Unlocking the term hilah in Islamic banking

THE term ‘hilah’ refers to a legal trick in banking transactions meant to circumvent riba-based loan. The plural of ‘hilah’ is ‘hiyal’. Overtly, I define ‘hilah’ as an action which changes an illegitimate act to a legitimate one using one’s wisdom or intellect.

Hilah was founded since 1983 in the Malaysian Islamic banking system. Bay bithaman ajil (BBA) was the first product to practise hilah. Hilah is practised out of three factors but are not confined to:

(1) Darurah factor - Without it, an Islamic mortgage is similar to its conventional peer where borrowing-lending matters. The legal trick is a hidden way whereby ones reaches a good objective that is not reachable except by applying a certain type of expertise. Thus, a legal trick is permitted.

(2) Maqasid factor - Any act that protects one’s life, religion, intellect, property and lineage are accepted when it benefits the ummah at large. Legal tricks found in BBA meet these assets.

(3) Mutual help - The legal trick practice promotes brotherhood among individuals in society. The practise of legal trick allows Islamic banks to help those in need of financial assistance to obtain houses while they are still young. I refer this Quranic verse to support my assertion that is, “Help ye one another in righteousness and piety, but help ye not one another in sin and rancour” - Surah alMaidah (5:2).

This week, I intend to draw your attention pertinent to the term hilah in the context of Islamic banking. Three questions are in need of answers. Question #1 - Do Prophets in Islam practise hilah? Question #2 - What are the Islamic banking products which extend hilah? Question #3 - What are the issues of hilah in the context of Islamic banking products?

The practise of hilah by the Prophet Muhammad (S.A.W) and the Prophet Abraham (AS) are expounded. Both prophets are ulul azmi prophets. They are called ulul azmi out of their strong will and perseverance. For instance, the Prophet Abraham (AS) was tested by his father who made idols, which were the opposite of his faith. Both his father and his tribe tussled with him.

In the case of the Prophet Muhammad (S.A.W), an interesting situation relates to a legal trick when a man who was being followed by his tribe passed by the Prophet for help and safe escape. The Prophet told the man to keep going on his way and the Prophet “changed his seat and sat at a different place”. When the tribe approached and asked about the man, the Prophet said, “I have not seen anyone passing by this point since the time I am sitting here”. Hearing this, the tribe turned away and altered the course of their search.

The “wisdom” shown by the Prophet is not to resort to a lie but it is ma’arid. Ma’arid occurs if I say like this, “I intend to talk about ABC while the other persons think that I mean CBA.”

In terms of the Prophet Abraham (AS), there are three circumstances in which the Prophet used words similar to a lie. In the first situation, the Prophet was invited by his people to accompany them for the yearly celebrations but the Prophet said “I am indeed sick!” The Prophet, however, was not sick. He just meant the sickness of spirit due to the evil doings of his people. What he meant was, “I am indeed sick at heart of such a rude society.”

In the second situation, it occurred after the people returned from celebration and they discovered that their idols have been destroyed. The people suspected that the Prophet did it and they approached him to ask whether he did this to their idols. The Prophet said, “Surely some doer has done it, the chief of them is this, thus ask them if they can speak”. There is a wisdom behind this Prophet’s saying as he conveys a message to his people to think about the inability of idols to speak to defend themselves.

In the third case, the Prophet admitted before the cruel king that his wife, Sarah, was his sister (instead of his wife) to save himself from being killed by the king. This case implies that “protecting one’s life” as promoted in the maqasid al-Shariah is essential to allow legal tricks.

Inthesecases,bothProphetshave used hilah in the form of ma’arid that is likely to be confronted by some sort of affliction for better well-being in return. The “genuine need” must prevail to allow legal tricks.

Pertaining to the second question, three products are expounded out of their importance to the industry. First, a legal trick has been used in BBA home financing in the forms of “Property Purchase Agreement” and “Property Sale Agreement”, which are explicitly known as a civil procedure that allows the second sale to take place.

Second, a legal trick is also found when an Islamic bank provides ar-rahnu facility to customers. Typically, a traditional pawnshop charges its customers an interest rate of 2 per cent per month on the borrowed amount when extending services to the latter. In the case of ar-rahnu, an Islamic bank that offers its customers a qard loan requires the latter to put a valuable item as mortgage. In turn, this kept item is subject to “upah” which is a legal trick.

Third, a legal trick is also found in tawarruq home financing. In the transaction, a customer identifies a house to be owned and pays a down payment of 10 per cent of the house’s price. He then approaches a bank for financing. The bank later buys a commodity from broker X at cost, and the bank subsequently sells it to the customer at premium. The customer will repay the amount obtained via monthly instalment throughout the financing’s period. The customer appoints the bank as an agent to sell the commodity to a second third party, say broker Z. The proceeds will be used to pay the house developer. In this case, what is the legal trick? I believe that you are clever enough to recognise it.

With respect to the third question, three new issues are being raised. The first issue is about the real trade issue. Does hilah make an Islamic banking product fit to be called as a real trade? The propagation of the idea whether BBA and tawarruq home financing are actually based on trade however, in reality, is not the case as far as legal tricks are found.

The second issue is on “What are the proper parameters to allow hilah to be practised”, which warrants qualitative and quantitative studies to prove the “actual indexes” for the well-being of Islamic banking industry.

The third issue is on the public fallacy of discrepancies between permissible hilah and impermissible hilah. Is a hilah found in the Islamic banking system darurah? Are individuals harmed by the current practise of hilah? All these permit empirical investigations for enhancement.

All told, hilah is a legal device that allows Islamic banks to circumvent the “implications” of riba, gharar, maysir and any other elements that mar a bank’s Shariah compliance. Yet, not all hilah is considered to be in contradiction with Shariah.

The current hilah used in Islamic banking products has been fully examined by Shariah scholars as permissible as it meets the maqasid al-Shariah where the benefits to the ummah are greater than the individual benefits. It is thus vital for all parties involved to resolve any drawbacks associated with it for an enhanced practice of Islamic banking products in the future, at least.

*The author is an Associate Professor/Dean at the Labuan Faculty of International Finance, Universiti Malaysia Sabah, Labuan International Campus. He has a PhD from the International Islamic University Malaysia (IIUM) in Islamic Banking and Finance (PG310163). He can be contacted at hanudin@ums.edu.my