Are government bonds legal in Islam?
I belong to Pakistan. Our government is running a scheme of Prize Bonds of varying amounts and prizes. We can purchase a bond and balloting is held periodically. The successful persons get a prize of defined amount(s) while those whose name do not appear in ballot, retain their amount of bond and still have chances of prize in subsequent ballots.
Is such prize lawful in the light of Quran and Sunnah? JazakAllah
Government bonds are defined as long term treasury bills. Treasury bills are a kind of securities issued by a country's central bank to the Ministry of Finance. This means that the bank acts as an intermediary between individuals and the state. Treasury bonds are issued at a discounted value; i.e. they are sold for less than their face value. The government is obliged to pay the face value of the bonds in full from the maturity date. The difference between the bond's face value and the actual amount paid for the treasury bill is equal to the value of the return to the holder.
According to what has been established in the science of economics, issuing government bonds aims at supporting the transactors' savings awareness, financing the state's development plan as well as the budget deficit which in turn decreases the state's inflation problem. This also helps to avoid the problem of issuing banknotes and the increase in its supply which results in price rise that consequently cause severe injustice to low-income individuals. Therefore, issuing government bonds is deemed from among the indispensible financial policies. It also makes printed banknotes the medium of exchange while departing from the principle of tying [the issuance of] banknotes to the state's gold [reserves]. The profits generated from these bonds are only meant to encourage individuals to subscribe to them, enabling the state to face the previously mentioned problems.
The state is responsible for issuing banknotes and settling these treasury bills by printing their cash value at the appropriate time. This enables the state to ward off problems, preserve balanced prices and wisely push development forward.
By issuing such treasury bills, the state is considered a legal entity with rulings that differ from those of a natural person. Jurists have considered four variables for changing rulings; these include changing a ruling according to the entity in question. For example, they maintained that zakat is not owed on money assigned for endowments, mosques and the state treasury and the permissibility of taking a profit-based loan towards an endowment when there is a necessity.
These treasury bills are actually considered finance contracts and not loans. This is because loans are classified from among non-profit contracts which are based on virtue and good manners through fulfilling needs and relieving the troubles of others. So, if this contract involves the rich exploiting the needs of the poor by overwhelming them with interest and the accumulation of compound debts, it is then deemed a manifest injustice towards them. A treasury bill, on the contrary, is a new kind of contract that is based on exchanging the previously mentioned interests and benefits.
According to the opinion implemented for fatwa, it is permissible to create new transactions not designated in traditional fiqh [Jurisprudence]. This is the preponderant opinion of the Sheikh of Islam Ibn Taymiyah and other jurists.
Based on the above, we opine that government bonds which are long term treasury bills are considered new finance contracts that are void of risk, harm, and usury and that achieve the interest of the parties involved. Therefore, this is a form of permissible transaction and there is no objection to investing in these bonds according to the Shari'ah (Islamic law).