Secondly, there is a difference of opinion among Muslim jurists about the legality of selling something before it is in the possession of the buyer as it is in the above case. Such a difference of opinion will be much wider if the arrangement is just a promise and not a contract whether it is binding or not as is the case with murabahah lil 'amir bi al-shira'. However, the issue of sale before possession in salam although disputed by the majority, is meanwhile legalized by the Maliki school and very well defended by Ibn Taymiyyah and his disciple Ibn al-Qayyim. Therefore, to resort to a solution, which has a precedent, and with strong legal basis is much preferable to a case with disputed legal ground and without precedent in the work of early scholars. Lastly, the issue of selling an item before it is in the possession of the buyer could be solved through the idea of parallel salam, which is not possible in murabahah.

On the other hand, it should be noted that the expression -arbbun in murabahah has been used in several works on Islamic finance. However, it seems that what the authors mean by 'arbbun here is a penalty or liquidated damages on the one hand, and a pledge or rahan on the other rather than 'arbbun in its strict legal sense. Thus several Islamic institutions are including in their contracts on murabahah lil 'amir bi al-shira' a liquidated damages clause but under the name of 'arbbun. For instance, in the resolution adopted by the second conference on Islamic banks held in Kuwait, it is stated that 'arbbun in murabahah is legal with the condition that the Islamic bank should not take from the amount of 'arbbun given to the client more than the real damage. Meanwhile, a practical approach to the above is reflected in Dubai Islamic bank's sample of contract on murabahah and the general steps for murabahah sale as adopted by the bank. Furthermore, the following question addressed to the shariah board of Faisal Islamic Bank of Bahrain may shed more light on the' issue. The bank accepts advance payments 'arbbun from its clients when it receives their order to purchase. The advance is then deposited in an account maintained specifically for such payments until such a time as the goods (that were ordered by the bank on behalf of its client) arrive and the client takes possession. This amount is kept as a guarantee against payment of the installment agreed to in the murabahah contract. There are certain clients, however, who seek the return of an appropriate amount of the advance to their current account with every installment payment they make. What is your opinion on this matter?

The answer of the shari'ah board was that 'arbbun may be defined as what is paid as a first part of the whole price when a contract is concluded, and the buyer has the option at that time to either retain the goods or nullify the contract. In the event the contract is nullified, the 'arbbun advance will belong to the seller. If the contract is not concluded, however, and never passes beyond doing a pledge (on the client's part to buy from the bank when the goods arrive), then, whatever the client (who desires to purchase) easy in advance will not be considered 'arbbun. Under those circumstances, the amount will become a trust in the hands of the seller until the time the contract of murobahah is actually concluded, at which time it will become a part of the overall price. In case the two parties consider the amount paid, once the contract has been concluded, as a pledge or rahan that may be held against the Installments owed by the buyer, then, this will be lawful as long as the parties keep in mind the principles of shari'ah that a cash pledge must not be used to the advantage of the one holding it, the pledged. Therefore, if the amount is invested, the profits earned on the investment will accrue to the benefit of the one giving the pledged (not the one holding it), and such an act should not take place unless the person giving the pledge or the bank's client gives his or her permission to the pledge to make such an investment.

In another similar fatawa, the shariah board confirmed the first fatwa that in the case of such an advance payment before the conclusion of the contract, or in the case of a pledge to purchase, such as that in murabahah lil 'amir bi al-shira', the advance given by the purchaser, is not called in 'arbbun, nor does' it have the same legal properties. Rather it is an amount given by the "purchaser" so that if he fails to live up to his end of the bargain, the advance amount may serve to recompense the bank for its expenses. If there is a remainder, after the bank is recompensed, it will be returned to the client. If the advance is insufficient as recompense, the "purchaser" should pay the rest. This is the opinion of those who hold the view that a pledge or a promise to purchase in murabahah lil 'amir bi ai-shira' is binding.

It might be noted here that despite the fact that the above clause is not an 'arbbun as it is legally defined but rather looks like a clause on, liquidated damages or penalty, the Islamic financial institution using it could manage its risk exposure to some extent. Although the above, clause is apparently similar to a clause of liquidated damages, in practice some Islamic banks try to avoid the transfer of the dispute over the assessment of the real damage inflicted on it following the customer's failure to fulfill his binding promise to purchase to the court as it is the norm with cases involving penalties and damages. They try to avoid this by making a clause in the contract from the beginning that in such cases, namely the assessment of the real damage inflicted, the dispute should be referred to the shari'ah board of the Islamic bank concerned, for a final decision, which shall not be contested in court. Indeed, such a clause will render the issue somehow different from a pure penalty and save the Islamic bank the cost and time of court procedures. On the other hand it should be noted that the Islamic Fiqh Academy in its final resolution No. 76/3/d8 disallows 'arbbun in murabahah lit 'amir bi ai-shira'.

'Arbbun in Salam

Salam is defined as the sale or purchase of a deferred commodity for present price. Thus, in a salam contract, generally the price is paid in advance while the commodity is deferred to an agreed date in the future, such as, buying two tons of wheat which will be delivered one year later while the price is paid on the spot. However, in such a case if the buyer wants to cancel the contract before the maturity of the contract and does not want to take possession of the commodity for which he has already paid the price, he could ask for the cancellation of the contract through iqalah. If the seller accepts his request, the contract will be cancelled. Even if he asks for compensation for this cancellation there is no legal problem on that. However, the question which will arise it is it legal for the parties to insert a condition in the contract from the beginning that, in such a situation, the buyer should give the seller a specific amount of money as an 'arbbun? It seems that there is no legal problem in such a deal and the buyer should pay the 'arbbun to the seller if the initial agreement stipulates so, and there, is no possibility of riba in this transaction. It is the buyer who has already paid the price and will forfeit part of his money in exchange for the right to cancel the contract. However, if the seller wants to cancel the contract, the possibility of riba arises. This is because he has already received the price, which is for instance, US$ 1000. Then, he will be returning it plus US $100 as 'arbbun or to get the right to cancel the contract after three months from the conclusion of the contract, the possibility of riba is clear and it is similar to the case of borrowing US$ 1000 and returning it US$ 1100 after three months.

It has been reported from some prominent scholars from the Tabi'in such as Said Ibn al-Musayyib, Suraih, Ibn Sirin, Ibrahim al- Nakhai, Said Ibn Jubair, Tawus and Ibn Umar from the companions that it is legal for the buyer who would like to return the commodity and cancel the contract after taking possession of it, and the seller asks for some money in exchange for such a cancellation to do so. Therefore, the above case could be accommodated by an analogy to this case based on the opinion of the above scholars. This form of iqalah has some similarity with bay'al-'arbbun. In fact, Imam Ahmad used the case as evidence for the legality of 'arbbun. In both cases, there is a cancellation of the contract in exchange for a specific amount of money. On the other hand, some other scholars such as Ibn Abbas, al Sh'abi Ata' and Hammad maintained that it is illegal. They described this form of iqalah as a kind of a new contract and by consequence it is illegal on the grounds that it involves. The combination of two contracts (the contract of selling the commodity and that of canceling it at a discounted price) in a single transaction.

However, it seems that this is not a form of combination of two contracts. It is just a kind of stipulation in the contract, which does, not contradict its objectives and, Muslims are bound by their stipulation unless it is a stipulation which prohibits what is allowed, and vice versa. Therefore, it could be said that 'arbbun in salam is permissible if it is stipulated by the buyer. However, if it is stipulated by the seller it will be illegal.

'Arbun in 'Istisna'

Similar to the case of salam above where the purchaser could ask for 'arbbun in a salam without contravening the principles of shariah, the buyer can also opt for 'arbbun in 'istisna'. Yet, some .have voiced reservations that such a deal would be a kind of talfiq because 'istisna' is only recognized by the Hanafi's school as a non-binding contract while 'arbbun is only legalised by the Hanbali's school. Thus, to add an option to the minority Hanafi's option for which 'istisna' is not binding seems a radical step.

However, such an argument will be acceptable only if we consider talfiq as a genuine source in Islamic jurisprudence on one hand and the strict adherence to the prevalent schools of Islamic law as a must on the other. However, in reality talfiq is not at all a source of Islamic law. It is a kind of taqlid and since taqlid is not a part of shariah, neither is talfiq. Yet, some modern scholars have argued in its favor but this will not change the reality. Secondly, the imitation of the prevailing school is just a kind of weakness and lack of ijtihad although even some early scholars have mistakenly argued for such a thing. Therefore, to judge the legality of 'arbbun in'istisna', the only requirement which needs to be considered is whether or not such a transaction is in line with the general principle of freedom of contracts and conditions. Thirdly, the Islamic Fiqh Academy, in its resolution no. 66/3/7, has already endorsed the opinion that 'istisna' should be binding on both parties and could include a clause of liquidated damages. Similarly, it has endorsed that 'arbbun is legal in all kinds of sales except those which require immediate delivery and 'istisna' is not such a contract. Therefore, it could be concluded that 'arbbun in 'istisna' is legal.

To give an example of the above, suppose Kuwait Airways wants to purchase ten Boeing 777 aircraft for delivery in two years. Boeing requires progress payments roughly parallel with the growing value of the partially completed planes and an 'istisna' contract is drawn up. However, Kuwait Airways is uncertain about the level of future demand and wants the right to cancel the order at any time within the first year of the agreement. The purchaser (with or without a parallel 'istisna' arrangement providing financing) contracts an 'arbbun with a non-refundable deposit that will properly compensate Boeing (and any financing intermediary) for losses and inconvenience if the cancellation option is exercised.

'Arbbun as the Islamic Alternative to Options

Our purpose here is not to find a way to accommodate conventional options as they are used nowadays in the international market but to formulate a type of contract that fulfils the objectives of options as a means of risk management and the possibility of transferring it from one investor to another. 'Arbbun, as discussed above, has some similarities with options. Thus, the basic rationale of options resembles that of 'arbbun especially in the sense that both can be used as risk reduction strategies, or a method by which traders might wish to give themselves flexibility before committing themselves to large contracts.

'Arbbun as an Alternative to call options.

"An option contract conveys the right to buy or sell an underlying commodity at a specified price within a specified period of time. The right to buy is referred to as a call option; the right to sell is a put option".

Addressing the relationship between 'arbbun and a call option, Kamali maintains that the basic rationale of an option resembles that of 'arbbun especially in the sense that both can be used as risk reduction strategies. Suppose that a bakery owner wishes to expand his business and thinks that the current market price of $2.50 per bushel of wheat is reasonable. He may want to lock in the current market price for six or nine months ahead, and yet because of the element of uncertainty in the success of his expansion plan, he may choose to tread cautiously and decide to limit his possible loss to a small amount but still be able to reserve the price level for the next several months. This he can do by means of buying a call option on say ten wheat contracts of 5000 bushels each, but instead of committing himself to the full price of such a large contract he may decide to pay an option of$100 per contract. This means he would have limited his possible loss to only $1000. The basic notion of 'arbbun can also operate along similar lines; the buyer risks a small amount of money to give himself flexibility and also to limit his possible losses to a much smaller amount.

EI-Garie upheld that achieving a balance between the two formulas is not difficult. If we assume the presence of a central authority (or several central authorities), such as the stock exchange authorities or the clearing house that concludes these contracts including one hundred shares, for instance, for a fixed price on the basis of delivering them within a specific period (90 days for instance). Instead of the investor's payment of a price for the option, he may pay a certain percentage of that amount on the basis of advance on the sale. If he feels that it is in his interest to go ahead with the sale during the period of time specified, he may sign the contract. If he feels that this course of action is not in his interest, he will give up his claim to the advance payment. Such a percentage may be raised or reduced depending on the factors of supply and demand. What is paid against the transfer of risk in not the least affected by the fact that such payment is a lump sum or a percentage of a sum known well in advance? Therefore, the formula suggested above is quite appropriate to serve as a model for the call option and does not involve any contradiction with the rules and requirements of shari'ah.

On the other hand, after quoting parts of Ibn Qudamah's analysis on 'arbbun, Vogel and Hayes said, "The discussion shows how closely the 'arbbun contract can be analogized to the pure calf option. It also shows how, given the right market or institutional framework, an 'arbbun contract could be devised with results and pricing identical or nearly identical to the call option".

From the above it could be concluded that 'arbbun could be the, Islamic alternative to a call option without contravening shari'ah principles. However, the question is what would be the Islamic alternative to a put option?

'Arbbun as an Alternative to put option

The possible alternative to a put option in connection with 'arbbun is to make it a condition in the contract that if the seller fails to fulfill, his contractual obligations, he shall pay the buyer a certain amount in the form of reverse 'arbbun. Although, the issue has not been directly addressed by the classical scholars, the case of 'arbbun in salam discussed above is in many ways similar to this one.

To give an example of such a transaction and how it is needed, it could be said that a retailer may enter with another into a salam contract to purchase one million barrels of oil at a price of US$25 a barrel, which is to be delivered six months later. The buyer here is hoping that the price of oil in the coming six months will reach US$30 a barrel. Then, he will take delivery from his counterpart and sell his stock on a retail basis to his client on the spot market to make some profit. He pays the price at the time of contract as it is stipulated by the majority or some time later according to the Malikis.

However, four months after the signing of the contract, the buyer realizes that his prediction may not be realized due to some external factors, such as the weather is not cold in the year at issue and therefore, the demand for oil is not as high as expected and as a result the price of oil falls sharply. Or some oil producing countries, due to domestic economic problems increase their quota of production which affects negatively the price of oil in the international market which is now US$23 a barrel and there is even a possibility that it may go down to US$20. In such Ii case, the buyer may be willing to rescind the contract and collect his money. After negotiations with the seller, the contract is cancelled and in exchange for that the buyer has relinquished US$ 2 per barrel to the seller in exchange for this cancellation. In such a case, the buyer has minimized his loss. Thus, rather than losing US$5 per barrel, if he takes delivery from the seller on the agreed date now he is just losing US$2 per barrel.

Such a transaction is permissible as kind of iqalah according to some and it could solve partially the problem risk as it is in the above case. However, it is not sufficient in today's volatile and complex economic activities. It is quite possible that the seller may not be willing to cancel the contract and consequently the buyer may suffer a huge loss. Thus, to manage such a risk, the buyer may be willing from the beginning to include a condition in the contract to the effect that if the purchaser fails to take delivery, for one reason or another during an agreed upon period, he will have the right to rescind the contract on condition that he forfeits to the seller US$2 per barrel.

Some modern Muslim jurists have addressed this issue. Al-Sanhuri, for instance, is of the opinion that if the seller, who has already received the 'arbbun. fails to fulfil his obligation, he should return the first 'arbbun twice as compensation to the buyer. This opinion has also been endorsed by Rafiq al-Misri who did not see any difference between the original 'arbbun and the reverse 'arbbun. In both cases, the payment is in exchange for the right to cancel the contract or an option with a price. Al-Misri added that, by giving this right to both parties, the transaction will be much fairer than by giving it to just one part.

However, some other jurists like al-Darir have rejected the reverse 'arbbun without further analysis on the ground that such a clause is only discussed under secular legislations and not under Islamic legal works. I t should be noted that almost all Arab legal systems have opted for the legality of reverse 'arbbun including the Jordanian civil code which is recognized as being based on the principles of Islamic law. Thus, al-Sanhuri as a member of the committee, which drafted that law, tried to prove that reverse 'arbbun is in accordance with Islamic principles. However, according to al-Darir, al-Sanhuri did not take the right path in this case.

However, despite al-Darir's conclusion it seems that al-Sanhuri's, argument is legally well established. Al-Sanhuri maintained that if Imam Ahmad based his argument on the adoption of arb bun by drawing an analogy between 'arbbun and the legality of the case where a person who has bought something but after some time he wants to rescind the contract, he could do so by relinquishing part of the price to the seller. Therefore, based on Imam Ahmad's analogy, we can say that as al-Sanhuri argued, it is possible to give to the seller also the right to rescind the contract and pay the amount of 'arbbun twice. Moreover, if it is permissible to give the right to rescind the contract in exchange for something to the buyer or the seller, it is possible to grant it to both of them in a contract at the same time.

Considering this difference of opinion and the absence of any explicit text regarding the issue, we will try to discuss it in line with the general theory of freedom of contract. Thus, it is clear that such a stipulation does not contradict the objective of the contract or any explicit text. Moreover, it is in the benefit of the contract and agreed upon by both parties with their full consent. Therefore, it is a legal condition or clause as Imam al-Shafie said, "In principle all contracts are permissible if they are concluded with the full consent of the parties unless there is an explicit text from the prophet to prohibit such a sale, or such a prohibition could be understood from the explicit text". Similar statements have been echoed from different scholars of the different schools of Islamic law.51 Thus, it could be concluded that reverse 'arbbun is legally permissible and could serve as an alternative to a put option.

On the other hand, El-Garie tried to come up with what could be considered as a similar formula to a put option by suggesting that in this the transaction may be reached on the basis of the assumption the contract involves the rendering of a service by a certain party who is the holder of shares who wishes to sell his shares. The fee paid for this service is fixed by the investor in agreement with that party with the period, effort and the service rendered being fixed. It would not serve the purpose, if that party looked for a buyer as soon as possible. What is required is that a buyer should be found within a certain period (for example 90 days) during which an investor will have the option. The party referred to is some central authority such as the stock exchange administration or clearing house at the exchange or the market maker but not the stockbrokers or investors. The function of this party is actually the rendering of this service. Such a party is not a stockbroker who is an agent. The entity should act in a manner similar to the formula of the European rather than the American options.

EI-Garie's proposition seems to be based on the contracts of ijarah and ja'ala. However, the practical success of the formula as an alternative to a put option needs to be ascertained especially when El-Garie himself acknowledges that when the buy orders fall short of the sell orders, some problems may arise.

Another proposition about a put option is the suggestion by Vogel and Hayes under the concept of the third party guarantee in which a customer can use a bank as a guarantor. The bank would be compensated by an administrative fee paid by the purchaser of the item. To be Islamically acceptable, this fee cannot be stated as a percentage of the value of the contract. In case of default, the bank can seize and sell the item to help satisfy the purchaser's remaining obligations to the seller. From the purchaser's viewpoint, the third party guarantee can be thought of as a put option obtained from the bank in exchange for a premium. If at some future time the purchase concludes that the item is not as valuable as the remaining installments, he could theoretically stop paying the installments to the seller and surrender the item to the bank. This is, therefore, a put option with a strike price equal to the remaining installment payments (as a practical matter however, he can write a provision allowing him to recover from the purchaser any loss thereby suffered). Assuming that the bank sold guarantees to many customers, its aggregate risk would be reduced through diversification, and it could use collected premiums as a reserve fund.

However, if we consider the fact that the premium in conventional options varies according to the force of supply and demand and the price of the underlying asset or the fact that the down payment in 'arbbun also varies according to the purchased item, then the premium in the third party should vary in similar manner. And if it varies in the same manner, it will no longer be an administrative fee but a price for -the guarantee, which in principles to be Islamically acceptable, should be without price. Secondly if the purchaser of the item requests the guarantee from the bank, not because he is in need of such a guarantee but just to benefit in the future from the change in the value of the item and the remaining installment, he will not be acting in good faith whereas as a matter of principle in Islamic law all transactions must be concluded and executed in good faith. Despite these marks the practical value of the above propositions may not be discounted totally although the present study prefers reverse 'arbbun as the alternative to a put option

It is worthwhile looking now into the points of difference between option and 'arbbun as postulated by some contemporary Muslim jurists. These objections could be summarized in the following points:

1. An option requires payment for something that is a mere intangible "right", not property (mal) in the usual sense; tangible good or a utility taken from a tangible good, for which alone compensation can be demanded. Then, the option price is "unearned".

2. The right of option is given to the buyer as well the seller while 'arbbun is given only to the buyer. The price of option is separate from the price of the underlying commodity and one could sell it or give it as a gift, which is not the case in 'arbbun.

3. The objective of option trading is not the benefit of the contract, where the buyer receives the commodity and the seller receives the price, but rather they are looking for price differential. Moreover, in the exercise of option, only one party can gain from the contract while the other must lose. Whether a party will gain or lose depends on unknown future market prices.

4. In most actual option contracts, the parties have no intention of taking delivery, but only to liquidate their contracts against the price differentials. In every lawful Islamic sale, at least one of the counter values is presently, 'even if not immediately, paid.

5. The underlying asset in option is not only a commodity as is the case in 'arbbun but it could also be currency or even stock indices, which are a kind of gambling.

6. The price of option is determined through the movement of interest rates, which is not Islamic.

7. If the option is in currency, not even forward sales are allowed since currencies may be exchanged only at spots.

It is clear that the first objection is the most important. It is directed to the essence of the contract by invalidating its- subject matter. However, we will deal with it in a separate study while maintaining for the moment that there is nothing in shari'ah, which prohibits the sale of rights and that the arguments advanced by those prohibiting such a sale are far from convincing.

Concerning the second objection, namely the right to rescind the contract being given to both the seller and the buyer while in 'arbbun 'it is only granted to the buyer, it could be said that even if this right is guaranteed to the seller, there is no riba or gharar involved in such a transaction and it does not contradict any specific shari'ah text.

Therefore, it is a legal transaction based on the general theory of freedom of contracts and stipulations. Similarly, the right to option in khiyar ai-share is originally guaranteed by text only to the seller but later extended by way of ijtihad to the buyer or both of them. Therefore, to extend the right of 'arbbun to the seller as well, is a similar case as long as it does not contradict a specific text and, indeed; such an extension does not contradict any text. But rather it is a condition that is harmonious with the contract and its objectives.

The third objection is that the parties are just looking for price differential and are not willing to fulfill the objectives of the contract, it could be said that the issue of price differential has been declared unlawful by some Muslim scholars who equate it with excessive speculation which will lead to market instability and then injustice, However, not every issue of price differential is speculation or excessive speculation, For instance, commenting on the relationship between 'arbbun and option, Rafiq al-Misri, said "options are illegal for many reasons among others the objective of the parties is to look for price differential. We are not saying options are illegal because paying a premium is illegal but because the objective of the parties is to look for price differential which we see as illegal".

It should be noted that, from this statement it is clear that al-Misri is against option not because of the contractual form of options or because the sale of right is not in line with shari'ah but because the, objective of the participants is to look for price differential. However, the issue of price differential is raised also against other transactions, which are unanimously considered as contractually legal such as the ordinary sale/purchase of shares and commodities unless the buyer has the intention to buy and keep the shares for some time. Therefore, it is not the nature of the contractual form of options but the way in which they are traded, although it sometimes leads to market speculation at the same time sometime it is necessary to solve the problem of liquidity for some genuine traders who want to hedge against possible risk. Moreover, such stand may lead to the evaporation of the idea of an Islamic market. More importantly, the issue of price differential and speculation is not offhand. A limited form of speculation could be regulated So as to avoid any negative impact.

Concerning the objection that the underlying asset in options is not only commodity as is the case in 'arbbun but it could also be currency or even stock indices which are a kind of gambling, we have already indicated that 'arbbun could not be used for currency, stock indices or interest rate options trading. Therefore, any objection about the use of 'arbbun as the Islamic alternative to options should be limited to commodities and snare markets where there is a possibility of options from an Islamic point of view.

Regarding the print that the price of option is determined through the movement of interest rates, it could be said that in an ordinary 'arbbun market, there is no possibility of determining 'the price through interest. Moreover, the alternative to option through 'arbbun is just limited to the primary market. Therefore, the objection may have some legitimacy with regard to the Islamic alternative if it is possible to trade it in the secondary market. Furthermore, the determination of price in the already approved Islamic modes of investment is not determined by interest rates. Therefore, the determination of price in options would not be an exception.

Concerning the objection that option incorporates the idea of a future sale, it could be said that the idea of future sale is accepted by Islamic law in other places such as al-bay'al-mu'ajjal, salam and istisna', therefore, the idea of a future sale in itself could not be a genuine legal ground for objection.

Thus, it is clear that none of these objections against 'arbbun as an alternative to options is well founded and we could conclude that it is possible to use 'arbbun as an alternative to a call option while reverse 'arbbun could be used as an alternative to a put option.'

Conclusion

The above discussion about 'arbbun as a tool of risk management and as alternative to call and put options shows that 'arbbun can play a very important role in helping. Muslim financial institutions to manage their business risk. Nevertheless, 'arbbun is not the only alternative to options as a tool of risk management. Khiyar al-share and khiyar al-naqd could also be designed to manage price risk. Moreover, the use of 'arbbun as an alternative to options is just limited to the primary market and to extend this possibility to the secondary market the legality of selling "pure right" in Islamic law must be established.

By Muhammad At-Bashir Muhammad At-Amine