Comparing Arbūn and Down Payment: Islamic vs Conventional Practices

Arbon plays a significant role in Islamic financial contracts. The buyer benefits by having the right to revoke the contract if he realises it is not in his favour, while the seller benefits by retaining the paid amount if the buyer cancels the contract.

From a Shariah perspective, it is a highly debated topic among jurists, as outlined in the following paragraphs. 

What is Arbon (Earnest Money) in Islamic finance?

Arbon (earnest money) is the amount paid by the buyer to the seller at the time of the contract, on the condition that the buyer has the right to revoke the contract within an agreed period. If the buyer confirms the contract, the amount is credited toward the purchase price.

If the buyer does not confirm the contract or fails to pay the remaining amount within the stipulated time, the seller is entitled to forfeit the Arbon.

Ibn Manẓūr defines Arbon as a transaction in which the buyer purchases a commodity while stipulating that he has the right to either confirm or revoke the contract.

If he confirms it, the amount paid is counted toward the price of the commodity. If he does not confirm, the seller keeps the amount paid, and the buyer has no claim to its return.

Can Arbon be considered “earnest money” in English law?

Arbon cannot be considered the same as earnest money in English law. In English law, earnest money is an amount paid upfront to the seller to show commitment and is later applied toward the final payment.

In Islamic law, Arbon allows the seller to keep the amount if the buyer does not proceed with the contract.

Is Arbon halal in all Islamic schools of thought?

Jurists hold different views regarding the permissibility of Arbon. The Hanafi, Shafi, Maliki schools, and Abu Khattab from the Hanbali school, hold that it is not permissible. This view is also narrated from Ibn ‘Abbas and Hasan al-Basri (may Allah be pleased with them).

On the other hand, the Hanbali school (majority opinion within it) considers it permissible. This view is narrated from ‘Umar, Ibn ‘Umar, and a group of the Tābi‘īn, including Mujāhid, Ibn Sīrīn, Nāfi‘ ibn ‘Abd al-Harith, and Zayd ibn Aslam (may Allah have mercy on them).

Those who prohibit Arbon rely on the hadith of ‘Amr ibn Shu‘ayb, in which the Prophet (ﷺ) forbade the sale of ‘Arbon. They argue that it contains uncertainty (gharar) because the buyer loses the Arbūn amount if he does not proceed with the purchase.

Those who permit it rely on the narration from Zayd ibn Aslam, in which the Prophet (ﷺ) was asked about ‘Arbon and he allowed it.

The International Islamic Fiqh Academy has adopted the view of Imam Ahmad ibn Hanbal, permitting Arbon under certain conditions.

Read more about: Gharar: What exactly is it and how to avoid it?

What is Down Payment in Conventional Finance?

A down payment is the amount paid by the buyer to the seller after the contract is executed. It is considered part of the price of the purchased item.

Once the down payment is made, the buyer generally has no right to revoke the contract. The sale is regarded as concluded, and the remaining amount is payable in agreed instalments.

Read more about: Are Installments Halal? Exploring Different Scenarios.

Arbon vs Down Payment, Main Differences  

- The purpose of Arbon for the buyer is to reserve the right to cancel the contract, while a down payment is an amount paid in advance toward the purchased item.

- In Arbon, if the buyer cancels the contract, the seller keeps the amount paid. In a down payment, ownership of the money passes to the seller, and it is applied toward the full purchase price.

- Arbon is non-refundable. 

- A down payment is usually refundable if the contract states so; otherwise, in case of buyer default, it may be non-refundable.

- Arbon is recognised in some legal systems under certain Shariah views, while the down payment is standard in most legal systems.

- From a Shariah perspective, the majority of scholars consider the non-refundable condition of Arbon impermissible, while the Hanbali school allows it with certain limits.

- A down payment is permissible in Shariah as long as it is not linked to prohibited conditions.

 
How is Arbon different from security deposit?

A security deposit falls under Hamish al-Jiddiyyah, which is paid by the buyer to the seller to demonstrate the buyer’s seriousness and is held in trust by the seller.

In contrast, Arbon is a type of down payment made when the buyer has the option to revoke the contract; if the contract is confirmed, the amount is applied toward the price.

Does Arbon apply to leasing contracts in Islamic finance?

Yes, Arbon apply to leasing contracts in Islamic finance. According to the clause of the AAOIFI Shariah standard related to the Lease, “Arboun (Earnest Money) may be taken in respect of lease at the execution of the contract of lease,

with the lessee having the right to terminate the contract during a specified period of time, and Arboun is treated as an advance payment of the rental.

If the Ijarah contract is not executed for a reason attributable to the lessee, the lessor may retain the Arboun. However, it is preferable for the Institution to forgo any amount in excess of the actual damage it has suffered.”

Is Arbon considered part of the purchase price or a separate payment?

Yes, Arbon will be considered as part of the purchase price if buyer confirm the contract. According to the AAOIFI Shariah Standard related to the Arbon,

“. If he confirms the contract, the earnest money is credited towards the price. If he does not confirm the contract or fails to pay the remaining price during the stipulated time, the seller is entitled to forfeit ’Arboun (Earnest Money).” 

References:

Accounting and Auditing Organization for Islamic Financial Institutions. (2017). Shari’ah standard No. 53: Arbūn. Manama, Bahrain: AAOIFI.

Usmani, M. T. (n.d.). Fiqh al-buyū‘ [The jurisprudence of sales].