This is a very basic question. Who has the right to gain income and earn profit? What is the basis of this right? The Prophetic tradition gives a very short, meaningful and exact answer. It provides one of the most crucial and basic principles of business transaction in Islam.
The Prophet (peace and blessings of Allah be to him) said: Right to earn is linked with risk-bearing (Al kharaj bidh dhaman). [Recorded in Dar Qutni (53/3), Hakim (15/2), Tirmidhi (1280), Nasai (4490), Ibn Maja (2242)]
This tradition comprises two key words; kharaj and dhaman. It is useful to understand these key words so that full meaning of the tradition may be understood and appreciated.
Kharaj is something which is due to someone, something that someone needs, desires or deserves. For example, tax due to the state like land tax is known as kharaj. Profit is kharaj because it is due to someone who needs and desires it. It is paid to him not only because of his needs or desires as it would be a charity which one may or may not oblige. But profit is payable to a person because he deserves it; it is his right.
Dhaman, in a dictionary, is referred to as responsibility, guarantee, warrant, surety, security and liability.
Liability refers to the risk on account of loss or damage of something. A person who is responsible for something carries its liability and risk. The basis of deserving income out of something means that the person has the right to possession of that thing. Compensation is required for transfer of his possession. This compensation for transfer of the right is kharaj. Alternatively, a person may transfer his possession out of charity or as a gift, foregoing this right. Along with the transfer of possession of something the responsibility and liability (dhaman) on account of that thing is also transferred. So the right to profit is linked with possession which entails liability and risk. This is exactly the meaning of the tradition: Al kharaj bidh dhaman.
Another tradition is more speaking and direct on the subject.
Amr bin Shoaib reported from his father who reported from his (Amr’s) grandfather that the Prophet (peace and blessings of Allah be to him) said: There is no profit (la ribhin) for (the person) that bears no risk (ma lam yadhman). [Recorded in Abu Daud, Tirmidhi, Nasai]
The converse of the above principle is also true. A person has no right of earning profit on transfer of something which he does not possess and so has no risk therefor. So one cannot sell something on which he has no right to possession and does not carry the consequent risk on account of damage or loss of that thing. This principle is elaborated in the following Prophetic traditions.
Amr bin Shoaib reported from his father who reported from his (Amr’s) grandfather that the Prophet (peace and blessings of Allah be to him) said: It is not permitted to sell what you do not have (possess). [Recorded in Dar Qutni (57/3), Hakim (17/2), Ahmad (186/2)]
Hakeem bin Hazam (may Allah be pleased with him) said that he asked, “O Apostle of Allah! A person comes to me to purchase something which I do not have. I purchase that thing from market and sell to him.” The Prophet (peace and blessings of Allah be to him) replied: “Do not sell something which you do not have.” [Recorded in Abu Daud (3503), Nasai (279/7), Ibn Maja (2186), Ahmad (402/3), Baihaqi (317/5)]
It is an interesting situation. The question is that whether a deal is in order where a person sells something that belongs to any other person, and that other person agrees to that deal. One group of Islamic scholars opine that the deal will now become in order. However, another expert opinion is that the deal is wrong from the beginning (void ab-initio).
Above mentioned traditions highlight that one should sell something after its possession. A number of traditions have specifically forbidden selling food grains before purchasing them. Ibn Abbas (may Allah be pleased with him) opined that this ruling is true for all other items [Recorded in Ahmad (403/3), Tabarani (3107), Nasai (286/7)]. Similarly, one tradition reported by Hakeem bin Hazam (may Allah be pleased with him) describes this principle in general terms too: Do not sell anything which you have purchased, before its possession. [Recorded in Bukhari (2135), Muslim (1525)].
However, Islamic scholars have understood and construed above traditions differently. As regards food grains, they agree that the sale should occur only after physical possession subsequent to purchase. Regarding other items there is difference of opinions. The question that arises is regarding the concept of possession itself. It need not be always physical, as “Constructive Possession” also entails the risk of loss which is the basis of disposing something and getting benefit therefrom. The litmus test is that if a person bears to suffer loss of anything, he is the rightful owner of that thing and he can sell that. Such a moment may arrive before that item comes under his physical possession; that particular possession may be referred to as the “Constructive Possession.”