Question # 279: I had purchased a property, 5 years back for Rs. 1.3 lacs from an xyz company. The company had given me a buy back offer for the said purchase saying that they will buy back the property after the period of 5 years and pay me double the amount for the said property. I had not purchased the property with an intention of accepting their buy back offer or selling the property after 5 years but my intention was to build a bunglow on the said property. But now I am in need of money and I want to sell off the property, so can I accept the buyback offer from the company? Is it allowed according to the Shariah law? The market rate of the property is 3 lacs to 3.5 lacs and the company is giving me 2.6 lacs, I have the option to sell the property in the open market but that will take time and I’m in need of money right now.
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Shorter Answer: Although the transaction under consideration hints toward repurchase agreement and sell/buy-back arrangement (Bai’ al-Wafa), the selling back of the property to the original seller in this case is permissible in Shari’ah law, because of the following:
- the resale of the property to the original seller is not made a condition to the initial sale i.e., two sales are not stipulated in the original contract; and
- the buyer (current owner of the property) has no obligation to sell the property back to the original seller and he is at free will or has the right and option to sell the property in the open market.
Long Answer: Bai’ al-Wafa [(also known in shari’ah sources as bai’ al-thanaya (Maliki school of thought) or bai’ al-‘uhdah (custody) (Shafi’i school of thought) or bai’ al-amana (trust or faithfulness sale) (Hanbali school of thought)] is a sale (bai’) in which the seller has the right, as stipulated in the contract, to repurchase the underlying property (an estate like a house or land) from the buyer by refunding the purchase price. The right of redemption is given to the original seller upon an understanding that the buyer will give (i.e., resell) the property back to the seller and receive the original price. The buyer agrees to honor that understanding and hence the name “wafa” which means “honor”. Bai’ al-Wafa is viewed by the majority of jurists (fuqaha) as impermissible. ((Investment & Finance, the online financial encyclopedia,//www.investment-and-finance.net/islamic-finance/b/bay-al-wafa.html)
Also known as Bai’ul Al Raja’a, it is one of the most popular forms of sale is which one party, who wants to obtain an interest-bearing loan, agrees to sell an income-earning asset to the lender. The lender will thus become entitled to the income of the asset as long as it remains in his ownership. The buyer then undertakes to return the ‘sold’ asset to the seller whenever the seller pays back the same price to him. In this manner, the borrower (artificial buyer) succeeds to get the loan amount against payment of the agreed upon interest. (‘Shari’a Standards’ by Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI))
If, after the purchase of the commodity, there is a time lapse and the effect is that either the value of the commodity or its form /structure changes noticeably, then it can be repurchased by the seller, as allowed by the Shari´ah Standards Accounting and Auditing Organization of Islamic Financial Institutions (AAOIFI)… Although the AAOIFI has not indicated any specific period, yet the Shari’ah scholars have suggested one year so that the value of the asset or its price could change during that period and the transaction might not enter into the prohibited category of sale and buy-back arrangement. (Study Material on ‘Islamic Commercial Law and Contracts’ by Institute of Islamic Banking and Insurance London, UK)
In general, Islamic jurisprudence does not forbid the same property being sold back to its original seller, provided that the two sales are not stipulated in the original contract. Otherwise, a sales contract that requires the buyer to sell the property back is not a sale at all, since the buyer never in fact obtains ownership rights, which include the right not to sell the property, and certainly the right not to sell it to any given individual or entity (e.g., the original seller). (‘Islamic Finance – Law, Economics, and Practice’ by Mahmoud A. El-Gamal)
Therefore, the Hanafi jurists have opined that if the resale of the property to the original seller is made a condition for the initial sale, it is not allowed. However, if the first sale is affected without any condition, but after effecting the sale, the buyer promises to resell the house whenever the seller offers to him the same price, this promise is acceptable and it creates not only a moral obligation, but also an enforceable right of the original seller. The Muslim jurists allowing this arrangement have based their view on the principle that (قد تجعل المواعيد لازمة لحاجة الناس) (the promise can be made enforceable at the time of need).
Even if the promise has been made before effecting the first sale, after which the sale has been affected without a condition, it is also allowed by certain Hanafi jurists. One may raise an objection that if the promise of resale has been taken before entering into an actual sale, it practically amounts to putting a condition on the sale itself, because the promise is understood to have been entered into between the parties at the time of sale, and therefore, even if the sale is without an express condition, it should be taken as conditional because a promise in an express term has preceded it.
This objection can be answered by saying that there is a big difference between putting a condition in the sale and making a separate promise without making it a condition. If the condition is expressly mentioned at the time of sale, it means that the sale will be valid only if the condition is fulfilled, meaning thereby that if the condition is not fulfilled in future, the present sale will become void. This makes the transaction of sale contingent on a future event which may or may not occur. It leads to uncertainty (gharar) in the transaction which is totally prohibited in Shari‘ah. Conversely, if the sale is without any condition, but one of the two parties has promised to do something separately, then the sale cannot be held to be contingent or conditional with fulfilling of the promise made. It will take effect irrespective of whether or not the promisor fulfils his promise. Even if the promisor backs out of his promise, the sale will remain effective… This makes it clear that a separate and independent promise to purchase does not render the original contract conditional or contingent. (‘An Introduction to Islamic Finance’ by Mufti Muhammad Taqi Usmani)
Further, Bai’ al-Wafa, a composite contract that combines the features of bai (sale) and rihn (pledge) has the effect of rihn (pledge) in that the buyer cannot resell the asset to a third party. This contract is similar to the conventional Repo with the difference that in case of Bai’ al-Wafa, the repurchase price is same as the initial sale price. In case of the former, the repurchase price is set higher than the initial price, which reduces the transaction to riba-based borrowing. As in case of a Repo, the buyer is free to derive benefits from ownership of the asset. The additional feature with Bai’ al-Wafa is that the contract can be revoked by either party any time. Hence, though the rights to revoke are not strictly classified as options from a fiqhi point of view, Bai’ al-Wafa may be seen as equivalent to a conventional Repo with a call and a put option. (‘Islamic Financial Services’ by Mohammed Obaidullah)
Very briefly, Repo is a generic name for both repurchase agreements and sell/buy-backs. In this, one party sells an asset to another party at one price at the start of the transaction and commits to repurchase the fungible assets from the second party at a different price at a future date or (in the case of an open repo) on demand. If the seller defaults during the life of the repo, the buyer (as the new owner) can sell the asset to a third party to offset his loss… Thus, although repo is structured as a sale and repurchase of securities, it behaves economically like a collateralized loan or secured deposit (and the principal use of repo is in fact the borrowing and lending of cash). The difference between the price paid by the buyer at the start of a repo and the price he receives at the end is his return on the cash that he is effectively lending to the seller. In repurchase agreements, this return is quoted as a percentage per annum rate and is called the repo rate. Although not legally correct, the return is usually referred to as repo interest. (‘What is a Repo?’ from icmagroup.org)
Based on our understanding of your question and detailed explanation of Islamic view point on similar transactions, it can be said that since a) the resale of the property to the original seller is not made a condition to the initial sale i.e., two sales are not stipulated in the original contract; and b) the buyer (current owner of the property) has no obligation to sell the property back to the original seller and he is at free will or has the right and option to sell the property in the open market, the transaction of selling back to the original seller is permissible in Shari’ah law.
(The above answer has been verified by Dr. Main Khalid Al-Qudah, Member of the Fatwa Committee of Assembly of Muslim Jurists in America)
Allahu A’lam (Allah (سبحانه و تعالى) knows best) and all Perfections belong to Allah, and all mistakes belong to me alone. May Allah (سبحانه و تعالى) forgive me, Ameen.