Short Selling

Short selling Short selling is a practice of selling a borrowed security that the seller does not necessarily own. Short sellers are generally betting that the price of security will go down, and assume that they will be able to lock-in a certain profit by buying the security at a lower price than the price at which they originally sold short. Example of short selling Short seller borrows the security for a given fee and sells it short on the market for Rs 40000.

If tomorrow the price of security drops to Rs 38000, short seller could buy it back in order to return the security and lock a profit of 2000 (the price difference between 40000 and 38000), less the borrowing fee. Islamic Point of View Short selling is prohibited (Haram) from the Shariah perspective. Shariah scholars found several reasons behind which, short selling is considered haram, and the reasons are as follows:- 1- selling something you doesn’t own:-In Islamic transactions; to sell something you must first have the ownership of what is being sold or the subject of the sale.

Therefore in order to sell a security, the security must be owned by the seller and not borrowed – which is the case in short selling. 2- Riba:-Short selling is associated with the conventional borrowing and lending system of securities which includes a series of interest-based charges for services, and interested payments on borrowed securities. And as we all know, charging interest on services and borrowed securities is considered as Riba. 3- Speculation: – Since short sellers are watching out for fluctuations in the markets, to sell the share at a higher price and buy it back at a lower price and pocket the difference.

Speculation has been perceived negatively due to its resemblance with gambling. 4- Gharar/ Ghobun :- there is uncertainty in the contract and the buyer is also deceived. 5- unjust deeds Hamish Jiddiya Token money, down payment by a party intending to purchase certain goods who wishes to confirm the intention to do so by paying an amount to the seller as token money or down payment to secure the goods. Hamish Jiddiya is a collateral given for a promise to purchase.

If the buyer is not proceeding to purchase, the seller can demand compensation for the actual damage, if the collateral is higher, the buyer receives an amount back, if the actual damage is higher, the the seller can demand additional compensation above the collateral. Arba’un The term Arba’un means an amount of money that the customer as purchase orderer pays to the Bank after concluding the Murabahah sale, with the provision that if the sale is completed during a prescribed period, the amount will be counted as part of the price.

If the customer fails to execute the Murabahah sale, then the Bank may retain the whole amount. Waqf A Wakf is an unconditional and permanent dedication of property with implied detention in the ownership of God in such a manner, that the property of the owner may be extinguished and its profits may revert to or be applied for the benefit of mankind except for purposes prohibited by Islam. Examples of Waqf Land & Buildings: one or more persons provide Cash as waqf to purchase land and buildings, e. g. a small shopping complex.

Once the complex is purchased, the property may be classified as a waqf property and waqf rules apply. The property may not be sold (except to replace), be gifted, or inherited. The property remains intact and may not be spent. The rental income that is produced by the complex may be used for any shari’ah compliant purpose. Valid contract The remedy of specific performance presupposes the existence of a valid contract between the parties to the controversy. The terms of the contract must be definite and certain.

This is significant because equity cannot be expected to enforce either an invalid contract or one that is so vague in its terms that equity cannot determine exactly what it must order each party to perform. It would be unjust for a court to compel the performance of a contract according to ambiguous terms interpreted by the court, since the court might erroneously order what the parties never intended or contemplated. Example A homeowner (who is over the age of 18 and of sound mind) signed a contract with the appliance store to buy a refrigerator.

The homeowner pays for the refrigerator and the appliance store presents the refrigerator for the homeowner to take home. Void contract A void contract is not a contract and has no effect in a court of law and cannot be enforced in a court of law. Most commonly, a void contract will be missing one or all of the essential elements needed for a valid contract. Neither party needs to take action to terminate it, since it was never a contract to begin with. Example A contract that was between an illegal drug dealer and an illegal drug supplier to purchase a specified amount of drugs for a specified amount.

Either one of the parties could void the contract since there is no lawful objective and hence missing one of the elements of a valid contract. Voidable Contracts A voidable contract is a contract, which may appear to be valid, and has all of the necessary elements to be enforceable, but has some type of flaw, which could cause one or both of the parties to void the contract. The contract is legally binding, but could become void. If there is an injured party involved, the injured party or the defrauded must take action, otherwise the contract is considered valid. Example

A contract entered into with a minor could be voidable. Bai Tawliyah Bai Tawliyah Is a sale and buy-back agreement, is a type of Islamic finance that is a banking activity that is congruent with Shariah, which are the principles of Islamic law. Bai Tawliyah is a part of Islamic finance, such as a Muslim mortgage, where there is transaction of buying and selling between the customer and the financial institution. The financial institution, or the financier, will purchase an asset from a customer and the price that they pay for the asset will be disbursed by the terms that the financial institution lays out.

Because of this the asset that is purchased is one that the payments are deferred and the price paid will be done so in installments. The second sale in this type of Islamic finance is done so in order to make the customer obliged to the financial institution. Commutative contracts Commutative contracts are those in which what is done, given, or promised by one party is considered same as the other or in consideration of what is done, given or promised by the other. A contract of sale is an example of a commutative contract.

Put in a simple form, commutative contracts are contracts where the contracting parties give and receive something similar or an equivalent. An Example is a sale at less than two thirds of the value. Non-Commutative contract A non-compensatory contract in which a property is donated by one party to another against no consideration. The donor transfers ownership of the property to the done free of any commitment or obligation. Refrences http://www. ukessays. com/essays/economics/short-selling. php http://jazaa. rg/knowledge-center/islamic-finance-terminology/h/hamish-jiddiyah/ http://www. almustafatrust. org/content/Donate/Islamic/types/waqf. htm http://legal-dictionary. thefreedictionary. com/Valid+Contract http://www. trainagents. com/DesktopModules/EngageCampus/CourseContent. aspx? ModuleType=StudentMyCourses;CrsPageType=Topic;CourseRecordID=107;LessonRecordID=1372;TopicRecordID=24861;Demo=True http://definitions. uslegal. com/c/commutative-contracts/ http://majdbakir. com/islamic-finance/n/noncommutative-contract. html