Takaturn in Light of Shariah

Islam allows loan as a form of social service among the rich to help the poor and those who are in need of financial assistance. However, Islam does not recognize any loan with interest for the benefit of the debtor. It only recognizes a gratuitous loan. According to Abu Hurairah, the Messenger of Allah said, “If anyone relieves a Muslim believer from one of the hardships of this worldly life, Allah will relieve him of one of the hardships of the Day of Resurrection. If anyone makes it easy for the one who is indebted to him (while finding it difficult to repay), Allah will make it easy for him in this worldly life and in the Hereafter, and if anyone conceals the faults of a Muslim, Allah will conceal his faults in this world and in the Hereafter. Allah helps His slave as long as he helps his brother.” [Muslim].

The above hadith indirectly encourage the Muslims to give Qard al-Hasan which increases their credits in manifold and brings forgiveness.

The majority opinion among contemporary scholars is permissibility of this practice including the majority of the Saudi Council of Major Scholars. They argued that the default ruling for financial transactions is permissibility. Therefore, prohibition requires proof, and there was no valid proof for prohibition in this case. On the contrary, this is classified under mutual assistance, good charity, and assistance of fellow Muslims. The Egyptian 'Dar Al-Ifta' went further by arguing that such mutually useful practices are not only permissible, but commendable because mutual cooperation is one of the best religious works.

In practice, the Qard al-Hassan is used for short-term bridging financing and social welfare. Qard al-Hasan enhances brotherhood among the Muslims. Islam emphasizes brotherhood among Muslims and the main principle of brotherhood is to care and share with each other. Some objectives of Qard al Hasan can be listed as follows:

• Perform a good deed that is encouraged and appreciated by the Almighty Allah and His messenger.

• Establish better relationships among all people in the society.

• Strengthen the national economy.

• To establish a caring society.

• Attract non-Muslims by showing them the beauty of Islam.

There are some general principles that are of particular importance in order for Islamic Financial Institutions to be compliant with shariah and these include:

• There must be some risk, whether funds are used in a commercial or productive venture.

• A financial transaction needs to have a “material finality”, that is, it should be directly or indirectly linked to a real, tangible economic activity as opposed to financial pure speculation.

• The product or service that is bought or sold must be clear to both parties.

• There should be no funding of haram or sinful activities such as the production of alcoholic beverages or gambling, and funds should preferably finance socially productive activity. In broad terms, Islam forbids all forms of economic activity, which are morally or socially harmful.

• Financial risk must lie solely with the lenders of the capital and not with the manager or agents who work with the capital. Furthermore, a financial transaction should not lead to the exploitation of any party in the transaction. Interest is forbidden in that it is a predetermined, fixed sum owed to the lender irrespective of the outcome of the business venture in which the fund is used. This does not imply in any way that capital is free of charge or that it should be made available without any cost or that there should be absolutely no return on capital. Rather, a return on capital is allowed, provided that capital participates in the productive process and is exposed to business risk.

• It is not permitted to sell what one does not own – therefore “short-selling” (selling something that one does not own in the hope that it can be bought cheaper at a later date) is impermissible.

Islamic Financial Institutions are allowed to charge a service fee to cover the administrative and transaction costs of these loans so long as such costs are not related to the maturity or amount of the loan. And may make ‘Qardh al hasan’ either as a charitable activity or as a favor to customers, lawfully charging for the actual costs of its services in providing such loans, but not for the opportunity cost of the money.

However, an important condition attached to such charges to prevent them becoming equivalent to interest is that the commission or charge cannot be made proportional to the amount or to the term of the loan.

Mortgage

Mortgage also called “Ar rahnin” in Arabic has occupied a large space in the business of lending engaged by financial institutions considering its enormous role.

Mortgage means a security deposited by the borrower to secure a loan. Such securities are deposited as a pledge or a guarantee that the loan will be repaid at maturity, if not paid the security may be sold to reimburse the lender. These collaterals may take any form like papers of security, property documents, bonds, cheques, shares, and vehicle papers etc. Other forms of collateral are those where the objects themselves, instead of their papers, are put as collateral.

Mortgage is confirmed by the Book of Allah and the Sunnah of the Prophet and by the consensus of the Muslim nation.

فَقَالَ تَعَالَى: "وَإِن كُنتُمْ عَلَى سَفَرٍ وَلَمْ تَجِدُواْ كَاتِبًا فَرِهَانٌ مَّقْبُوضَةٌ فَإِنْ أَمِنَ بَعْضُكُم بَعْضًا فَلْيُؤَدِّ الَّذِي اؤْتُمِنَ أَمَانَتَهُ وَلْيَتَّقِ اللّهَ رَبَّهُ وَلاَ تَكْتُمُواْ الشَّهَادَةَ وَمَن يَكْتُمْهَا فَإِنَّهُ آثِمٌ قَلْبُهُ وَاللّهُ بِمَا تَعْمَلُونَ عَلِيمٌ"

Allah Says (what means): "And if you are on journey and cannot find a scribe, then a security deposit [should be] taken. And if one of you entrusts another, then let him who is entrusted discharge his trust [faithfully] and let him fear Allah, his Lord." [Quran 2:283]

Moreover, ‘Aa’ishah narrated: “The Prophet died while his shield was mortgaged with a Jew for 30 Saa’ (a Saa’ equals approximately one and half kilogram) of wheat.” [Al-Bukhari and Muslim]

Also, the scholars agreed in a consensus that mortgage is permissible if the lender keeps the collateral as a security against the money that he lent to the person and takes the collateral without benefiting from it, but rather only holds onto it, and he returns it to the owner whenever the latter pays back the loan.

If the lender benefits from the collateral, it is considered impermissible due to the presence of 'Riba' in the loan. However, with the consent of the members, using the collateral in financial activities that benefit the owner rather than the lender is allowed.

Yield Generation

In our case, Takadao does not act as a lender, so the issue of 'benefiting the lender' does not apply. In the new version of Takaturn, members will have the opportunity to stake their collateral in liquidity pools with our partners who offer halal staking solutions for the Muslim community.

The staking process of our partners can be described as follow: Crypto exchange act like as money changers who have different types of currencies in crypto in case someone wants to exchange them. The investors who provide these cryptocurrencies earn a bit of the fees the exchange gets for each exchange. There is no lending transaction, rather an exchange from one digital asset to another. Some scholars argue that yield generation is inherently halal.

In our case, Takadao acts as an investor and deposit some ETH into our partner liquidity pool. Whenever someone wants to buy ETH, the exchange swaps it with the other crypto currency and receives a fee for each swap. Our partners, along with Takadao acting as a 'wakil,' will receive a small portion of the earnings made by each member in the form of 'hujrah' or 'wakala' fee.

However, it's important to understand that participating in these financial solutions carries risks independent of our company's control, which may arise due to rare conditions like extreme market reversals. In such cases, the default of a user in a turn coupled with a significant downtrend in cryptocurrencies can slightly affect the amount received by a member due to fluctuations in ETH. Therefore, members who willingly join a turn or stake their collateral must agree beforehand to forfeit (tanazul) part of their rights for the benefit of the community.

Almighty Allah knows best. Praise be to Allah, the Lord of the Worlds and may His Blessings and Peace be upon our Prophet Muhammad and upon all his Family and Companions.