IWAD AS A REQUIREMENT OF LAWFUL SALE: A CRITICAL ANALYSIS

Abstract

This paper will argue that replacing riba with al-bayc does not mean that the latter can imply any form of sale (al-bayc) to justify Islamic legitimacy. Apart from the prohibition of uncertainties (gharar) in sale, the requirement of an equivalent countervalue (ciwad) must also be met. Risk (ghurm) and liability (daman) after sale and value-addition or effort (ikhtiyar) are the principal components of ciwad. As such, any increase from sale must contain ciwad, otherwise riba is implicated. In classical Islamic commercial contracts such as ijarah, salam and mudarabah, ciwad is evident. However, the contracts of credit of al-murabahah or al-bayc bithaman ajil are widely used by Islamic banking practitioners. To prove Islamic legitimacy, this contract must show that the financiers assume the risk of ownership in making the sale. It must also show evidence that the seller is liable to the option of defect (khiyar al-cayb). The same holds for bayc al-cinah and bayc al-dayn which are also widely used in Islamic money and capital markets in some Muslim countries.

JEL classification: G20, K39, Z12

Key words: Islamic banking, Iwad, Riba