Yousuf Azim Siddiqi
It is almost four decades since the world’s first Islamic commercial and development banks started functioning in the Middle East. The overall experience was supported by good intentions of the shareholders and by true spirit of a largely Muslim-dominated customer base that exhibited sincere attitude in getting rid of interest-based banking practices. However, a major argument against Islamic banking products keeps on surfing up every now and then. Public in general and critics of Islamic banking in particular object to Islamic banks charging more than their conventional counterparts for the products and services they offer to the customers and clients. This is also known as Shari’a premium. Although this argument stood valid when Islamic banks (like any new entrant in an established industry) were few and new, which charged higher rates of profits on financing products and gave away lower rates of deposits due to higher costs or experience to manage funds in a profitable way and in compliance with Shari’a. However over a period of time, Islamic banks have done fairly well and, consequently, over-pricing is now almost an outdated argument. Now, one may observe that Islamic banking products are either lower or at least at par with conventional banking products. It must, however, be mentioned at the outset that while the pricing of financing products and contracts is purely result of demand-supply forces, pricing of deposits is greatly influenced by banking regulators that adopt an interest rate policy that must be in line with the overall economic policies of the government.
Although pricing in the contemporary banking and financial markets is influenced by government policies, economic doctrines of Islam are in general in favour of a laissez-faire approach, allowing the market forces to freely price goods and services. This means the markets are favoured to function in accordance with forces of demand and supply forces, without any external or government intervention. This paper focuses on Islamic juristic stance on pricing of goods and services. The analysis here is based on some of the classical writings of Islamic jurisprudence, with a special reference to the maliki school of thought. Undoubtedly the most comprehensive Arabic reference in this regard is “Rulings on Pricing in Islamic Jurisprudence” ¹ by Shaykh Muhammad Abu-Huda Al-Yaqoubi, who relied extensively on the writing of an earlier maliki scholar Yahya Al-Kanani (circa 10th century) who produced “Akham Al-Souq” (i.e., Rulings of the Market) in Arabic.
Types of Price in Islamic Economic Law
As per Dr Nazih Hammad, a famous contemporary Shari’a scholar, price (thaman) is what the buyer and seller agree in a particular transaction. For example A agrees to sell (or lease) his car to B for £2,000. This may not necessarily reflect what could be deemed as the fair value of the subject of sale (or lease). The fair value indeed could be lower, higher or equal to the agreed price.
What can be classified as price under Shari’a? Majority of Islamic jurists define price as cash receivable by the seller, which could be in the form of dinars (gold currency) or dirhams (silver currency) or any other modern-day currency. So if A exchanges a commodity X with B for £10, then A is the seller and £10 is the price for the subject of sale, which is the commodity X. In case both the items are cash then this would be what is known as a sarf contract, i.e., exchange of cash for cash. For example, A may sell £10 for $25.
However, hanafi jurists opine anything given in exchange of a subject of sale qualifies to be a price⁴. Hence, the price could be cash, debt, assets, food grains etc. In our modern-day banking, the same concept becomes extremely handy while dealing with issues of selling (i.e., transferring) debt owed to creditor A to another creditor B. For example, A has entered into a credit transaction with C whereby £50,000 would be payable by C after 1 year then as per Shari’a, A is left with no choice except to hold the payable debt by C for a year or to transfer the same to B at par. However, A may enter into a separate and independent sale transaction with B whereby A agrees to buy a commodity, shares, or Sukuk worth £45,000 offered by B against a price which is equal to face value of the debt (£50,000). Once a sale is executed then A can sell the commodity in the open market and realize £45,000 and B would realize £50,000 on maturity, i.e., 1 year.
Settlement of price can be on deferred or on spot basis. However, the hanafi jurists do not allow deferring settlement of price if it is in kind (i.e., assets). For example, if A sells a house to be delivered on spot to B against a price which is in the form of a car to be delivered after a month, this transaction stands invalid because price in kind cannot be deferred.
Price Regulation
It is not surprising to read the classical books on Islamic jurisprudence to find a vast variety of opinions on issues related with trade and market discipline. The diversity of opinions of the jurists reflects on the time and social circumstances in which these opinions were issued. Given the diversity of views on price regulation, one may find that the Islamic law of business transactions covers almost all possibilities and allows the determination of prices in various ways, including the following three forms:
1. market benchmark;
2. regulated by the ruler/government; or through
3. a mutual agreement between the seller and the buyer.
Although some of the Prophetic traditions prohibit regulating price but now there is a complete consensus amongst the jurists of all schools of thought that the prohibition of regulation of price can not be generalized. Hence, the above three ways of price determination are recognised throughout the Muslim world.
As a baseline rule, prices should be left to be determined by market factors of demand and supply. However, when interaction of these factors results into economic inequality and injustice then intervention or forceful correction is inevitable – the case for regulation.
Maliki School of Thought on Market Discipline
As price regulation is very much the case in banking and finance, it is worth looking into the views of Islamic jurists on the topic. It appears as if it is the maliki school of thought that emphasises on price regulation in accordance with a market benchmark.
Market benchmark can be defined as what sellers generally quote as their asking price for a given commodity. According to Ibn Qasim’s narration from Imam Malik, the basis for forming a market benchmark is a quotation by at least five market players/sellers. Another maliki Jurist, Al Baji, opines that a market benchmark should be accepted by all the market players/sellers. This is what is agreed upon by the majority of maliki jurists.
As per Al-Baji, the market benchmark is determined for all measurable or weighable commodities, whether eatable or non-eatable. It should be ensured that the universe of market benchmark comprises of only fungible goods and do not include non-fungible goods.
Moreover, if the quality is different for the same commodity then one market benchmark cannot be applied for different qualities of the commodity. As per Yahya Al-Kanani, a seller of a superior quality commodity cannot be forced to sell the same at a lower rate.
There is a general consensus among maliki jurists that the seller cannot be allowed to sell a commodity at a price lower or higher than the market benchmark. Stopping seller from selling commodities at a price higher than the market benchmark is understandable because that, eventually, amounts into reaping higher profits by a selected number of sellers, which results into economic exploitation. But why the seller is stopped from selling at a lower rate? This would ensure that chances of economies of scale are eliminated. Hence the seller shouldn’t be able to sell larger number of units at lower rates and eventually achieve overall bigger profits which other sellers miss out. In today’s time, issues surrounding dumping policies can be read in connection with this philosophy of prohibition.
In case a large number of sellers started offering commodities at a price below the market benchmark, then sellers offering original benchmark will not be forced to lower their rates to match the lower rate.
On the other hand, if one or few sellers raised their rates above the market benchmark, then other sellers will not be forced to raise their prices. And in case a majority raised their prices above the market benchmark then sellers offering original rates will be forced to raise their prices to match the new market benchmark. This means that lowering the rate by the majority will not result into lowering the market benchmark. However, raising the rates by a majority of sellers will result into a new market benchmark.
As per two reputed maliki jurists, Ibn Habib and Al Baji, individual sellers need to abide by the market benchmark even if they are selling the commodity to their clan. The underlying assumption in this viewpoint seems to be fixed supply of the commodity; if some consumers buy it for a lower price then some others must pay a higher price to maintain the overall balance in the market. A similar concept is adopted in the contemporary accounting practices of transfer pricing in what is known as Arm’s Length Principle.
Considering the price restrictions on local market sellers, the outsiders (i.e., foreign traders) can offer commodities at a rate that is different from the market benchmark. This comes in order to ensure that supply of necessary goods is not disrupted due to restrictions to sell at the market benchmark. However, as per Ibn Habib, the outsiders should have a benchmark for themselves and they need to abide by the same rate.
The majority of Islamic jurists (shafi’i, hanbali, dahiri and hanafi) have a consensus that seller cannot be forced to sell at the market rate as long as normality prevails in the market. However, in emergency cases, the seller can be forced to decrease or increase the asking price to match market benchmark.
In addition to the market-driven price regulation, there are also provisions for centrally administered price regulation by the government. As opposed to regulated price according to a market benchmark, Islamic law of transactions also allows for the regulation of prices directly by the government or the ruler. Such a regulated price could be lower or higher than the market benchmark. This is also known as taseer jabri in Islamic law, which means coercive pricing.
As per most of the hanafi and shafi’i jurists, coercive pricing applies to only foodstuff for humans and animals. However, two famous hanafi jurists, Shamsudin Qahestani and Huskafi are of the view that price can be regulated coercively for anything if unregulated prices can cause harm to public interest. As per Imam Nawawi, a shafi’i jurist, coercive pricing should not apply to foodstuff coming from foreign markets (imported items). He allows it for locally grown food stuff.
Ibn Taimiya, a hunbali jurist, seems to have a wider scope in deciding upon the subject of price regulation. As per him, it should not be restricted to food items or commodities. Rather it should even include labour and services. Hence if general public is unable to access necessary services and utilities (e.g., hotels or public hammams) then the government may force the service provider to charge no more than the market benchmark. The same applies to manufacturing facilities of war equipment or building bridges where workers or service providers can be forced to extend their services at the market benchmark, which would serve as the regulated price.
Ibn Qayam and Ibn Taimiya also envisaged another form of regulated pricing wherein the buyers may exploit the situation, and interests of the seller needs to be protected – the so-called case of monopsony in modern economics wherein many sellers supply specific and exclusive goods to one particular buyer. For example, in infrastructure and energy projects, where the state is normally the sole-buyer to which various construction companies sell. In such situations, the government or an independent regulator needs to regulate prices to safeguard the interests of the sellers rather than the buyers.
As per hanafi, shafi’i and maliki jurists, coercive pricing is not allowed unless it is understood that not doing so will cause social harm. Shafi’i jurists in particular find no justification for coercive pricing to determine a floor to prevent them fall below a threshold. However, they allow for a ceiling if the asking price is unjustifiably high.
Many hanafi jurists, in particular Al-Mirghinani, opine that the government cannot decide upon a regulated price unilaterally. In their view, full and unilateral discretion to the government in this regard may result into financial exploitation by state-run corporations. Hence, a very comprehensive market consultation process is recommended, which must take into account the capital invested by the sellers, and scarcity of the commodity or its surplus. This exercise is as good as forming an expert committee in modern time. Ibn Habib further elaborates the formation of the above committee and its tasks and recommends that the government must consult market players or their representatives. And while deciding the regulated price, the government needs to consider the capital invested by the seller and their usual profit margins and should ensure that the given price is not, in any way, imposed forcibly upon them. If care is not exercised in determining the regulated price, this might result into grave economic consequences like price disruption and goods hoarding.
Majority of hanafi jurists find a price which is double of the commodity’s value as unjustified, the value of the commodity being its cost of production or acquisition. The jurists have also debated the possibility of artificially inflating the cost of acquisition and recommend a thorough system of monitoring and supervision of markets. In some cases, where commodities are supplied as gifts to the seller, the market price will serve as the guiding principle.
On the other hand, Hanbali jurists, especially Ibn Taimiya, find it permissible for the government to force the seller to sell a necessity commodity if its price goes beyond its known value. In that scenario the sale needs to be affected at the market rate. Hence as per this opinion, the regulated price is equal to the market benchmark.
In case the seller is forced to sell a commodity at a regulated price (if he at all wants to sell), without his absolute consent, then what are the Shari’a provisions for treating this contract of sale?
Interestingly, Ibn Mudod Al-Musli, a hanafi jurist, considers it as an invalid sale because the seller was forced or obliged to sell at a price that he did not fully consent to. Although Ibn Abidin, another hanafi jurist, puts a counter-argument and concludes that firstly the sale was not forced upon the seller. Secondly, it is not necessary to obtain absolute consent of the seller if the government finds the asking price to be causing more harm than achieving personal welfare.
On the other hand, if the seller sells the commodity at a price that is higher than the regulated price then, as per Hanafi and shafi’i jurists, this contract stands valid. In case a credit buyer refuses to settle the higher price then he would be persecuted for recovering of the same. This ensures that the buyer is not taking any undue advantage of the seller by relying on a regulated price post concluding a transaction at a higher price.
In case it was found that the seller is selling at a price higher than the regulated price then, as per hanafi jurists, the first incident would be investigated and then a warning would be given. If it prevails for three times then the government may take suitable action. As per shafi’i jurists, violating price regulations is a punishable crime.
Conclusion:
It can be concluded that Islamic rulings on price regulation are dynamic and versatile and can be explored for various cases of modern practices of Islamic banking, wherein higher rates of profit on murabaha or ijara can be regulated or benchmarked as a Shari’a requirement to protect larger and bigger public interest of the society.
The concept of the government deciding upon the regulated price could be easily executed/replaced by central bank of the country provided the procedural guidelines given in the maliki references are followed in terms of forming a multi-task committee.
Also, it is evident that Islamic jurists did not restrict discussion on price regulation to food grains or animal fodder. Rather it was extended to services as well. Hence mudaraba deposits or other services can be subject to price regulation as the case with murabaha sale.
Given this allowance for regulation of prices of goods and services, it may not be completely unadvisable to regulate prices of Islamic financial products to ensure that they are not higher than the equivalent conventional products. Although, this will mean more resemblance between Islamic and conventional financial products in the short run, it will however push Islamic banks and financial institutions to innovate hard to come up with products that are sufficiently different from their conventional counterparts.
