Wednesday, October 31, 2007

Q&A: Selling the security upon the debtors inability to pay

The following is a translation from Arabic.

بسم الله الرحمن الرحيم

Question: I have known people to take as security/guarantee against a debt given to a debtor, if the debtor does not pay back the debt within a pre-agreed time, the creditor has the security which is a guarantee against the debt and in most cases the security is much more expensive and even many times the amount of the debt itself. What is the Shari’ah rule? Is it allowed under the Shari’ah to give or take loans against such security?

Answer:

It is allowed for a creditor to keep a security as guarantee of repayment against a loan that he gives to a debtor. It is reported by Muslim on the authority of ‘Aisha (r.a) about the Prophet (saw) that:

«اشترى رسول الله r من يهودي طعاماً بنسيئة فأعطاه درعاً له رهناً»
"The Prophet (saw) bought foodstuff from a Jew on deferred payment and pawned his shield to him as guarantee of payment."

But the creditor keeps the mortgage (pawn) only as a security against the inability of the debtor for repayment and the security remains the property of its owner (the debtor) because the Prophet (saw) said:

«لا يُغلَق الرهن من صاحبه الذي رهنه»
"The mortgage (security) is not to be denied to its owner who gives it to the creditor as guarantee." (Reported by Shafa’ee on the authority of Sa’eed ibn Mussayyib (r.a).

It implies that the creditor does not become the owner of the security, but he only keeps it as security against the loan and in case the debtor is unable to repay the loan, the security should be sold to recover the loan amount and return the rest of the amount realised by its sale to its owner i.e. the debtor.

The details are as follows: On the maturity of the loan period, the creditor (holding the security) calls on the debtor to pay back the debt. If the debtor has the money to back the loan, he clears the loan and the security is returned back to him (the debtor). But if the debtor does not have sufficient money to pay back the loan in full or part, then it becomes incumbent upon the debtor to sell the security (mortgage) with the permission of the creditor and first of all clear the loan amount and then keep the rest of the amount realised by the sale of the mortgage.

From this it becomes clear that in case of the inability of the debtor to repay the loan, it is not allowed for the creditor to seize the security (mortgage) and become its owner. Similarly he is not allowed to sell the security (mortgage) by himself except by order of a judicial court which will force the debtor to sell the security in order to repay the loan. This is because the security remains the property of the debtor as stated by the Prophet (saw):

«لا يُغلَق الرهن من صاحبه الذي رهنه»
"The mortgage (security) is not to be denied to its owner who gives it to the creditor as guarantee."

It is therefore the debtor who sells the security and repays the loan, and if he refuses, the ruler enforces the law and makes him sell the security to first repay the loan and then retain the rest of the amount realised by its sale for himself i.e. the debtor.

Shawwal 5th, 1428 A.H
October 16th, 2007 C.E

Arabic Source: Website of Sheikh Ata Abu Rashta

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