Handling Debt in Islam

Handling Debt in Islam
By, Peer Syed Mohyuddin Mahboob

Concept of debt in Islam is sufficiently guided by Qur'an and Sunnah. Debt in Arabic term known as dayn which is rooted in the same root with diin i.e da ya na, which depict any right or wealth that is payable upon a person either to another person or his Lord based on commitment towards that person or his Lord (Sano, 2001). This covers two dimensions namely the right of one's fellow human beings and the right of ALLAH. The first dimensions will be all rights arising from financial transactions such as sale contract, lease, credit and rental, or from non-financial transactions such as the dowry of a woman, the cost of damage and the cost of crimes. It also covers the rights, which arise from services.

The latter dimension is more comprehensive in sense that all mankind in this world are being indebted to ALLAH, the creator. It includes all religious matters especially that involve the relationship between a man and his Lord such as missing prayers, missing zakat, or sawm. Besides, the debt may be a right or a wealth; it may also in kind as well as in cash. Debt is inevitable element of one's life. Thus Islam commands its adherents to fulfill their obligation either towards (debt to) mankind or ALLAH.

In line with the debt toward mankind, it has been restricted in Islam, in the sense that it should be paid back without involving injustice between the debtor and creditor. Islam encourages Muslims to help each other. In Islam to give loan is better than to give charity. In fact Islam prohibits any acts of begging. For it may humiliate the doers. As Prophet Muhammad (peace be upon him) once was asked by the companion by the name Qabisah to help him to repay the debt. The Prophet (PBUH) then said, "Wait until one gives a charity than we will give it to you" then the Prophet (PBUH) said, "Begging is prohibited except in three conditions; one is being indebted and fails to pay it back, the begging is permissible until he fully paid back then he stops begging, one whose property was damaged by the natural disasters so that the begging is permissible until he received a sufficient assistance to survive, and finally the poor and needy one whom has been witnessed by three trustworthy people in his community, the begging is permissible to fulfill his needs. Qabisah, other than three above mentioned, begging is prohibited and those who do it, they eat unlawful things"..

Thus one who takes credit or loan and repays it back is better and respected than those who receive charity. However, Islam has commanded Muslims to give and take debt that is free interest based or Qardh Hasan. As ALLAH says,

"Who is he that will loan to ALLAH a beautiful loan, which ALLAH will double unto his credit and multiply many time? It is ALLAH that giveth (you) want or plenty, and to Him shall be your return" (Qur'an 2:245)

Al-Qardh al-Hassan means a beautiful loan that does not carry any value added to the principle that is borrowed. In Islamic bank practices, it refers to a credit or loan in which the debtor uses it for the good purposes and later on he has to pay only the same amount with that he took from the bank.

Beside lawful or unlawful consideration in the debt, assets vis a vis liability should be taken into consideration. In buying a car with deferred price or bay' bi thaman ajil for example, a Muslim should look into type of property. Is a car liability or an asset? How is his financial situation? Islamic financial planners may help him to classify it into either liability or asset. As an asset, the property will increase and become an effective and strong investment in the future. But being a liability it will be a burden in the future.

In addition, Debt in Islam should be written down properly as ALLAH says,

"O ye who believe! When ye deal with each other, in transactions involving future obligation in a fixed period of time, reduce them into writing, let a scribe write down faithfully as between the parties; let not the scribe refuse to write: as ALLAH has thought him…" (Qur'an 2:282).

This verse shows the significance of writing of debt. Debt in Islam is long last liability that does not limit in this world but it is also liability in the hereafter as well. As a result, whatever debt the deceased had, in estate distribution for example, the heirs should settle it first, before the estate is distributed to eligible heirs. As ALLAH says,

"In what your wives leave, your share is a half, if they leave no child; but if they leave a child, ye get a fourth; after payment of legacies and debts…" (Qur'an 4:12).

The Prophet (peace be upon him) warned debtor to pay back his debt. For the debt if it is not paid, it will trigger debtor's soul hanging in the hereafter and will not be accepted by ALLAH. As a result, Muslims should be careful when they come into the debt and write it down so that if he fails to pay it back, the heirs or his next kin will settle it down on behalf. In sum, Islam prescribes debt to mankind is more powerful than that of ALLAH, for ALLAH will not forgive the debtor to mankind unless it is paid and released by the creditor.

Al-Tirmidhi narrated from Maula ‘Ali (may ALLAH be pleased with him) that a mukaatib (slave who had entered into a contract of manumission) came to him and said: “I am unable to pay off my manumission; help me.” He said: “Shall I not tell you some words which the Messenger of ALLAH (peace and blessings of ALLAH be upon him) taught me? And if you have debt like the mountain of Seer, ALLAHwill pay it off for you. He said: ‘Say: Allaahumma akfini bi halaalika ‘an haraamika wa aghnini bi fadlika ‘amman siwaaka (O ALLAH, suffice me with what You have permitted so that that I have no need of that which You have forbidden, and make me independent of means by Your bounty so that I have no need of anyone besides You.”

Debt has its strict rules and regulations in Islam. For one, interest is completely forbidden. Additionally, while debt is discouraged, for cases where a person must borrow money, the debtor and lender must enter into a contract, the rules of which are clearly stipulated in the Quran. In cases where a debtor has made the mistake of taking debt on interest, all efforts should be sought to get rid of the interest. When not possible immediately, the debtor should seek all means to reduce payment of interest rates on repayment of debt, whether through debt consolidation or other means - until the debt is paid off completely

So the correct way of lending money is:

1- To specify the period of the loan, i.e., the length of time after which the loan must be repaid.

2- Writing down the loan and the time when it is to be repaid.

3- If the one who writes down the loan is a person other than the debtor, then the debtor is the one who should dictate to him the details of the loan.

4- If the debtor is unable to dictate because of sickness or some other reason, then the one who should dictate on his behalf is his guardian.

5- The loan should be witnessed, and the witnesses should be two men, or one man and two women.

6- The lender has the right to ask the borrower to guarantee the loan with a pledge which the lender will keep. The benefit of the pledge is that if the time comes for the debt to be repaid and the borrower refuses to pay, the item in pledge may be sold and the debt paid with that money; anything left over is to be given to the owner of the pledge, namely the debtor.

Guaranteeing a debt in one of these three ways (writing, witnesses or pledge) is mustahabb and is preferable, but it is not obligatory (waajib). Some of the scholars are of the view that it is obligatory to write down a loan, but most of the scholars say that it is mustahabb, and this is the more correct view. The reason for that is to protect people’s rights so that they will not be exposed to loss because of forgetfulness or confusion, and as a precaution against those who do not fear ALLAH.

If a loan is not written down and not witnessed, and no pledge is taken, that does not mean that it is a sin. The aayah itself indicates that:

“then if one of you entrusts the other, let the one who is entrusted discharge his trust (faithfully), and let him be afraid of ALLAH, his Lord”

[al-Baqarah 2:283 – interpretation of the meaning]

Trust means not guaranteeing the loan by writing it down, having it witnessed or asking for a pledge. But in this case it is essential to fear ALLAH. Hence in this case ALLAH commanded the one who is in debt to fear ALLAH and discharge his trust: “let the one who is entrusted discharge his trust (faithfully), and let him be afraid of ALLAH, his Lord”..

If the loan is not written down and the debtor denies it or takes a long time to repay it, then the lender has no one to blame but himself, because he exposed his property to loss. It was narrated from the Prophet (peace and blessings of ALLAH be upon him) that if a loan is not written down, the du’aa’ of the lender against the debtor will not be accepted if he takes too long to pay or he denies the loan. He (peace and blessings of ALLAH be upon him) said: “There are three who call upon ALLAH but their prayer will not be answered:… a man who lent money to another man but he did not have (the loan) witnessed.” (Saheeh al-Jaami’, 3075).

Whoever thinks about these rulings and others will see the perfection of the Islamic sharee’ah and how concerned it is to protect people’s rights and not expose them to loss. For ALLAH commands the one who has wealth to protect it and not to expose it to loss, no matter how little it may be:

“You should not become weary to write it (your contract), whether it be small or big, for its fixed term”

[al-Baqarah 2:282 – interpretation of the meaning]