5. islamic law of contract

5/23/2018 5. Islamic Law of Contract

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Essentials of Islamic Finance IU Gulshan Campus, Slide # 1

Essentials of Islamic Banking and FinanceIQRA University Gulshan Campus

TALHA SALEEM [email protected]

Islamic law of contract


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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;


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Islamic law of contract andtypes of sale


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Definition of contract

Legally a contract is an agreement between two or more persons orparties for doing something;

According to Islam every action or work that takes place betweentwo 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. comeunder the umbrella of 'contract';

Contract has different types for which the rules and law aredifferent;


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A contract can be of two nature: Compensatory or financial contract;

This is a contract in which there is exchange of either goods or servicesagainst an agreed compensation / price / fee / charges;

Non Compensatory or social contract;

This is a contract in which there is exchange of either goods or servicesagainst an agreed compensation / price / fee / charges;

Types of contract



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 forexecution of contracts;

The contract should not be for those activities which have beenconsidered 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;



The conformity with laws of Shari'ah and the element of Gharar areimportant points that need elaboration;

Every contract has some basic elements which should conform torules 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);




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/permitrequirement etc. etc.);




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 givesense of future are not allowed, I will buy it does not make sense ofimmediate effect);

Unconditional and Non-contingentconditional wording do not createimmediate effects, I will accept if my father allow it is a conditionalwording;




Subject matter of a contract should be: Lawfullegally 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;

Existentsomething that exists, contract of supply of mangoes in

January;

Deliverablecan be transacted and exchanged, sale of fish in water orbird in air;

Specified in clear manner, Toyota corolla, XLi, engine # and chassis #;

Quantified if quantifiable, X1000 kg of wheat;




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 Quantifiabilitybecome important;

In normal trade specification of currency is enough;




Mechanics of the contracts (rights and responsibilities) should beclear;

Both parties should bear the responsibility and have the rightswhich 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 notresponsible, (reason behind the secured nature of credit sale);

Any condition inserted which is against the mechanics of thecontract 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 whetherboth parties agree on it or not);




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 acondition in a contract;

Three types of conditions are allowed while one type is not allowed;


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Conditional contract

A condition, which is not against the basic objective of thecontract, is a valid condition, e.g. a condition of free delivery tobuyers 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 avalid condition, e.g. a charity imposed on a transaction;

A condition that is against the basic objective of the contract andnot in market practice and favours one of the contractors or subjectmatter or price, is a void and invalid condition, e.g. selling a carwith a condition from seller of its free use for two days everymonth;


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Summary

A contract, whether it is a sale contract or Ijarah contract orpartnership 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 inapplication of these rules from other contract in other sector;

Oil sector has different meaning for specification and quantificationfrom what sugar industry has;

Market norms of every sector are the decisive factors in this regard;


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Application

Islamic law of contract applies on all types of contracts;

Here we will see its application to sale (being the vast mode offinancing in Islamic banking industry);

According to Islamic laws of sale these are key elements of a saletransaction:

Contract of sale:

Wordings i.e. Offer & Acceptance ( Ijab-o-Qobool) Oral/verbal (Qauli) orImplied (Ishsraa);

Parties to contract (buyer and seller) [Mutaaquadain] must be Sane andMature;

Does not contain any unacceptable element i.e. sale must be non-contingent,immediate and unconditional;


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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;


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Types of sale

The application of the law of contract into Sale and Purchaseelaborates to us the way an Islamically acceptable sale should be;

A sale sometimes does not comply with these laws and misses someor 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;


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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 contractualnature;

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 containsan impermissible element;

Valid but disliked sale (Bai Makrooh):

A sale that meets basic requirements of its contractual nature but executedin bad/unethical manners.


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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 wellknown to both parties;

With specific price; and

Delivery of the sold goods

Exchange of a 'Citizen cx200 golden chain with black dial' watch againstcash payment of PKR 10,000/= with immediate delivery is a Valid Saletransaction;


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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 increation of ownership for buyer nor the price received by seller is Halal

for him;


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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 thespecifications;

Such sale is a hung sale meaning the ownership transferred if the buyertakes delivery but the status will be hung unless the element is removed;


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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 highlydiscouraged;

Types of sale


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Questions?

5. islamic law of contract

Documents

umbrella of contract

contract sane mature

essentials of islamic

law of contract5232018

law aredifferent5232018

exchange of goods

element of riba explicit

different types