Essentials of Islamic Finance IU Gulshan Campus, Slide # 1

Essentials of Islamic Banking and Finance

IQRA University Gulshan Campus

TALHA SALEEM KAPADIA
talhasaleemkapadia@gmail.com


Islamic law of contract
Essentials of Islamic Finance IU Gulshan Campus, Slide # 2
Contents of the lecture
Definition of contract;
Types of contract;
Basics of the contract;
Conditional contract;
Application of law of contract;
Types of sale;
Q & A;
Essentials of Islamic Finance IU Gulshan Campus, Slide # 3
Islamic law of contract and
types of sale
Essentials of Islamic Finance IU Gulshan Campus, Slide # 4
Definition of contract
Legally a contract is an agreement between two or more persons or
parties for doing something;
According to Islam every action or work that takes place between
two or parties is a contract;
Therefore, exchange of goods, receiving a gift, accepting a woman
as wife through Nikah and agreement on partnership etc. etc. come
under the umbrella of 'contract';
Contract has different types for which the rules and law are
different;
Essentials of Islamic Finance IU Gulshan Campus, Slide # 5
A contract can be of two nature:
Compensatory or financial contract;
This is a contract in which there is exchange of either goods or services
against an agreed compensation / price / fee / charges;
Non Compensatory or social contract;
This is a contract in which there is exchange of either goods or services
against an agreed compensation / price / fee / charges;
Types of contract
Essentials of Islamic Finance IU Gulshan Campus, Slide # 6
Basics of a contract
A Financial Contract is allowed in Islam with some conditions:
The contract should not contain any element of Riba (explicit or implicit);
The contract should not have element of Gharar (excessive uncertainty);
The contract should conform to the rules laid down by Shari'ah for
execution of contracts;
The contract should not be for those activities which have been
considered impermissible (Haram) i.e. general prohibitions;
Element of Riba can easily be recognized and eliminated;
Similarly compliance to the ruling about general prohibition can
also be achieved easily;
Essentials of Islamic Finance IU Gulshan Campus, Slide # 7
The conformity with laws of Shari'ah and the element of Gharar are
important points that need elaboration;
Every contract has some basic elements which should conform to
rules of Shari'ah;
The elements of a contract are:
Parties/persons to contract (those who enter in a contract);
Wordings of contract;
Subject matter of contract (the thing/task meant by the contract);
Compensation (remuneration/price for exchange);
Mechanics of the contracts (rights and responsibilities);
Basics of a contract
Essentials of Islamic Finance IU Gulshan Campus, Slide # 8
Parties to contract should be:
Eligible to enter in such a contract;
Sane;
Mature enough to understand the nature of transaction;
Legally allowed for executing of such transaction (licence/permit
requirement etc. etc.);
Basics of a contract
Essentials of Islamic Finance IU Gulshan Campus, Slide # 9
Wordings of a contract should:
Contain Offer from one party and Acceptance from other ( Ijab-o-Qobool)
in session of contract (Majlisul A'qd);
This Offer and Acceptance can be:
Oral/verbal (Qauli), purchase through bargaining;
Implied/understanding (Ishsraa), purchase in super market;
Be Present i.e. they must create sense of immediate effect (words give
sense of future are not allowed, I will buy it does not make sense of
immediate effect);
Unconditional and Non-contingent conditional wording do not create
immediate effects, I will accept if my father allow it is a conditional
wording;
Basics of a contract
Essentials of Islamic Finance IU Gulshan Campus, Slide # 10
Subject matter of a contract should be:
Lawful legally and Islamically allowed;
Subject matter and the underlying cause must be lawful;
The transacted object must be legally owned by the parties to a contract;
Existent something that exists, contract of supply of mangoes in
January;
Deliverable can be transacted and exchanged, sale of fish in water or
bird in air;
Specified in clear manner, Toyota corolla, XLi, engine # and chassis #;
Quantified if quantifiable, X1000 kg of wheat;
Basics of a contract
Essentials of Islamic Finance IU Gulshan Campus, Slide # 11
Compensation (remuneration/price for exchange):
Conditions apply to Subject matter also apply here;
In case of barter system the application becomes important;
Lawfulness, Existence, Deliverability, Specifiability and Quantifiability
become important;
In normal trade specification of currency is enough;
Basics of a contract
Essentials of Islamic Finance IU Gulshan Campus, Slide # 12
Mechanics of the contracts (rights and responsibilities) should be
clear;
Both parties should bear the responsibility and have the rights
which are required by the nature of transaction;
In case of sale ownership related risks should be born by owner
during the ownership, after its transfer the owner is not
responsible, (reason behind the secured nature of credit sale);
Any condition inserted which is against the mechanics of the
contract is invalid, (making a lessee in a lease transaction
responsible for ownership related expenses is not allowed.
Guaranteeing of principle in a partnership is not allowed whether
both parties agree on it or not);
Basics of a contract
Essentials of Islamic Finance IU Gulshan Campus, Slide # 13
Conditional contract
Conditional contract are not permissible in Islam;
However, business norms allow conditional contracts especially in
current business scenario;
Ulema and scholars have described the method for inserting a
condition in a contract;
Three types of conditions are allowed while one type is not allowed;
Essentials of Islamic Finance IU Gulshan Campus, Slide # 14
Conditional contract
A condition, which is not against the basic objective of the
contract, is a valid condition, e.g. a condition of free delivery to
buyers premises;
A condition, which is against the basic objective of the contract,
but is in the market practice, is also a valid condition, e.g. condition
of five-year warranty and one year free service;
A condition, which is against the basic objective of the contract,
not in the market practice and not in favour of any contractor, is a
valid condition, e.g. a charity imposed on a transaction;
A condition that is against the basic objective of the contract and
not in market practice and favours one of the contractors or subject
matter or price, is a void and invalid condition, e.g. selling a car
with a condition from seller of its free use for two days every
month;
Essentials of Islamic Finance IU Gulshan Campus, Slide # 15
Summary
A contract, whether it is a sale contract or Ijarah contract or
partnership contract, should conform to these basic rules;
Violation of these rules make the contract unacceptable to Shari'ah;
As a matter of principle a contract in one sector may differ in
application of these rules from other contract in other sector;
Oil sector has different meaning for specification and quantification
from what sugar industry has;
Market norms of every sector are the decisive factors in this regard;
Essentials of Islamic Finance IU Gulshan Campus, Slide # 16
Application
Islamic law of contract applies on all types of contracts;
Here we will see its application to sale (being the vast mode of
financing in Islamic banking industry);
According to Islamic laws of sale these are key elements of a sale
transaction:
Contract of sale:
Wordings i.e. Offer & Acceptance ( Ijab-o-Qobool) Oral/verbal (Qauli) or
Implied (Ishsraa);
Parties to contract (buyer and seller) [Mutaaquadain] must be Sane and
Mature;
Does not contain any unacceptable element i.e. sale must be non-contingent,
immediate and unconditional;
Essentials of Islamic Finance IU Gulshan Campus, Slide # 17
Application
Subject Matter (sold good) [Mabee']:
Should be Existing, Valuable and Usable, Capable of ownership/title;
Deliverable, Specified and Quantified;
Seller should have title and risk.
Price:
Quantified [Maloom]
Specified and certain [Mutaayyan];
Time and mode of payment should be well known;
Delivery and Possession of the sold goods:
Delivery and possession either Physical/Actual or Constructive;
Place and method of delivery should also be known;
Essentials of Islamic Finance IU Gulshan Campus, Slide # 18
Types of sale
The application of the law of contract into Sale and Purchase
elaborates to us the way an Islamically acceptable sale should be;
A sale sometimes does not comply with these laws and misses some
or one of the important elements;
In such case the sale is considered unacceptable to Islam;
There different levels in unacceptability to Shari'ah;
Coming slide elaborate these levels and types;
Essentials of Islamic Finance IU Gulshan Campus, Slide # 19
Types of sale
According to the nature of contract the sale has four types:
Valid sale ( Bai Sahih):
A sale that meets all requirements laid down by Shari'ah for its contractual
nature;
Void/Non existing Sale [Bai'-e-Baatil];
A sale that does not meet basic requirements of its contractual nature;
Existing sale but void due to defect (hung sale) [Bai'-e-Fasid];
A sale that meets basic requirements of its contractual nature but contains
an impermissible element;
Valid but disliked sale (Bai Makrooh):
A sale that meets basic requirements of its contractual nature but executed
in bad/unethical manners.
Essentials of Islamic Finance IU Gulshan Campus, Slide # 20
Types of sale
Valid sale ( Bai'-e-Sahih):
A sale that meets all requirements laid down by Shari'ah for its
contractual nature;
A sale that executed by:
Eligible parties;
With proper wordings;
For exchange of a permissible thing which is identified, quantified and well
known to both parties;
With specific price; and
Delivery of the sold goods
Exchange of a 'Citizen cx200 golden chain with black dial' watch against
cash payment of PKR 10,000/= with immediate delivery is a Valid Sale
transaction;
Essentials of Islamic Finance IU Gulshan Campus, Slide # 21
Types of sale
Void/Non existing Sale [Bai'-e-Baatil];
A sale that does not meets some or all basic requirements laid down by
Shari'ah for its contractual nature;
A sale that executed:
By ineligible parties; or
For exchange of a impermissible thing; or
For a thing which is not owned by seller; or
For a thing which is not deliverable;
Sale of stolen watch is an invalid (Baatil) sale which does not benefit in
creation of ownership for buyer nor the price received by seller is Halal
for him;
Essentials of Islamic Finance IU Gulshan Campus, Slide # 22
Types of sale
Existing sale but void due to defect (hung sale) [Bai'-e-Fasid];
A sale that meets basic requirements of its contractual nature but
contains an impermissible element;
A sale that executed:
With element of Gharar;
For an unspecified thing; or
With unknown price;
Conditionally or contingently;
Sale of one Toyota corolla from a lot of cars with explaining the
specifications;
Such sale is a hung sale meaning the ownership transferred if the buyer
takes delivery but the status will be hung unless the element is removed;
Essentials of Islamic Finance IU Gulshan Campus, Slide # 23
Valid but disliked sale (Bai'-e-Makrooh):
A sale that meets basic requirements of its contractual nature but
executed in bad/unethical manners.
A sale that executed at the time of Azaan for Jum'ah;
Sale of grapes to wine maker;
Sale of tranquilizer to addictive person;
Interruption in an ongoing deal between two;
Such sale is allowed but disliked by Shari'ah and sometimes highly
discouraged;
Types of sale
Essentials of Islamic Finance IU Gulshan Campus, Slide # 24
Questions?