Question:

If the rahn/pledged collateral is valued at an amount greater than the debt and the debtor defaults, can the creditor keep the collateral even if its fair market value is greater than the debt owed, or must the creditor liquidate the collateral and give any excess above the original debt back to the debtor?

The Fatwa

In the Name of Allah, the Most Gracious, the Most Merciful

The Answer 

The creditor can only liquidate the collateral with prior authorisation. If he does have prior authorisation to liquidate the collateral, then he must return the surplus balance back to the debtor. If there was no prior authorisation to liquidate, then the creditor must seek authorisation from the debtor to initiate the liquidation of the collateral.

In practice, a creditor can have a clause inserted in the collateral agreement that makes the creditor an agent to liquidate the asset upon default. 

The Fiqh of the Answer

Imām Gānim (d. 1030 AH) in Majmaʿ al-Ḍamānāt mentions that the creditor cannot liquidate the collateral except if he has one of the following:

1. Authorisation from the debtor
2. Approval from the court

The reason as to why the creditor cannot sell the item without permission is because he does not have Ḥaqq al-Taṣarruf (right of disposal). Ḥaqq al-Taṣarruf follows Ḥaqq al-Raqabah (proprietary title) by default, which the creditor does not have; he does not own the asset. The creditor and mortgagee (Murtahin) does not have Ḥaqq al-Raqabah, instead he only has Ḥaqq al-Yadd (possession), which has been authorised and ratified by the mortgagor. Ḥaqq al-Yadd (possession) comes when one party grants permission to another to hold and possess something they own. Due to this, the mortgagee must gain permission from someone who has Wilāyah (authority) to liquidate the asset. This can either be the owner of the collateral or a court.

The debtor’s permission to liquidate the collateral can be obtained through one of two methods:

1. Gaining authorisation upon default. However, this may not always be practical and possible.
2. Inserting a conditional agency (Wakālah Muʿallaqah) in the collateral agreement. In this scenario, both parties agree that if the debtor defaults, the creditor can act as an agent to liquidate the collateral and recoup the value. This arrangement is mentioned by Imam al-Marghīnānī (d. 593 AH). Imam al-Zaylaī (d. 743 AH) states that since the debtor is the rightful owner of the asset, they possess the authority to designate and delegate anyone they choose to liquidate the asset. Further, Wakālah is from the types of contracts known as Isqāṭāt; this refers to the idea that in such contracts, one party is forgoing their rights in favour of someone else to do and perform. In Wakālah, the principal is forgoing their rights and empowering the agent to act, hence it is a form of Isqāṭ.

The AAOIFI Standards also state that the mortgagee has the right to stipulate a condition that the mortgagor should appoint him or his representative as an agent who can sell the mortgaged asset and repay the debt out of its value in case of default, without resorting to judiciary. The mortgagor does not have the right to retreat from such agency once agreed upon. After repayment of the mortgagee’s debt the remaining value of the mortgaged asset should be given to the mortgagor by virtue of the mortgage contract. If the sale value of the mortgaged asset happened to be less than the due debt, the difference shall be subject to Shari’ah rulings on normal debt, and the mortgagee should have the right of recourse on the mortgagor for settlement of such difference. The mortgagee does not have the right to stipulate a condition that he should own the asset in case of default.

If a Wakālah to liquidate has been inserted within the contract, then the creditor retains the right to liquidate the collateral upon default. In the scenario mentioned above, where the collateral’s value surpasses the debt, following the sale of the collateral, the creditor is obliged to return the excess, as has been mentioned by Shaykh al-Islam Muftī Taqī Uthmānī quoting the classical jurists.

The rationale behind returning the excess amount has been mentioned by Imam al-Mawṣilī (d. 683 AH). He states that when a debtor pledges a collateral to the creditor, the creditor has received his debt legally (Ḥukman) according to the value of the collateral. This is Ḥukman and not Ḥaqīqatan, as he has not actually liquidated the asset yet and received the funds, however, it is as good as having the outstanding debt in one’s ownership as the debt is secured and within touching distance of being realised. In cases where the collateral’s value exceeds the actual debt, the surplus is held by the creditor as an Amānah (trust) on behalf of the debtor. Therefore, it becomes the moral and legal obligation of the creditor to return this entrusted surplus to the debtor.

Imam al-Signāqī (d.711 AH) also mentions that the creditor’s rightful claim resides solely in the actual debt owed to him, not in the collateral. Hence, if the debtor defaults, the creditor retains his right to the debt owed, while the remaining amount is treated as an Amānah. These principles show how Sharīʿah recognises private property and upholds the rights of the property owner to this extent and degree.

While many collateral contracts typically incorporate the clause of Wakālah, it’s essential to note that if such a condition is not stipulated, and the debtor defaults, the creditor does not have the legal authority to liquidate the collateral. As Shaykh ul-Islam Muftī Taqī Uthmānī explains, in the absence of permission from the debtor to liquidate the collateral, the only remaining recourse is for the creditor to approach the debtor and request that they initiate the liquidation of the collateral. Subsequently, the debtor can then settle their debt with the creditor from the proceeds of the sale.

And Almighty Allah Alone Knows Best

Maulana Inaamul Hasan Chothia
Trainee Mufti

Reviewed and approved by
Mufti Faraz Adam
Darul Iftaa Muadh ibn Jabal
www.darulfiqh.com 

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قَالَ: (وَيَصِيرُ الْمُرْتَهِنُ مُسْتَوْفِيًا مِنْ مَالِيَّتِهِ قَدْرَ دَيْنِهِ حُكْمًا، وَالْفَاضِلُ أَمَانَةٌ، وَإِنْ كَانَ أَقَلَّ سَقَطَ مِنَ الدَّيْنِ بِقَدْرِهِ) لِأَنَّ الْمَضْمُونَ قَدْرُ مَا يَسْتَوْفِيهِ مِنَ الدَّيْنِ، فَعِنْدَ زِيَادَةِ قِيمَتِهِ الزِّيَادَةُ أَمَانَةٌ، لِأَنَّهَا فَاضِلَةٌ عَنِ الدَّيْنِ وَقَدْ قَبَضَهَا بِإِذْنِ الْمَالِكِ، وَعِنْدَ النُّقْصَانِ قَدِ اسْتَوْفَى قِيمَتَهُ فَبَقِيَ الْبَاقِي عَلَيْهِ كَمَا كَانَ. [الإختيار للموصلي]

وَلَوْ كَانَتْ قِيْمَتُهُ أَكْثَرَ مِنْ الدَّيْنِ: أَدَّى قَدْرَ الدَّيْنِ إِلَى الْمُرْتَهِنِ) (٢)، وَهَذَا هُوَ الصَّوَابُ، وَفِيْ عَامَّةِ النُّسَخِ: (أَدَّى قَدْرَ الْقِيْمَةِ إِلَى الْمُرْتَهِنِ)، وَهَذَا سَهْوٌ وَقَعَ مِنْ الْكَاتِبِ وَهَذَا ظَاهِرٌ لَا حَقَّ فِيْهِ لِأَحَدٍ؛ لِأَنَّ حَقَّ الْمُرْتَهِنِ فِيْ قَدْرِ الدَّيْنِ لَا فِيْ قِيْمَةِ الرَّهْنِ  [النهاية للسغناقي]

إن لم يكن أذن الرَّاهنُ للمرتهن بالبيع، طولب الراهن بالوفاء أو ببيع الرهن [توثيق الديون]

AAOIFI, Shari’ah Standards: Shari’ah Standard No.39 Mortgage and Its Contemporary Applications, pg. 969-973

وإذا وكل الراهن المرتهن أو العدل أو غيرهما ببيع الرهن عند حلول الدين فالوكالة جائزة لأنه توكيل ببيع ماله [الهداية]  

فإن وكل المرتهن أو العدل أو غيرهما ببيعه عند حلول الدين صح ، لأن الراهن مالك فـلـه أن يوكل من شاء من الأهل ببيع ماله معلقاً أو منجزاً لأن الوكالة يجوز تعليقها بالشرط لكونها من الإسقاطات لأن المانع من التصرف حق المالك و بالتسليط على بيعه أسقط حقه والإسقاطات يجوز تعليقها بالشروط [تبيين الحقائق]  

وأما أن الوكالة لا تفسد بالشروط فلأنهما من الإسقاطات إذ الموكل يسقط حقه بالتعويض إليه، فإذا لم تبطل الوكالة ينفذ تصرف الوكيل. (البناية)

وأما عن الطلاق ونحوه فإنه من الإسقاطات، فلا يلزم من أسقط عنه شيء كإسقاط الحمل عن الدابة، لا يكون إلزامًا، إنما اللزوم في جانب من أسقط، (النهاية)

وَهُوَ مُسَوِّغٌ لِأَنَّ ذَلِكَ مِنْ الْإِسْقَاطَاتِ، وَمَا هُوَ كَذَلِكَ لَيْسَ فِيهِ شَيْءٌ مِنْ الْإِلْزَامِ  (العناية)

وقوله: (الوكالة لا تبطل بالشروط الفاسدة) لأن الوكالة من جملة الإسقاطات فيكون قابل للتعليق بالشرط وذلك لأن تصرف الوكيل في مال الموكل قبل التوكيل (٤) كان موقوفا حق للمالك فهو بالتوكيل أسقط هذا فيكون إسقاطا (النهاية)

م: (وقال زفر: هو صحيح لازم) ش: أي النكاح المؤقت صحيح، والتوقيت باطل طالت المدة أو قصرت، لأن النكاح لا يبطل بالشروط الفاسدة لأنه أتى بالإيجاب، والشرط الزائد على ما يتم به النكاح، فصح الإيجاب وبطل الشرط م: (لأن النكاح لا يبطل بالشروط الفاسدة) ش: كما لو تزوجها بشرط أن يطلقها بعد شهر، وعن إبراهيم النخعي: النكاح يهدم الشرط والشرط يهدم البيع، وذلك لأن النكاح من الإسقاطات لأن معناه سقوط حرمة البضع في حق الزوج إلا أنه شرع ملكا ضروريا لأجل شرعية الطلاق ولهذا لا يبطل بالشرط الفاسد. (البنلية)

أَيْ أَنْ لَا يَكُنْ مِنْ التَّمْلِيكَاتِ وَالتَّقْيِيدَاتِ بِأَنْ كَانَ مِنْ الْإِسْقَاطَاتِ الْمَحْضَةِ أَوْ الِالْتِزَامَاتِ أَوْ الْإِطْلَاقَاتِ أَوْ الْوِلَايَاتِ أَوْ التَّحْرِيضَاتِ صَحَّ التَّعْلِيقُ (قَوْلُهُ لَكِنْ فِي إسْقَاطَاتٍ) أَيْ مَحْضَةٍ كَالطَّلَاقِ وَالْعَتَاقِ بَحْرٌ، احْتِرَازًا عَنْ الْإِبْرَاءِ فَإِنَّهُ وَإِنْ كَانَ إسْقَاطًا لَكِنَّهُ تَمْلِيكٌ مِنْ وَجْهٍ كَمَا يَأْتِي فَهُوَ مِنْ التَّمْلِيكَاتِ (قَوْلُهُ يَحْلِفُ بِهِمَا) الضَّمِيرُ الْمُثَنَّى عَائِدٌ إلَى إسْقَاطَاتٍ وَالْتِزَامَاتٍ، وَقَوْلُهُ كَحَجٍّ وَطَلَاقٍ لَفٌّ وَنَشْرٌ مُشَوَّشٌ، وَقَوْلُهُ مُطْلَقًا: أَيْ بِشَرْطٍ مُلَائِمٍ، أَوْ غَيْرِ مُلَائِمٍ، وَلَمْ يَظْهَرْ مِنْ كَلَامِهِ حُكْمُ مَا لَا يَحْلِفُ بِهِ مِنْ النَّوْعَيْنِ وَلَا أَمْثِلَتُهُ، وَلَمْ أَرَ مَنْ ذَكَرَ ذَلِكَ. وَيَظْهَرُ لِي أَنَّهُ كَالتَّمْلِيكَاتِ يَبْطُلُ تَعْلِيقُهُ وَأَنَّ مِنْ الْأَوْلَى تَسْلِيمَ الشُّفْعَةِ إذَا عُلِّقَ بِشَرْطٍ غَيْرِ كَائِنٍ فَإِنَّهُ فَاسِدٌ. (ابن عابدين)

(ِكتَابُ الْعِتْقِ)
ذَكَرَهُ عَقِيبَ الطَّلَاقِ؛ لِأَنَّ كُلًّا مِنْهُمَا إسْقَاطُ الْحَقِّ وَقَدَّمَ الطَّلَاقَ لِمُنَاسَبَةِ النِّكَاحِ، ثُمَّ الْإِسْقَاطَاتُ أَنْوَاعٌ تَخْتَلِفُ أَسْمَاؤُهَا بِاخْتِلَافِ أَنْوَاعِهَا فَإِسْقَاطُ الْحَقِّ عَنْ الرِّقِّ عِتْقٌ وَإِسْقَاطُ الْحَقِّ عَنْ الْبُضْعِ طَلَاقٌ وَإِسْقَاطُ مَا فِي الذِّمَّةِ بَرَاءَةٌ وَإِسْقَاطُ الْحَقِّ عَنْ الْقِصَاصِ وَالْجِرَاحَاتِ عَفْوٌ، (البحر الرائق)

قَالَ ﵀ (فَإِنْ وَكَّلَ الرَّاهِنُ الْمُرْتَهِنَ أَوْ الْعَدْلَ أَوْ غَيْرَهُمَا بِبَيْعِهِ عِنْدَ حَوْلِ الدَّيْنِ صَحَّ)؛ لِأَنَّ الرَّاهِنَ مَالِكٌ لَهُ أَنْ يُوَكِّلَ مَنْ شَاءَ مِنْ الْأَهْلِ بِبَيْعِ مَالِهِ مُطْلَقًا وَمُنَجَّزًا؛ لِأَنَّ الْوَكَالَةَ يَجُوزُ تَعْلِيقُهَا بِالشَّرْطِ لِكَوْنِهَا مِنْ الْإِسْقَاطَاتِ؛ لِأَنَّ الْمَانِعَ مِنْ التَّصَرُّفِ حَقُّ الْمَالِكِ وَبِالتَّسْلِيطِ عَلَى بَيْعِهِ أَسْقَطَ حَقَّهُ وَالْإِسْقَاطَاتُ يَجُوزُ تَعْلِيقُهَا بِالشُّرُوطِ، وَلَوْ أَمَرَ بِبَيْعِهِ صَغِيرًا لَا يَعْقِلُ فَبَاعَهُ بَعْدَ مَا بَلَغَ لَا يَصِحُّ عِنْدَ أَبِي حَنِيفَةَ – رَحِمَهُ اللَّهُ تَعَالَى -، وَقَالَا لَا يَصِحُّ لِقُدْرَتِهِ عَلَيْهِ عِنْدَ الِامْتِثَالِ هُوَ يَقُولُ إنَّ أَمْرَهُ يَقَعُ بَاطِلًا لِعَدَمِ الْقُدْرَةِ وَقْتَ الْأَمْرِ فَلَا يَنْقَلِبُ جَائِزًا. (البحر الرائق)