Is the Sale of Debt Permissible in Islamic Finance?

Is the Sale of Debt Permissible in Islamic Finance?

One example of the sale of debt is selling receivables to another party, but, is it permissible in Islamic finance? Such a transaction likely occurs when the receivable holder needs liquidity while it is not yet due. The trading of Negotiable Islamic Certificate of Deposit (NICD) in Malaysia is another example of the sale of debt in Islamic finance. This article will discuss briefly what is the sale of debt, its types, and the divergence of the Middle East and Malaysia for its Sharia ruling. In the end, we conclude what investors might consider whether to decide for their investment in the debt-related instrument.

What is the sale of debt?

In conventional finance, especially in banking practice, the bank sells outstanding advances accounts (customer debt to bank) to the third party at a generally discount price. The buyer will deserve 100% par value of the debt at the due date. For example, a bank has 1 million USD advances from their clients and is due within 30 days. However, on day 15, the bank needs liquidity and decides to sell its advances to buyers at 960,000 USD (or a 4% discount). The holders of the advances accounts will claim 1 million USD on day 30 later on.

Shariah Advisory Council of Bank Negara Malaysia (SAC BNM) defines the sale of debt in Arabic term as Bay’ al-Dayn. It refers to the selling of debt established by exchange contracts such as murabahah, bai’ bithaman ajil, ijarah, and istisna’. These contracts distinguish the practice of the sale of debt in Islamic finance from its conventional counterpart.

Types of the sale of debt

Sometimes, the term of the sale of debt is interchangeable with al-Kaali’ (debt for debt). Hence, to clarify such a bias, we compare the type of sale of debt as below:

  • Bay al-Kali bil al-Kali (Purchasing good at deferred basis, and payment at deferment as well). There is nothing being transferred at the time of contract concluded. Such a type of sale occurs in the Salam contract where the purchaser (al-Muslam ilaihi) pays the ordered goods (al-Muslam fihi) at a deferred basis. For example, Ahmad orders 1 ton of rice from Hamid with a delivery date after 15 days from the concluded agreement; Ahmad should pay $1000 to Hamid on spot basis. If Ahmad maintains to deliver $1000 at day 15, it is the exact Bay al-Kali bil al-Kali. Sharia prohibits such a transaction from preventing potential disputes between counterparties.
  • Bay’ al-Dain for the debtor. It occurs when a creditor sells his receivables to his own debtor. For example, Ahmad owes $1000 to Hamid for 30 days. Because of some reason, Hamid (creditor) wants Ahmad (debtor) to buy his receivables ($1000) in exchange for an iPhone worth $950.
  • Bay’ al-Dain for the third party. This happens when the creditor sells his receivables to other person instead of his debtor. For instance, with the same scenario above, Hamid (creditor) wants to sell his receivables to David (third party) with the same exchange value of an iPhone worth $950. At the maturity date (day 30), Ahmad will pay $1000, not to Hamid but to David.

Islamic Fiqh Academy of Jeddah with Mufti Taqi Usmani as the prominent scholar from this school prohibits the sale of debt in Islamic Finance. He suggests that the traditional Muslim jurists (fuqaha) are unanimous that Bai’-al-dain with discount is not allowed in Shari’ah. Furthermore, he argues that the prohibition of Bai’-al-dain is a logical consequence of the prohibition of riba or interest. A ‘debt’ receivable in monetary corresponds to the concept of money. For every transaction where money is exchanged for the same denomination of money, the price must be at par value. Any increase or decrease from one side is tantamount to riba and can never be allowed in Shari’ah.

On the other hand, Shariah Advisory Council of Bank Negara Malaysia (SAC BNM)in its resolution resolved that the sale of debt is permissible. The condition of permissibility is the actual existence of the debt. In this regard, numerous fiqh schools have permitted flexibility in debt trading between creditor and debtor. The majority of scholars from the Hanafi, Maliki, Syafii, and Hanbali schools permit debt trading to the debtor. The reason is no issue of non-delivery of the contract’s object exists because the sold debt is already in the creditor’s hands.


The issue of the sale of debt in Islamic finance is the great concern of fixed-income instrument holders, such as Sukuk and NICD. Investors who are inclined to adopt Islamic Fiqh Academy’s point of view will not exchange Sukuk or NICD in the secondary market at a discount or premium price. This is a scrutiny attitude for Muslim investors. However, the Shariah Advisory Council of Bank Negara Malaysia resolution is also applicable for other kin of Muslim investors who are more convenient with such sharia ruling due to their liquidity needs. We cannot say that SAC BNM doesn’t have a scrutiny attitude because they base the resolution on major classical scholars’ opinions. This Sharia rulings provide easiness for all Muslims relative to their unique needs and conditions.

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