfer of the commodity or stock to the buyer, which is
explicitly prohibited by the Prophet.”” The prophetic hadith cited in sup
port of his view addressed a Companion, Ijakim ibn I$-, says “do not
sell what is not with you.” Khan has not taken this hadith to its logical con-
clusion and has not explored the juridical meanings of “transfer“ and 4ubd
(taking possession) that have a bearing on the substance of his statement.
For example, he has not touched on the Milliki opinion of 4uw (confiied
to foodstuffs) or Ibn Qayyim al Jawayah’s critique of the majority position
on the issues of delivery and transfer. Khan shows no awareness of the jur-
istic discourse of thefuqahi’ and commentators on the issues he has raised,
and yet he states categorically that “all the transactions in these chain are
unlawful” and “the Islamic position on futures market is quite clear.””
In his 1983 publication on the Islamic law of obligations, Sub@Mah-
w$& ii in passing that “contractsconcerning future things (al ushycI’
stated
 Kamali: Islamic Commercial Law:An Analysis of Futures 203

ul mustuqbuluh)are basically invalid, for such things are non-existent at the

time of contract-except for the fact that the majority of jurists have excep
tionally permitted certain contracts such as sulum (forward sale) and istipui’
(contract of rnanufa~ture).”’~ It is stated further that proprietary contracts
(‘zqiid ul tumlik), which seek to postpone the transfer of ownership of the
object specified in the contract, is a form of gambling, which is why they
are pr~hibited.’~
In his 1982 article entitled “Ra’y al Tashfi’ al I s b i fi MaSil al
Bqah” (The Shari’ah Perspective on Bourse-Related Issues), w d
Yiisuf Sulayma reviewed the fiqhj rules on such issues as the sale of
objects that the seller does not own, sale prior to taking possession, deferred
sales, and sale of the nonexistent. He applied the rules for conventional sale
on these issues directly to futures and passed prohibitive judgments on
almost every issue raised. In support of his views, he relied mainly, like
Khan and others, on the earlier quoted hadith. Sulaymi3n also has not
looked into this hadith’s meaning and rationale, but instead states that the
Shari’ah has validated sulum (forward sale in which only the price is paid
at the time of contract, but delivery is postponed to a future date), and that
this is the only framework within which a deferred sale involving a fum
delivery can be concluded validly.”
This is also the position taken by Badr al Mutawalli ‘Abd al B&i.t,
Shari’ahadvisor to the Finance House of Kuwait, whose prohibitive views
on futures are based entirely on sulum. Since futures do not fulfii all
requirements of a sulum sale, they are prohibited. Of course, the point is
that in a sulum sale, one countervalue (the price) is paid on a prompt basis
while delivery of the item is postponed to the future. This is the extent,
according to Sulayma and ‘Abd al Bbih of the Shari’ah’s flexibility con-
cerning deferment in a sale. In other words, a sale in which both counter-
values are deferred to a future date is ultra vires and, in their view, the
Shari’ahis closed totally to the prospect of validating futures.
To discuss these arguments in detail is beyond the scope of this essay.
But, I note here that the views of Sulayma and ‘Abd al B&i.t have been
challenged and refuted, respectively, by two prominent commentators: ‘Ah
‘Abd al @dir and Majd al Dm ‘ h a . ‘Abd al Q W s commentary, which
refutes Sulaymh’s contentions, was published in the same volume of the
Encyclopedia of Islamic Bunks (in Arabic) that carried SulaymW’s article.
‘Az2im”Sresponse to ‘Abd al B&i.t appeared in the same collection of legal
verdicts ~utdwh)published by the Finance House of Kuwait. Both com-
mentators criticized the basic approach used by Sulaymh and ‘AM al BbiJ
and emphasized, in turn, that futures trading was a new mode of trading that
called for a fresh response formulated in light of the operative procedures
of futures markets.16
A similar analysis of futures has been advanced by yet another author,
‘Abd al Kafim al Khapb, who admited that futures contracts did not fulfill
all the requirements of a conventionalcontmct, even though they were reg-
ulated carefully and satisfied the basic purpose and rationale of those
204 The American Journal of Islamic Social Sciences 13:2
rulers.” ‘Azzibn,al Khafib, and ‘Abd al Qiidir share the view that the regis-
tration and clearance procedures, as well as the guarantee functions of the
clearinghouse, are precise and that trading futures are conducted by rrained
professionals in a highly centralized and controlled market. The contract
specifications and its related procedures are such that the prospects of
uncertainty and ghurar were virtually eliminated. Thus, the conclusion is
drawn that futures contracts are valid from the Shari‘ah perspective.
In its 1985 resolution on stocks and commoditiesmarkets, the Makkah-
based Fiqh Academy has taken a somewhat ambivalent view of futures.
While it acknowledges the benefits of futures to farmers and commodity
traders, it fails to reflect that evaluation in its final verdict on the subject.
The Fish Academy also acknowledged that futures trading has developed
into a variety of different transactions, and therefore one ought to look at
each individually and evaluate it on that basis, but did not reflect this view
in its final resolution, which is prohibitive on futures as a whole and does
not attempt to address individual issues. Futures trading in stock indices
and currencies, for example, are governed by a different set of rules than
trading in commodities. In addition, options and futures options traded on
commodity exchanges are altogether different modes of trading that must
be addressed separately The Fiqh Academy has not done this, notwith-
standing its clear acknowledgment of the availability of a variety of differ-
ent trading formulas in the futures markets. In sum, its approach to futures
is similar to that taken by Stdaymiin and ‘Abd al Bait and has drawn,not
surprisingly, the same conclusion: Futures transactions are forbidden, as
they involve the sale of things that the seller does not own or possess and
are concluded over things that do not exist at the time of contract. The
Academy’s resolution stated that most futures sales were not genuine sales,
in that the parties were not interested in making or taking delivery but were
seeking to make a profit from commodity price movements. The conclu-
sion was drawn that buying and selling futurescontracts was closer to gam-
bling rather than trading.”
A typical example of the approach taken by western scholars is, per-
haps, Rayner’s 1991 publication The Theory of Contract in Islamic Law
(originally a Ph.D. dissertation), where she writes in a broad sweep that
“the institution of mortgages and insurance, and the combined concepts of
share trading, financial futures and spot commodity purchases would
clearly be Bdgil on several grounds according to the tenets of the Sha-
ri‘ah.”’’ She continued to specify these “strict tenets” as far as they relate
to futures to include “leaving open the payment terms . . .not taking pos-
session of object before resale,” and stated that the speculative nature of
futures trading brought this line of commerce close to gambling.2oThis is
about all one can find in this work (over 440pages) on the futures contract.
Apart from the absence of any specific investigation to support these con-
clusions, Rayner’s comment that futures contracts leave payment terms
open is factually incorrect. The fact is that the previous day’s closing
prices of all futures contracts are quoted regularly in the process and the
 Kamali: Islamic Commercial Law: An Analysis of Futures 205

exact “exercise price” is determined when the deal is struck on the trading
floor. The delivery month is specified by the maturity date (usually the
third week of that month). There is a certain mechanism involved in the
daily adjustment of the price, which is due to a clearance procedure,
known as mark-to-the-market or daily settlement, but this is simply a
clearance procedure that does not change the substance of our statement
that the payment terms, on the whole, are adequately specified and guar-
anteed by the clearinghouse procedures.
Rodney Wilson exhibited a similar attitude when he wrote that “for-
ward, futures and options dealings are viewed as potentially corrupting by
modem specialists in Islamic finance.’*’ Apart from any attempt to inquire
into the details of his statement, Wilson’s observation is also inaccurate
insofar as it treats the forward sale (sulam) on the same footing as futures
and options and because sulum is clearly valid in Islamic law. Therefore,
it does not qualify for the description “potentially corrupting.” I now turn
to a discussion of the hadith that is commonly quoted by those who inval-
idate futures.

Do Not Sell What Is Not With You

The above heading is a direct translation of the well-known hadith Zd
tub? rmi Zuysu indikiz, which the ulama and commentators have quoted as
the standard authority for many of their d i n g s on the item of sale: The item
must exist and be owned by the seller at the time of contract. Futures trad-
ing, which consists of short selling, is therefore contrary to the requirements
of this hadith. However, the juristic conclusions drawn, as I shall elaborate
presently, consist mainly of their different interpretations, all of which fall
short of unanimity and consensus. Their rulings, therefore, may be Seen as
manifestations of juristic ijtihad that command no fmality, and the matter
may be said to remain open to further interpretation.
Several issues have been raised concerning this hadith, one of which is
a certain weakness in its authenticity and transmission. Neither al BukhGfi
nor Muslim recorded it in their collections, although others, among them
Abii Diiwiid and al Tirmidhi, did. This discrepancy is as follows: Abii
Dawiid, m adibn Hanbal, and Ibn m b b h state that it was narrated by
Ja‘far ibn Abi Wahsliiyah, from YBuf ibn from Hal<-im ibn &%m,
whereas a fourth name, that of ’AbdAll& ibn ‘Ipnah, occurs in other hadith
collections between Yiisuf and Habn. In UZ Mizdn, al Dhahabi states that
this intermediate name is totally unknown (Id yu‘ruj). Even the principle
narrator of this hadith, ibn Hi-, is said to be “obscure” (majhiil uZ
&Z). Only Ibn Ijabbh includes him among reliable narrators (ul thiqqdt).
While al N&*i has recorded one hadith narrated by him, others have said
that he is “obscure.’”
The hadith’s precise legal value is open to interpretation. Does it con-
vey a total ban (tubrim), abomination (kizrdhiyuh),or mere guidance and
206 The American Journal of Islamic Social Sciences 13:2

advice of no legal impoxt? The phrase ki thbi'(do not sell) could sustain any
of these intqnetations. Specialists in usid al$qh admit all of these mean-
ings within the purview of a prohibition (nahy). Only when a prohibition is
espoused with a warning (d-4 is its meaning reinfo~edso as to convey
a total ban ( @.f - m ).As
" there is a weakness in its transmission, as it is not
accompanied by a warning or w d implying emphasis, and as it is open
to interpetation (as discussed below), it seemsreasonable to say that it con-
veys abomination and moral opprobrium (&ardhlyah)mther than total pro-
hibition. In fact, al Khafib recofds the view that this hadith conveys moral
guidance (irshdd)rather than a prohibition per se.'
The full version of the hadith is as follows:

Ja'far ibn Abi Wahsliiyah reported from Yiisuf ibn Miihak, from
IJaliim ibn €Jiz&n (who said): "I asked the Prophet: '0Messenger
of God. A man comes to me and asks me to well him what is not
with me. I sell him (what he wants) and then buy the goods for him
in the market (and deliver them).' The Prophet replied 'Do not sell
what is not with you.' "=

In an attempt to ascertain the precise meaning of this hadith, jurists

have advanced three different inteqmtations.

1. "Do not sell what is not with you" means not to sell what you do not
own (ya'nl md hysafi milkik) at the time of sale. One of the basic require-
ments of sale, as al KasWi has stated,is that the seller own the object of sale
when selling it, failing which the sale is not concluded, even if the seller
acquires ownership later. The only exception is a s a h sale, where own-
ership is not a prereguisite.16 In accord with this interpretation, al San'm
has stated that this phrase implies that it is not permissible to sell something
before owning it. Ibn al Hum- and Ibn Qudiimah have concluded simi-
larly that a sale involving something that the seller does not own is not per-
missible, even if he/* buys and delivers it latex.n
The Hanafis have ruled, however, that the seller's ownership of the
item in question is not a condition of validity (shafl a1 ;i&h) but of effec-
tiveness (n#Z&) of the sale. Hence, they validate a bonafide sale by an
unauthoriz-edperson m) who does not own the object but sells it nev-
ertheless. In this case, the sale is valid but not effective. It becomes effec-
tive only upon obtaiaing the owner's cons en^^

2. In general, jurists and hadith scholars hold that this hadith applies
only to the sale of specified objects ( a ' y a ) and not to fungible goods, as
these an be ~ubstibutedand replaced with e8~e.Al Bagha\kii and his c ~ m -
mentator, MUlla'AliQM, al IUu@&i, andmany others statedthat this pro-
hibition is confined to the sale of objects in Em (buyfi'ala'ydn) and does
not apply to the sale of goods by description (buyzi'al &if). Hence, when
salam is concluded over fungible! goods that are d y available in the
 Kamali: Islamic Commercial Law:An Analysis of Futures 207

locality, it is valid even if the seller does not own the object at the time of
contract.19 Im&n al S M 5 has ruled that one many sell what one does not
own provided that it is not a specific object, for delivery of a specific item
cannot be guaranteed if the seller does not own it.3oAl Kha@ibi stated that
this hadith refers to the sale of specific objects, for the Prophet permitted
deferred sales of various kinds in which the seller did not have the object
of sale at the time of contracting. In essence, this prohibition seeks to pre-
vent gharur in sales (e.g., a runaway camel, uncertainty over delivery, and
sale of someone’s propem without his/her permission).”
Ibn Qayyim al JawZiyah, commentator of Sunun Ahzi Dciwijd, and al
MubiWdTni, commentator of J h * ‘ ul Timidhi, agreed that’this hadith
contemplated the sale of specified objects and not the sale by description of
goods that are readily available in the market.= This would effectively take
futuresout of the purview of this hadith, for futures trading only takes place
in fungible commodities and cannot be expected to apply to specific objects
having unique qualities.

3. A third position is that sale of “what is not with you” means the sale
of what is not present and what the seller cannot deliver. This is Ibn
Tayniiyah’s view, who stated that the emphasis is on the seller’s inability
to deliver, which entails risk taking and uncertainty (rnzdhitaruh wu
gharur). If the hadith were taken at face value, it would proscribe sulm
and a variety of other sales. But this is obviously not intended. The Prophet
forbade Ijakim ibn IjizZim to sell the particular objects either because he
did not own them or because of uncertainty over his ability to deliver. The
latter reason is the more likely one for the prohibitionP The MiWi jurist
al Baji has recordeda similar view and stated that “what is not with you”
means “a specific object that is not in one’s ownership and one’s power to
deliver.”MIt is quite possible that the seller owns the object but is unable
to deliver it, or that the seller possesses the object but does not own it. In
either case, the seller would fall within the purview of this hadith.
Therefore, its emphasis is not on ownership or possession, but rather on
the seller‘s effective control and ability to deliver. And so the prohibition’s
effective cause (‘illuh)is ghrur on account of one’s inability to deliver.

Such contempomy writers as Ymuf MWI, ‘Ati ‘AM al QMr, and

Yiisuf al QanqlWi have drawn attention to the fact that the marketplace of
Madmah during the Prophet’s time was so mall that it could not guarantee
regular supplies at any given time. Therefore, the hadith only prohibited the
sale of i h that were not available at the time of sale. This is indicated,
perhaps, as M W added, by JJakim ibn Ijizh’s statement that people
would ask him to sell to them items that he did not have. In other words,
they wanted to secure goods that they could not find in the market due to
umxbhty over supplies. In contrast, modem markets are regular and
extensive, which means tbat the seller can find the goods at almost any time
and make delivery whenever required. With ref- to futures trading,
208 The American Journal of Islamic Social Sciences 13:2
M W observes that futures contracts normally operate on a deferred basis,
which gives the seller a fair amount of time to buy what is required in order
to make delivery, if necessary, within the contract period?’ When we com-
pare the Madinan market to its modem counterparts, we are faced with a
different reality. Given currently available means and facilities, the fear of
not being able to find the goods and make delivery (the basic rationale of
the original prohibition), is now irrelevant.M
Short selling of items that are not owned by the seller takes place in the
futures market with the assurance that identical contracts over the item can
be bought and sold on an almost instantaneous basis. Normally, there is no
fear that the seller will be unable to find an equivalent contract with which
to offset hisher position or to find and deliver the item in the event he/she
wishes to make delivery. The seller, in other words, is not faced with the
prospect of searching for the item in the open market or of making detailed
preparations for delivery. The clearinghouse guarantee function in this con-
text precisely means that delivery of the exact quantity and grade (or of the
nearest grade) is guaranteed. Even if the short seller does not own the item
when selling a futures contract, hisher ability to make delivery is never-
theless assured beyond any doubt. This is a peculiarity of futures trading
that provides systematic guarantees over delivery and payment, something
that the open market does not provide.

Sale Prior to Taking Possession (Qabl)

One requirement of a valid sale infish a1 mu‘cimalcit is that the pur-
chaser may not sell the goods purchased until they are in hisher possession.
In support of this ruling, jurists have referred to the authority of the hadith
that I shall discuss presently.. The main purpose of this inquiry is to ascer-
tain whether futures trading can be validated within the given terms of the
hadith and whether the concerns of the ulama in conjunction with the con-
ventional contract of sales are equally relevant to futures contracts.
Literally, 4ab4 means taking and holding something in one’s hands. In
its juristic sense, 4ab4 implies legal custody and possession in a proprietary
capacity, even if it does not involve the physical act of holding. The seller
must deliver the goods sold, and the buyer must pay the price. The buyer,
however, is not obliged to receive the goods or take possession, as it is
hisher right/privilege, which he/she may or may not choose to exercise.”
The following three hadiths need to be reviewed on the subject of 4ab4.

‘Abd All& ibn ‘Umar reported that the Prophet said “He who buys
foodstuff should not sell it until he has received it (man ittiba
ta‘cimiinfa lci yubi‘uhu bttci yutabi‘uhu).”38

According to another report by ‘Abd All& ibn ‘Umar, the Prophet

said: “He who buys foodstuff should not sell it unless he is satis-
 Kamali:Islamic Commercial Law: An Analysis of Futures 209

fied with the measure with which he has brought it” (man ittibii‘
@&ruin fa la yubi’uhu k t t d y a s t a ~ f i h ) ? ~

Ibn ‘ A b h has also reported the following hadith from the Pro-
phet: “He who buys foodstuff should not sell it until he has taken
possession of it.” Ibn Abbas s a i d “I think it applies to all other
things as well” (man ittibii’ .ta‘&ruin fa la yubi’uhu k t t d yatabi’uhu,
wa uzunnu kull shuy’in mithlahu).“

As we note, all reports are substantially concurrent. The only variation

is concerned with the use of words that may be said to be synonymous: the
word yuqbihhu (takes possession) in the first hadith is substituted with
yastuwfihi (obtains full measure). This variation does not seem to change
the substance of the message, which is conveyed in all three reports. The
third hadith has an added element that is clearly not a part of the original
hadith and represents an addition by Ibn ‘Abbb. The word .ta‘h (food-
stuff) occurs in precisely the same way in each report and constitutes the
only subject matter thereof.
As for the hadith’s basic rationale, the Hidcyah states that the Prophet
prohibited the sale of items, especially perishable ones, that the seller did
not possess, because of uncertainty and doubt over their delivery. All lead-
ingfuqahti’ have held, consequently, that one cannot sell foodstuff before
taking possession of it. According to h & n ShMi‘i, one cannot sell anything
(e.g., foodstuff, land, or a garden), before taking possession. Im&n Abti
-ah and m a d Ibn Ijanbal opined, however, that possession is not a
requirement in the sale of real property, as there is usually no fear of
destruction and loss?’ Possession is not required for the sale of foodstuffs
and real property if ownership of the goods in question was the result of a
gift or inheritance, for these involve no financial exchange and the seller is
not committed to paying a price to someone else.“
A recent resolution of the Fiqh Academy has confihned that “the effec-
tive cause (‘illah) of the prohibition of sale prior to taking possession is
ghurar, or the possible failure to deliver the goods purchased. The buyer
takes the risk of not receiving the goods, as the seller may delay the deliv-
ery or wish to revoke the contract.” The resolution stated further that while
such gharar tended to be of general application,there was an additionalele-
ment of ghurar in the sale of foodgrains and agricultural crops-they may
perish or be destroyed due to climatic factors and disease.“
According to the Hanifis, qabd is not an essential requirement (rukn) of
sale but rather a subsidmy condition, namely, that of effectiveness ( s h u ~
a1 n # M ) . This ruling led al Kiksihii to point out that a valid sale can be con-
cluded prior to the seller‘s taking possession but that it will remain in
abeyance until qaw has taken place.” To this, al S a i added that qubd
signifiesthe effect or outcome of the contract that materializes after its con-
clusion. Therefore, qabd is not a prerequisite of a valid contract, and it is
perfectly lawful to postpone delivery and qabd to a later date. Only in the
210 The American Journal of Islamic Social Sciences 13:2

case of sale of currency for cllrrency (wtj)is quw elevated to a prerequi-

site of a valid contract'4s Im&n IvEilik confined this hadith's application to
foodgrains, which means that non-foodgrain items (i.e., cotton, palm oil)
may be sold prior to taking possession.4 Ibn Rushd confvmed this and
stated that "there is no disagreement in the school that only food-
grains (mainly wheat and barley) cannot be sold prior to quw." Imam
IvEilik also validated the sale of foodstuffs in lump sum (juzdfun),that is,
without weighing and meamring, prior to taking possession^' for liability
for loss and destruction (&n&z) in this case is transferred to the buyer at
the moment of contract and not upon taking possession.
Ibn Tayniiyah, the renowned Hanbali scholar,departed from the major-
ity position by opening up the concept of quw to considerations of pre-
vailing custom. He criticized the majority, which confineidthe meaning of
qabQ to holding and retention (jzubs)or evacuation (tuhtiyuh) and the like,
and stated that neither the Arabic language nor the Shari'ahhas given a spe-
cific meaning to quw. In his words, fukhtiyuhvaries from object to object,
and the manner in which it occurs is not always the same. The precise
meaning of qm,therefore, is to be determined by reference to prevailing
custom.e Ibn @&ah stated that qu&i in all things refers to an apppri-
ate manner of taking possession. The Shari'ahstipulated quw, but the man-
ner in which it is accomplished is determined by custom. It may consist of
holding and retention, taking into custody (bin),evacuation (tukhtiyuh),or
separation (tajkrzq). QuW is necessary for all fungible goods sold by
weight, measurement, and number, as responsibility for loss (&m.jn) in
such commodities is transferred to the buyer after quw, which, in respect
of such goods, takes place when they are weighed and measured. Goods not
sold by measurement and weight (e.g., clothes and livestock) may be sold
prior to qobql, for the responsibility for loss in such items devolves upon the
buyer upon conclusion of the contract (prior to qabQ)."
As seen above, qid# has been understood as a relatively open concept
amenable to the changing influences of commemial reality and custom, for
it has meant evacuation, taking into custody, sewtion, measurement,
identitication(tu'sn or tamy3z) and viewing ( m u k m h ) .With the excep-
tion perhaps of the S W i s , no other school quires qaw prior to resale in
the case of immovable objects. The M W confined quw to foodgrains
only. Quw in foodstuffs occurs when they are weighed and measured. In
at least two varieties of sale,namely, s u h and isfipii', the requirement of
q&.i has been waived by the express authority of hadith. This exemption
extends to all items, including foodgrains. Sulum and istipxi' were validat-
ed on the grounds of utility and convenience for the people.so
We can say, perhaps readily, that qid# is not a requirement in fumes
trading in such nonfoodstuff items as cotton, rubber, and tin. In addition,
measurement and weighing, the recommended mode of qu&i in foodstuff
sales, was designed to ensure propriety in weighmg and to prevent fiaud.
lEis is not an issue in futures trading, for such foodgrain contracts are
bought and sold in stan- quantities and packages that are weighed
 Kamali: Islamic Commercial Law: An Analysis of Futures 21 1

and measured once. After this, the packages are sealed, labeled accord-
ingly, and do not need to be reweighed each time they are sold, as the rel-
evant documents provide sufficient evidence of the total weight. Thus,pre-
vailing commercial customs in futures trading have made personal super-
vision over weight and measurement unnecessary and unfeasible. It would
appear that qubd in such commodities takes place by obtaining the official
warehouse receipt, rather than by constant measuring and reweighing.
We have shown that customary practice has a role in determining the
manner in which the legal recpirements of qubd and delivery may be ful-
filled. provided that the processes adopted are free of uncertainty, unwar-
ranted gharur, and potential dispute, it may be acceptable even if it trans-
forms the initial concept of physical delivery and q u w into an altogether
different procedure. It is quite conceivable that modem technology and
computerization may bring further changes into the conventid concept
of qubd, which may gain popularity and customary approval. This would
be acceptable from the Shari’ahviewpoint if it M il sthe basic rationale of
qubd, which is to prevent uncertainty and gharur.
Our analysis of qubd would apply M ~ U ~to Yfutures hamactions
involving holding the contracts until maturity and then taking delivery. As
trading in stock indices,financial futures, and currencies does not involve
any physical exchange of assets, delivery and q u w are matters of debiting
and crediting accounts. As for the bulk of futures contracts, in which the
contractingparties close out their position by entering a reverse transaction,
this is another issue that must be addressed separately. Since,in principle,
the Shari’ahvalidates the sale of a physical object (buy’ ul ‘uyn)and the sale
(involving exchange) of debts (w ul h y n ) , delivery and quw in the lat-
ter case are no longer a matter of physical delivery or retention of an actu-
al asset, but rather one of appointment (fu‘ln) and computation of a debt
established on the person (dhimmuh)of the debt’s bearer. This is the sub-
ject to which we now tum.

Debt Clearance Sale (Bay‘ a1 Dayn bi a1 Dayn)

An offsetting transactionin futures consists essentially of sales involv-
ing adebt that one party owes to another and its settlement though the
modality of sales and purchases. ”his subject is somewhat technical, and
juristic writings are not consistent on either its or its validity in the
Shari’ah. Many types of sales have been included under buy‘ uf h y i n (lit.,
sale of debts [also known as bay‘ ul kdli’ bi ul Hi?), and it has been dis-
puted as to whether they in fact qualify as “sale of debts.” Sane instances
of this transaction are as follows:
1. Person A h w s two tons of wheatfarhis/b persod needs from
Farmer B. This amount is rehanatle in six months. Prior to the expWon
date, Farmer B sells dK wheat, which is a debt an Person A, to PerSonC m
exchange for a ploughing machine to be delived in one month. This sale
212 The American Journal of Islamic Social Sciences 13:2
consists of an exchange of debts and is considered unlawful due to uncer-
tainty over delivery and the resulting likelihood of gkrar?’
2. Person A borrows $2,000 from Person B for a period of one year but,
before repayment is made, Person B suggests to Person A that he/she will
rent Person A’s house in exchange for the sum owed to Person B. This is
also held to be unlawful, as it involves selling one debt for another and no
delivery on either side. If the proposed exchange is advantageous to one
party, it will also involve unlawful gain amounting to ribii.”
3. Person F is indebted to Person G for 20 ounces of gold, and Person
G owes Person H 150 ounces of silver. Persons F and H may not settle their
debts directly, for this would amount to the sale of one debt for another
(Person F is personally indebted to Person G [and the latter to Person HI,
and hisher dhimmuh can only be released by repaying the creditor direct-
ly). The Hanbalis forbid such a clearance of debts only if the two items are
different, whereas the ShSi‘is forbid it even if they are identical in genus
and quantity, in which case it would amount to a simple clearance of mutu-
al debts (maq&uh)P
4. Person A sells a garment to Person B for 100 dinars, payable in one
month, and then buys from Person B the same or a similar garment for 120
dinars, payable after two months. This transaction (‘inah), although vali-
dated by the Swi‘is, is invalidated by other schools on the grounds that it
involves ribii and, according to others, because it is a debt clearance sale.”
It is stated in Mughni al Mz&cij that the sale of a debt to a third person is
null and void (i.e., a person other than the debtor), but a second opinion val-
idates this practice on the condition that the debtor acknowledges hisher
debt and is willing to repay it“’
General consensus (ijnd)is said to have materialized on the prohibi-
tion of buy‘ al kdi’ bi al Eli’. Imsun Ibn Hanbal ruled, perhaps somewhat
vaguely, that common consensus (ijmti‘ al a) has forbidden it. But evi-
dence shows that such an ijmti‘ is unfeasible, bearing in mind that the ulama
do not agree on the definition of this transaction or on the various forms it
can take. The legal schools have recorded divergent rulings, which means
that the claim of ijnd on this issue is unfounded.S6Thenthere remains the
evidence in the Sunnah:M W ibn ‘Ubayd reported from ‘AM AlEh ibn
‘Umar simply that “the Prophet prohibited bay‘ al kdi’ bi al kdli’.”’’
This hadith only appears in some collections, such as al Darqu.trii*s,and
al ShawkMi reproduced Darqupii’s version in Nayl al Aytcir only to say
that many prominent scholars consider it unreliable. Its precise meaning is
also subject to doubt, as kiili’ is somewhat unfamiliar even to native Arab
speakers. However, it is generally understood to mean the sale of one debt
for another. According to al ShawkMi, only Miisii ibn ‘Ubaydah al R am
reported it and its authenticity is weak. w a d Ibn Hanbal said that
he knew of no other hadith transmitted by Ibn ‘Ubaydah and that no one
else transmitted it. ImW al ShWi said that the hadith scholars considered