chapter 5 : contract and principal in islamic business

1BPMS 1013 Theory & Practices of Islamic Business

Chapter 5:

Contract/ Principle

In Islamic Business

BPMS 1013 Theory & Practices of Islamic Business

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• Definition if Contract/ Principle??• Why we do need Contract/ Principle in Islamic Business?• The different between Islamic Business and Conventional?


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INTRODUCTION

Freedom, where there is no compulsion imposed on the sale and they were given time to choose to continue or cancel a transaction. While the freedom to make money purely temporal strictly forbidden in Islam and has been described in Surah Ali-Imran verse 196 which says:

"Never you be fooled by the unbelievers freedom to move and build their smooth development of trade and industry in the state of the world. All of that only temporary pleasure. Then (in the Hereafter) their abode in Hell. "


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Sources of the Shariah• Primary Sources

The Holy Quran

Sunnah (the sayings, deeds and endorsements of Prophet Muhammad PBUH)

• Secondary Sources (mostly by the exercise of Ijtihad (reasoning by the learned)) Ijma (Unanimous decision of the Ulama) Qiyas (analogy) Istishan/ Istihab (equity in Islamic law) Maslahah (necessity of the people) Surdul Dara’ih (Blocking the means) U’ruf (custom)


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ACCAD TRANSACTION• Islam is very concerned

about the contract or the contract.

• Without a contract, the contract or a legal bond between both parties will be considered invalid.

• When a contract is the case then both parties have rights and responsibilities.

PILLARS OF CONTRACT TRANSACTION• Pillars are things

fundamental to the existence of a practice or act.

• Pillars of the sale are: -• seller• buyer• Goods sold• price• Sighah (ijad and qabul)

CONDITIONS OF TRANSACTION• Conditions are the

properties that determine the validity of a practice or act.

• Terms of sellers and buyers

• Provided goods• Terms of price• Terms sighah• Sample contracts in

government housing loan scheme.


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KHIYAR Khiyar is one of the contracting parties can continue the contract or not to

proceed.

Is typical of the rules regarding the selection of the forward purchase contract or otherwise

Intended to give a right to the parties' buy and sell is not a loss or regret after the agreement was made due to certain things, arising from the purchase or sale consented either in terms of price, article, etc.


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Khiyar

Majlis

•as performed by the seller and the buyer before parted.

Khiyar

Syarat

• it happened during the sale aqad conducted where both parties agreed to unconditionally to pursue the sale or otherwise

Khiyar Aib

•where there are defects on the goods and the buyer does not know it during the purchase process•There are c0ndition on Khiyar Aib:•defects occur before or after akaq or goods not been submitted yet, if there has been handing it can not Khiyar anymore.• if the buyer is aware of the defect but still buy the goods can not be Khiyar.

Khiyar

Ta’yin

•allow the buyer to choose the option purchase one of the three items he wanted to buy.•The goods must be different in terms of price, and the nature

Khiyar

Rukyah

•unauthorized purchases if buyers do not see what would be purchased in advance as a condition for Khiyar is see what to buy.•To prevent fraud

Khiyar

Naqdi

• Imam Hanafi opinion Khiyar Naqdi is a branch of the Khiyar conditions.•requires that the buyer does not submit all the total price within a specified time. The set time is three days, if more than three days then purchase canceled


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CONTRACT OF DEALING

contracts mandate (without)

musawamah contract (bargain)

Setting the

contents contract Contract

Muawadah (pay)

Contract tabaruat (without)

The need paid


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METHOD BASED ON A

TRUST CONTRA

CT

Al-mudarabahah

Contract

Tauliyyah Contract

Al-wadziah Contract

Al-ishrak Contract


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METHOD BASED ON A

TABARURUAT

CONTRACT

Gift/Present

Ji’alah

Hibah

Al-qardhul Hassan

Donations Or Charity

Wakaf


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METHOD BASED ON A ACCAD MUSAWAMAH

Cash Method Of Trading

Bai’bathaman Ajil Sell Shares Musyarakah

Mudharabah Bai’ Al-i’nah Bai’ Al-wafa’ Al-wadiah

Al-rahnu (Mortgage)

Istisna’ Contract Bai’ Al-istijrar Ijarah

Al-sarf


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KEY ISLAMIC COMMERCIAL CONTRACTSKEY ISLAMIC COMMERCIAL CONTRACTS

Gratuitous

Contracts

Gratuitous

Contracts

Trading ContractsTrading

Contracts

Investment

Contracts

Investment

Contracts

Supporting

Contracts

Supporting

Contracts

LeasingLeasing SaleSale

Bay` Bithaman Ajil (BBA)

Bay` Bithaman Ajil (BBA)

Operational Lease

Operational Lease

Financial Lease

Financial Lease

Murabahah

Murabahah

SalamSalam

WaqfWaqf

LoanLoan

Mudarabah

Mudarabah

Musharakah

Musharakah

KafalahKafalah

RahnRahn

HiwalahHiwalah

WadiahWadiah

WakalahWakalah

JualahJualah

MuqasahMuqasah

Ibra’Ibra’

GiftGift

Istisna’ etc.

Istisna’ etc.


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Islamic Banking

SOURCES OF FUND

APPLICATIONS OF FUND


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EQUITY FINANCING

DEBT FINANCING

Fee Based ServicesWakalahKafalah

Sale based financing BBA / Murabahah‘Inah/Tawaruq/dayn

SalamIstisna

Lease Based Financing-Ijarah-AITAB

Comsumer Banking

MudharabahMusharakah

Corporate Banking


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ISLAMIC CAPITAL MARKET

Equity Market

Bond Market

DerivativesMarket?

MusyarakahMudarabah

-Debt Based-ABS-Equity Based

-Future Contract-Options-Swap

Mutual Fund / Islamic REITs

Wakalah / mudarabah / musharakah

Islamic Hedge Fund


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What to do and what to avoid

Conclusion of contract by mutual consent The avoidance of riba’ The avoidance of gharar The avoidance of transactions involving maysir (gambling) The avoidance of transactions involving prohibited

commodities


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WHAT TO BE AVOIDED Riba – prohibited in many Quranic verses and

sayings of the Prophet s.a.w. Meaning: riba is every excess in return of which

no reward or equivalent counter value is paid, in short, every unjust enrichment is riba

Literally: excess, expand, increase, growth Any unjustified excess above and over the capital, whether in

loans (between creditor and debtor) or in trade (with similar commodities)

PROHIBITION OF RIBA IN THE QURAN

First Stage (30:39) First Stage (30:39)

Second Stage(4:160-161) Second Stage(4:160-161)

Third Stage(3:130)

Third Stage(3:130)

Fourth Stage(2:275-281) Fourth Stage(2:275-281)

• Compare riba with zakat & charity

• Praising zakat & charity, not riba

• Attaching the practice of riba with the Jews

• Consider the practice as an iniquity (zulm)

• Prohibiting the practice of charging double and multiple riba

• Conclusively prohibiting all forms of riba

• Any excess over the capital is disallowed

4 STAGES4 STAGES



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“and that which you give in gift (to others), in order that it may increase (your wealth by expecting to get a better one in return) from other people’s property, has no increase with Allah…”

(Surah Ar Rum 30: 39) “… and their taking of Riba though they were forbidden from

taking it and their devouring of men’s substance wrongfully…. and we have prepared... a painful torment.”

(Surah An-Nisa’4:160 – 161) “O you who believe, Eat not Riba doubled or multiplied, but

fear Allah that you may be successful.”

(Surah al-Imran 3:130)


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• “those who eat riba will not stand (on the Day of Resurrection) except like the standing of a person beaten by Shaitan leading him to insanity. That is because they say: trading is only like Riba,” whereas Allah has permitted trading and forbidden Riba. So whosoever receives an admonition from his Lord and stops eating Riba, shall not be punished for the passt; his case is for Allah (to judge); but whoever returns (to riba), such are the dwellers of the Fire – they will abide therein forever.

( Surah al- Baqarah 2: 275 )• Allah will destroy riba and will give increase for sadaqat (deeds of charity, alms)

( Surah al- Baqarah 2: 276 )• O you who believe, be afraid of Allah and give up what remains (due to you) from Riba

(from now onward), if you are really believers

( Surah al- Baqarah 2: 278 )• And if you do not do it, then take a notice of war from Allah and hiss Messenger but if you

repent, you shall have your capital sums. Deal not unjustly (by asking more than our capital sums), and you shall not be dealt with unjustly (by receiving less than your capital sums).

• ( Surah al- Baqarah 2: 279 )


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• And if the debtor is in a hard time (has no money), then grant him time till it is easy for him to repay; but if you remit it by way of charity, that is better for you if you did but know.

• And be afraid of the Day when you shall be brought back to Allah. Then every person shall be paid what he earned, and they shall not be dealt with unjustly.

(Surah al- Baqarah 2:280 – 281)

• There are also a number of narrations from the Sunnah on the prohibition of riba

• Some of the narrations give general prohibitions of riba, e.g.:

“The Prophet of Allah s.a.w. cursed the receiver and the payer of riba, the one who records it and the two witnesses to the transaction and said: they are alike (in guilt)”.


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• Under Islamic law, riba can occur in two main situations, i.e.: o riba al duyun (loan): the riba or excess which occurs in

debt and loan transactions because of extension/delay in repayment

o riba al buyu` (exchange): the riba or excess which occurs in trading transactions involving the exchange of riba-bearing commodities without observing the required rules


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PROHIBITION OF RIBA (Loan)

Interpretative Efforts

What amounts to

TradeTrade UsuryUsury

Criteria■Oppressive / unfair distribution

of risk & return■Unjustified enrichment at

expense of others

Criteria■ Fair exchange of goods or

value■ Fair distribution of risk &

return

Surah al-Baqarah, ayat 275“ … But Allah hath permitted trade and forbidden usury

Surah al-Baqarah, ayat 275“ … But Allah hath permitted trade and forbidden usury

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PROHIBITION OF RIBA

(Exchange)

Interpretative Efforts

Application

Staple FoodStaple Food

Rules■Same Type

■At Par■Spot

■Different Type■Spot

Rules■Same denomination

■At Par■Spot

■Different denomination■Spo

CurrencyCurrency

Sunnah of the Prophet:Gold for gold, silver for silver, wheat for wheat, barley for barley,

dates for dates, salt for salt - like for like, equal for equal, and hand-to-hand (spot); if the commodities differ, then you may sell as

you wish, provided that the exchange is hand-to-hand or spot transaction.”

Sunnah of the Prophet:Gold for gold, silver for silver, wheat for wheat, barley for barley,

dates for dates, salt for salt - like for like, equal for equal, and hand-to-hand (spot); if the commodities differ, then you may sell as

you wish, provided that the exchange is hand-to-hand or spot transaction.”


SUMMARY OF RULES UNDER THE

HADITH

• money1 + money1 =2 conditions:– Equality– Hand-to-hand

• food1 + food1 =2 conditions:– Equality– Hand-to-hand

• money1 + money2 =1 condition:– Hand-to-hand

• food1 + food2 =1 condition:– Hand-to-hand

• money + food = No condition – free trading

• others + others = No condition – free trading



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DIVISION OF RIBA

Riba’ al-Duyun(RIba’ in Loan

Contract)

Riba’ al-buyu’(Riba in exchange

contracts )


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Riba’ al-duyun The debtor borrowed money to be paid in certain time, and the

amount is more than the amount borrowed A creditor gives a periodic loan and takes monthly interest.

The capital sum lasts until the expiration of the period. Upon expiry, if the debtor cannot pay, the period to pay back the capital will be extended and interest will be charged

Arising out of exchange contract, a buyer must pay a consideration. If he failed to settle on time, the period will be extended by increasing the amount (principle + interest).


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Riba al-Buyu’• Mainly based on the saying of the Prophet: “Gold for gold, silver

for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt; like for like, hand to hand, in equal amounts; and any increase is riba’”.

RIBA IN MODERN FINANCIAL TRANSACTIONS:

• Riba’ al-duyun in loans and certain controversial contracts (bay’ al-’inah, bay’ al-dayn, etc)

• Riba’ al-buyu’ mainly in bay’ al-sarf

(exchange of currencies)


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CONCLUSION• Islam is not limited to specific acts of worship alone but all

that is done solely for Allah is considered as worship, including business.

• Muslims can seek the pleasure of Allah through business.• That takes business must be to comply with god's commands

and prohibitions leave.• Businesses need to be ethical.