Al-Kharaj bi al-Dhaman

The sharia maxim of al-kharaj bi al-dhaman (or al-daman as some people prefer to spell it) has somehow become central to theory and practice of Islamic banking and finance. I have recently been thinking of doing some research into this fiqhi principle to see what does it really mean in the context of Islamic contract theory.

This sharia maxim is actually a hadith and is not something derived from juristic principle. Given that it is actually a hadith, it becomes even more important to understand its true meanings and its implications for Islamic banking & finance.

There are two important words in this phrase: al-kharaj and al-dhaman. The former is translated as profit and revenue; while the latter is taken as liability, responsibility and guarantee. Consequently, there are different translations of this maxim. Abdullah Alwi Haji Hassan, a contemporary Malaysian scholar, translates it into "the profit belongs to him who bears responsibility."¹ Monzer Kahf and Tariqullah Khan, two leading Islamic economists, take the view that this sharia maxim relates entitlement of the return to an asset to carrying the risks resulting from its possession². two contemporary Western scholars, Frank Vogel and Samuel Hayes, define the term as, "gain accompanies liability for loss."³  Umar Moghul adopts the translation of "(entitlement to) profit must be accompanied by a liability for loss."⁴ 

To understand the principle of al-kharaj bi al-dhaman in the context of Islamic banking & finance, it is important to see how the principle is applied in bilateral transactions.

Let us assume a party A transfers an asset X to another party B through a transfer mechanism Ω, whereby Ω may be (1) a gift (G), (2) a benevolent loan (BL), (3) a sale (S), (4) a rental arrangement (R), or (5) an involuntary arrangement like inheritance (I) in which case B gets the asset X on A's death. We can sum up the mechanism Ω in the following notation:

Ω = {S, R, I G, B}

The following notations will also help us specify the nature of the problem:

X ^AΩ^BP = An asset X gets transferred from Party A to Party B through exchange mechanism Ω for a counter value (e.g., price) P

X ^BΩ^AP = An asset X gets transferred from Party B to Party A through exchange mechanism Ω for a counter value P

If P = 0 in the above cases, then Ω may be equal to G, BL, I, thus:

X ^AG^B = An asset X gets transferred from Party A to Party B by way of a gift from A to B

X ^BG^A = An asset X gets transferred from Party B to Party A by way of a gift from B to A

X ^ABL^B = An asset X gets transferred from Party A to Party B by way of a benevolent loan from A to B

X ^BBL^A = An asset X gets transferred from Party B to Party A by way of a benevolent loan from B to A

X ^AI^B = An asset X is inherited by Party B from Party A on the latter's death

X ^BI^A = An asset X is inherited by Party A from Party B on the latter's death

X ^AR^Br= An asset X gets transferred from Party A to Party B by way of a rental arrangement whereby A serves as lessee and B serves as lessor and pays "r" as rental

X ^BR^Ar= An asset X gets transferred from Party B to Party B by way of a rental arrangement whereby B serves as lessee and A serves as lessor and pay "r" as rental

X ^AS^BP= An asset X gets transferred from Party A to Party B by way of sale whereby A sells X to B for price P

X ^BS^AP= An asset X gets transferred from Party B to Party A by way of sale whereby B sells X to A for price P

The contracts or arrangements (like gift and inheritance) which transfer the ownership rights permanently from one party to another inevitably transfer the risk of loss and entitlement to profit to the new owner. In loan or rental contracts, the lender and lessee retain ownership of the asset while parting from the asset for some time (loan period or rental period). Hence, lender and lessee face the risk of loss of the asset. Those who advocate the principle of al-kharaj bi al-dhaman contend that it is this risk of loss, which entitles the lessee to earn rental "r." In case of a benevolent loan, the lender foregoes his entitlement to profit. 

¹ Abdullah Alwi Haji Hassan 1994 Sales and Contracts in Early Islamic Commercial Law, Islamic Research Institute, Islamabad, Pakistan (ISBN 969-408-136-X).

² Monzer Kahf and Tariqullah Khan 1409 H (1988) Principles of Islamic Financing: A Survey, Islamic Research and Training Institute, Islamic Development Bank, Jeddah, Kingdom of Saudi Arabia.

³ Frank E. Vogel and Samuel E. Hayes III 1998 Islamic Law and Finance: Religion Risk and Return, Kluwer Law International, The Hague and Boston (ISBN 9041105476).

⁴ Umar F. Moghul No Pain, No Gain: The State of the Industry in Light of an American Islamic Private equity Transaction. Chicago Journal of International Law, Volume 7, Number 2.

Malaysia

I like Malaysia and Malaysian people. I feel like being in my second home when visiting Kuala Lumpur.