AAOIFI Shari’ah Standard No. (59) Sale of Debt

Statement of the Standard

1. Scope of the Standard
This Standard deals with the sale of the debt to the debtor and its sale to a third party, i.e., a party other than the debtor.
[This Standard] does not deal with the discharge of debt (istīfā’ al-dayn) by the debtor, whether in whole or in part, if it does not take place through a commutative arrangement nor with novation (ḥawāla) or (set-off (muqāṣa) since there is a different standard for both.

2. Definition of Debt
Debt is an asset that is established and owed, irrespective of its cause of establishment. It may be in the form of money, commodities, or usufructs. It includes debts arising out of (i) a loan or (ii) a commutative contract (Ꜥaqd muꜤāwaḍa), or (iii) misconduct or negligence.

3. Types of Sale of Debt
As far as the buyer is concerned, the sale of debt is one of the below two types:
3/1. Sale of debt to the debtor himself.
3/2. Sale of debt to a third party other than the debtor.

4. Sale of Debt to the Debtor Himself
4/1. It is permitted for the creditor to sell to the debtor a debt that is previously established between them, subject to the following rules:
4/1/1. The First Rule: The sale should not lead to ribā.
4/1/1/1. If the debt is a ribawī commodity, then it must fall within one of the below conditions [rules]:
a. The First Condition:
The consideration of the debt is a ribawī commodity and not of the same kind of debt: it is required to take possession of the consideration in the contract session, even if there is a difference in the quantity, such as: the debt is in gold and is substituted with silver, the debt is in wheat and is substituted with dates, orthe debt is in Egyptian Pounds and is substituted with Pounds Sterling.
b. The Second Condition:
If the consideration of the debt is a ribawī commodity, and it is of the same kind as the debt, then it is required to have equality (tamāthul) of the volume of the debt and its consideration, and to take possession of the consideration of the debt in the contract session. Such as the debt is in dates and is sold for another type of dates; the debt is in sea salt and is sold against rock salt, Subject to what is stated in s. (4/1/1/2).
4/1/1/2. It is permitted for the creditor to recover his monetary debt, either in whole or part, in a currency other than the currency in which the debt was established, subject to the following conditions:
a. Possession of the substitute of the debt should be transferred in the contract session so that no part of the debt amount, which has been converted into another currency, remains outstanding.
b. Discharge of the debt in another currency before the [stipulated] discharge time should not: be stipulated [as a condition], be [noticeable] by anticipation, or a customary practice.
c. [Discharge of the debt] should be at the exchange rate prevailing on the day of settlement, if: the debt was the result of a loan contract, or there was a delay by the debtor settling the debt when it matured.
4/1/1/3. In the contract of Salam, it is permitted to substitute the subject of Salam (the subject of sale), other than cash, after the maturity date by another asset without stipulating such substitution in the contract, whether such substitution is of the same or different kind, provided: the substitute asset (al-badal) is fit to be the subject of Salam for the Salam capital, and the market value of the substitute asset does not exceed the market value of the subject of Salam at the delivery time. For example, when the Salam contract is [for the sale of] gas, it is substituted by oil. See s. (4/2) of the Shari’ah Standard No. (10): Salam and Parallel Salam.
4/1/2. The Second Rule: The transaction shall not be a legal artifice (ḥīla) for ribā, such as when [the contracting parties] collude to have the buyer pay the cash amount on the spot in exchange for deferred delivery of the commodity. Upon the delivery of the commodity, it is substituted for an amount more than the currency itself.
4/1/3. The Third Rule: The transaction shall not lead to establishing a new debt as an obligation upon the debtor with an increase upon the existing debt.
4/1/3/1. It is not permitted to sell the debt to the debtor in exchange for a new debt, which is established as an obligation upon him, if [the new debt] is more than the [existing debt], and this shall be as a form of extinction of debt in debt (faskh al-dayn) by another debt which is prohibited as per Shari’ah.
4/1/3/2. It is not permitted to make the debt as the Salam capital, for example, to make cash loans or financing receivables, which are owed to the Institution by the customer, as Salam capital. See s. (3/1/4) of the Shari’ah Standard No. (10): Salam and Parallel Salam.
4/1/3/3. All such things are prohibited, which may lead to an increase in the amount or the value of the debt against increasing the debt tenure or could be a means to it, irrespective of whether the debtor is solvent or insolvent. This includes substituting the debt by the creditor for a commodity and then selling it to the debtor for a deferred price higher than the amount of debt, and it is in the form of the prescribed sale of ‘Inah.
4/1/3/4. Upon the request of a solvent debtor customer, it is permitted to execute a Murabaha contract between the customer and the creditor Institution, pursuant to which new debt is established upon the customer that will be more than the first debt, even if the customer settles whole or part of the first debt using the sale price of the commodity that was purchased under the new financing. This is subject to the following rules:
a. The new Murabaha should be a financing transaction independent of the transaction that established the first debt so that [entering the new Murabaha] will not be stipulated in the contract [of the first debt], it shall not be required in [the new Murabaha] contract, nor in the financing documentation, to settle the first debt using the sale price of what was purchased by the customer, and a credit approval must be given for [the new Murabaha] because it is new financing.
b. The contract of the new Murabaha should be a valid contract resulting [it’s respective] Shari’ah effects, such as the customer is entitled to take actual delivery of the subject of the sale, even if the delivery was constructive, and [the customer] is entitled to retain ownership [of the subject of sale] and to dispose of the subject of sale as he deems fit with no obligation to sell thereof. What is stated in the Shari’ah Standard No (8): Murabaha, Shari’ah Standard No. (30): Tawarruq, and Shari’ah Standard No. (20): Sale of Commodities in Organized Markets shall apply.
c. The customer shall have the right to dispose of the sale price of the thing, that he purchased under the new Murabaha, as he deems fit, even if the price is deposited in [customer’s] account held with the Institution. [His right to disposition] includes customer using [the sale price], as per his choice, to settle the first debt after (1) one working day following his receipt of the sale price or getting it deposited in his account.
d. If the new transaction is entered with a delinquent customer, then it is not permitted for the Institution to compensate itself, either directly or indirectly, for the delinquency [of the customer] in settling the first debt, and the profit rate in the new Murabaha should not exceed the rate for such a customer if he were not delinquent.
4/2. It is not permitted to enter into an agreement between the creditor and the debtor at the origination of the debt to sell [the debt] to the debtor in the future. Likewise, a bilaterally binding promise between [the creditor and the debtor] is prohibited. Although, if the preceding rules, as mentioned in s. 4/1, were materialised in the promised sale, it is permitted to have a unilaterally binding promise. Refer to s. (2/9) of the Shari’ah Standard No. (1): Trading in Currencies.

5. Sale of Debt to Third Party other than the Debtor
5/1. It is not permitted to sell a monetary debt against cash or for a monetary debt. However, if the transaction is an assignment of debt, then it is not considered a sale of debt. See Shari’ah Standard No. (7): Hawala.
5/2. It is permitted to sell a monetary debt for a commodity with spot delivery or for a usufruct or service wherein its subject delivery can be ascertained at the time of sale. Hence, it is not permitted to sell a monetary debt against a commodity with deferred delivery, for example, making a debt owed by a third party as the Salam capital. See s. (3/1/4) of Shari’ah Standard No. (10): Salam and Parallel Salam. Similarly, it is not permitted to sell [a monetary debt] for a usufruct or a service with unascertained subject-delivery.
5/3. It is not permitted to sell a commodity debt before taking its possession, whether it is sold against cash, commodity, usufruct, or service.
5/4. It is not permitted to sell the debt if it was a usufruct or a service that is a specified-cum-unidentified (mawṣūfa fī dhimma) (where the subject of delivery is not specific), regardless of whether [such usufruct or service] are sold for cash, commodity, usufruct, or service.
5/5. It is not permitted to sell the debt to a third party if [the sale] has excessive gharar (uncertainty), such as:
5/5/1. The debt is not established either by acknowledgement or by evidence.
5/5/2. Lack of knowledge (jahāla) of the amount of debt.
5/6. The debtor’s consent is not required for the sale of debt to a third party unless the debtor and the creditor have agreed otherwise.
5/7. The buyer shall have the rescission option for misrepresentation (khayār al-taghrīr) if the debt seller is aware of the debtor’s insolvency or procrastination. Still, the buyer was not informed about that. See s. (2) of the Shari’ah Standard No. (48): Options for Breach of Trust.

6. Division of the Debt
6/1. It is permitted for the claimants in one debt to divide it among themselves in proportion to their respective shares so that each claimant shall reserve his respective share in it.
6/2. It is permitted for the claimants in multiple debts to divide the debts among themselves so that each claimant shall reserve a debt or more based on his share.
6/3. If what is owned by the partners includes debts, tangible assets, and cash, then it is permitted for them to agree [on an arrangement] where some of them will take debts, some will take cash, and others will take tangible assets.

7. Transfer of Debt’s Ownership and Securing the Debt
7/1. Ownership of the debt and its risk are transferred to its buyer by the effect of any means that customarily allows the buyer to claim the debt.
7/2. If the debt is secured via an established pledge or an established guarantee, then the pledge and the guarantee will transfer to the buyer along with the sold debt, if: The buyer stipulated it upon the seller of the debt, or The custom admitted it, and the pledgor or the guarantor has not stipulated the non-assignability of the pledge or the guarantee.
7/3. The buyer of the debt may stipulate upon the seller of the debt to secure the debt by a Shari’ah compliant guarantee from a third party so that the buyer will purchase the debt secured via a guarantee. An example is the requirement to have Islamic insurance (Takaful) on the debt before its sale. Refer: s. (6/4) of the Shari’ah Standard No. (5): Guarantees.
7/4. The buyer of the debt may stipulate upon the seller of the debt to guarantee the debt owed by the debtor so that the buyer will have the right of recourse upon the seller about the portion of the debt that was not recovered.

8. Sale and Negotiability of Debt when combined with other assets:
8/1. If:
the debt is part of the assets of an entity that is in existence and has ongoing permissible activities, whether these activities were commercial, financial, industrial, related to real estate, services, agricultural, import-export, sale and purchase of commodities and the like,
then:
It is permitted to sell such an entity or its share of [the debt] without considering the provisions of the sale of debt about [the portion] of the debts out of its assets, whatever would be the ratio of debts, as long as such debts are generated from the turnover [of business] because such debts are ancillary to the activity [of the entity].
For example:
shares of joint-stock companies, including Islamic banks, investment fund units, Sukuks are based on Mudaraba and are investment agencies, provided the entity is not entirely composed of debt.
8/2. If:
Assets of the Institution include debts, tangible assets, usufructs, and rights, and out of such assets, the Institution separated some debts, tangible assets, and the like, in a legally recognized entity wherein commingling of assets (khulṭa) is materialized (e.g., a special purpose company, or an investment portfolio, that is registered with the relevant authorities), and assets of the Institution are not turned over on an ongoing basis,
then:
The Institution may sell or securitize such an entity (entirely or a common share out of it) or issue Sukuk thereof, subject to the following rule:
8/2/1. The sale shall result in [its respective] Shari’ah effects, including transfer of ownership and risk to the buyer, as the buyer shall bear the risks [associated with] the asset. It is not permitted to stipulate that the seller will bear such risks at any stage of the process.
8/2/2. The ratio of tangible assets and other like assets shall exceed 50% of the value of the assets of the entity.
8/2/3. Upon issuance of Sukuk, the Institution should take all the necessary precautions to maintain the referred ratio by selecting the assets to issue Sukuk. Hence, if the ratio is no longer maintained due to a supervening event, which is acknowledged by a competent Shari’ah Board, then the Institution is required to forthwith restore the ratio within a period specified by the Shari’ah Board. In all instances, the ratio of the tangible asset shall not fall at any time below 33% of the value of the asset(s). Otherwise, the Sukuk-holders shall be notified that the Sukuks are no longer negotiable except in accordance with the Shari’ah conditions for trading debts. If the Sukuk were listed on an exchange, it is required to delist, and the Sukuk-holders will be entitled to liquidate [their holding of] Sukuk, subject to compliance with the provisions of disposition of debts.
8/2/4. In case some of the debts of an entity’s assets were settled, the entity must, upon purchasing new debts, abide by the rule set out in s. (5) of this Standard. It shall not be deemed as a turnover if there was the substitution of part of the debts, tangible assets, or other like assets of the entity, or a new Murabaha was extended to the same debtor. Due to this, s. (8/1) of this Standard shall not be applicable; rather, provisions mentioned in s. (8/2) of the Standard will apply.
8/3. If:
Debts, other tangible assets, and the like were combined or separated for the purpose of selling them under one leg, without such assets being in an entity (where the principle of Shari’ah compliant commingling, asset out in paragraph (8/2), is materialized), for example: [debts and tangible assets] are combined in a sale contract, subjected to accounting separation, or separated in an account held with the Institution, even if it was in the form of a portfolio that is not registered with the relevant authorities,
then:
The provisions of the sale of debt, as set out in Para No. (5) of this Standard apply.
8/4. If:
Sukuk are issued, and a part of their proceeds are utilised in executing the Murabaha transactions while the other part is utilised in tangible assets (e.g., the assets of Mudaraba, Ijarah, or service agency),
then:
Trading of such Sukuk shall be subject to s. (8/2), provided that the Sukuk issuance shall not guarantee what is not permitted as per Shari’ah.

9. Contemporary Applications of Sale of Debt
9/1. Sale of Commercial Papers and Discounting Them:
9/1/1. It is permitted to sell a negotiable instrument to the debtor or a third-party subject to considering the provisions of the sale of debt, as set out in s. (4) and s. (5) of this Standard.
9/1/2. It is not permitted to discount the negotiable instrument but to settle it to its first beneficiary (the creditor), before its maturity, for an amount less than its value. See: s. (6/1) of the Shari’ah Standard No. (16): Negotiable Instruments, and s. (10) of the Shari’ah Standard No. (47): Rules for Profit Calculation in Financial Transactions.
9/2. Sale of Bonds:
9/2/1. It is not permitted to trade in Shari’ah non-compliant bonds, whether by their sale, purchase, assignment, or otherwise. Refer: s. (5) of the Shari’ah Standard No. (21): Securities (Stocks and Bonds).
9/3. Trading Salam- and Murabaha-based Sukuk:
9/3/1. It is not permitted to trade in Sukuks based on Salam and Murabaha for a cash price. See: Para No. (5) of this Standard and Refer: s. (5/2/14) of the Shari’ah Standard No. (17): Investment Sukuk.
9/3/2. It is permitted to exchange Salam Sukuk or Istisna’ Sukuk with the debtor following the rule of sale of debt, as set out in s. (4/1) of this Standard. Further, see s. (4/1/1/3) of this Standard.
9/4. Trading Financial Securities that comprise of debts:
9/4/1. Trading in financial securities, whose underlying assets comprise debts owed by a third party, shall be subject to the rule set out in this standard.
9/5. Securitization of Receivables
9/5/1. Securitization of receivables is a mechanism for converting debts to financial securities that can be traded in the money markets.
9/5/2. It is not permitted to trade in financial securities based on securitization of monetary debts unless their trading is against a commodity, a usufruct, or a service wherein its subject-delivery was ascertained. This shall be under s. (5/2) of this Standard.
9/6. Factoring:
9/6/1. 9/6/1 Factoring is a contract whereby an institution assigns its trade receivables, which are invoiced in whole or only in specific types thereof, frequently to a factor, [a party] that takes the place of the creditor-institution with regards to the debts it assumes and stands obliged to pay its amounts to the institution immediately on the spot or upon maturity, regardless of whether these debts were recovered or not, and [this shall be] in return for a pre-agreed monetary amount.
9/6/2. As per Shari’ah, it is not permitted to deal in a contract of purchasing the invoices on a discount (factoring) unless their purchase was for a commodity, or a usufruct or a service wherein the subject-delivery is ascertained, according to s. (5/2) of this Standard.
9/7. It is not permitted to sell the debt to a third party for another debt owed to this party [i.e., the third party] by another party. Such as when two institutions agree to swap their portfolios of receivables [owed] by their customers.

10. The Date of Issuing the Standard
This Standard was issued on 22nd RabīꜤ Al Ākhirah 1440 H. corresponding 29th December 2018.

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