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CHAPTER 6

BUSINESS CONTRACT IN ISLAM

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LEARNING OBJECTIVES

1. Understand to define contract from the Islamic Perspective

2. Define ‘Akad’ or contract accordance to Islamic perspective [language & term]

3. Identify the needs of contract in business & explain the proof [dalil] which shows contract needs in Islamic business transaction

4. Understand reason of ‘Akad’ as important law in Islamic business transaction

5. Differentiate between Honest Contract & Musawamah & describe the contract in Contract al Musawamah

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LEARNING OBJECTIVES

6. Understand Tabaruat and Musawamah Contract

7. Discuss Khiyar Concept in contract, types & the differences of khiyar

8. Know various Islamic business procedures through Amanah Contract and Tabaruat

9. Understand ways to applied Islamic business method.

10. Identify suitable business procedures through their needs in operating their business.

11. Discuss the instrument of Islamic finance in the market according to “Aqad amanah & tabaruat”

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INTRODUCTION A business is a legally recognized

organizational entity existing within an economically free country designed to sell goods and/or services to consumers or other businesses, usually in an effort to generate profit.

It is also referred to as a firm Business is an occupation encourage by Islam

Doing business is a practice that will be rewarded by Allah s.w.t

To make the transaction legal & accordance with the Syariah Law, commandment and requirement of sales must be 100% fulfill.

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SALES TERMS & TYPES OF SALES CONTRACT

“Akad” or Contract Ceremony is a symbol of willingness between the party that involve.

Ijab & Qabul is the symbol of willingness between both party.

“Aqad” is an agreement between 1st & 2nd party through “ijab & qabul” where it is a endeavor of bonding an agreement.

The reason of having “akad” is to clarify & produce willingness between both party who is in contract & knowing it’s implication.

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SALES CONDITION

Buyer & Seller’s Terms Willingness in transaction Both must hold responsibility Force selling is not valid

Goods Terms The goods must exist Legally own by the seller who is in

contract If there is any changes in contract, the

buyer will be given the rights for khiyar.

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SALES CONDITION

Price Terms Payment can be in cash, cheque, credit card

etc Willingness in transaction Force selling is not valid

Sighah Terms “Ijab” is the 1st step in a contract before “Qabul”“Ijab & Qabul” can be done verbally (Bil Kalam), written (Bil Kitabah), third party, sign language & action

Both must hold responsibility Force selling is not valid

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CONTRACT CEREMONY (MAJLIS AL-AQDU)

A place where both party performing sighah. Is a muamalat contract between two or more

party perform in a contract or in a place where the contract is valid

4 condition in fulfilling the contract ceremony: Both party must be at the ceremony The tenor must be indicated clearly

(written contract) Not to have a party who show

unwillingness during contract The 1st party must not withdraw the

agreement before the 2nd party accept the offer.

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TYPES OF CONTRACT

“Uberremae fidei contract”/Aqdul AmanahContract exist from agreement without

bargaining process between both party before signing the contract.

The Bargaining Contract / Aqdul Musawamah

Contract exist between both party through an agreement after the bargaining process.

e.g: Contract of Sale & Leasing

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TYPES OF CONTRACT

Payment or non-payment:

Contract Mua’wadah

Contract involve with payment e.g: Contract of Sales, Leasing Contract & Wages Contract (al-Ujr)

Contract al-Tabaru’at

Contract which not involve with payment e.g: al-hibah, al-qardhu hassan & al-tabaru’at ammah

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KHIYAR (OPTION) IN CONTRACT

According to Wahbah al-Zuhaili, Khiyar is an option to continue or discontinue the contract due to certain circumstances.

According to Sheikh Mohsin, both party were given the option to choose to continue the sales or to discontinue (fasakh) according to the rules or certain circumstances.

Khiyar is divided into 6:

Khiyar Majlis” Each party in “Aqad” has an option

towards another party as long as they are in the contract.

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KHIYAR (OPTION) IN CONTRACT “Khiyar Syarat”

Selection being told during “Aqad” According to Imam Syafie, the terms

must be clearly stated in the “Aqad ceremony” with cense of willingness and agreed between both party. If not clearly stated, it will be invalid.

“Khiyar Aib” Any defect on the goods (happen before

“Aqad” or during sales) sold not according to the specification, the buyer can end the contract or ask for price reduction.

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KHIYAR (OPTION) IN CONTRACT “Khiyar Ta’yin”

The party who is in sales “Aqad” can choose one out of three goods which differentiate by the price and the characteristic of the goods.

“Khiyar Rukyah” The buyer did not see the goods that

they want to purchase. “Khiyar Naqli”

Khiyar that stated the condition on when the buyer will not pay the full payment of the total price in certain time period. Within 3 days, the agreement will be forfeit.

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DISCONTINUING THE CONTRACT

Contract can be discontinued if: cancellation “ibtal” ended “fasakh” death of one of the party in contract Suspended contract (not fulfilling the

contract’s condition)

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CONTRACT BASED ON AQAD AMANAH

A contract based on exposing detail clearly between both party in contract

Both party in contract must be honest in providing the details in order to gather correct result.

There are 4 types of contract under “Aqad Amanah”:

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CONTRACT AL-MURABAHAH

Al-Murabahah also known as Deffered Lump Sum Sale

Al-Murabahah financing is a financing facility for working capital to purchase stocks, inventories, replacement, semi-finish goods or raw materials.

The concept is through selling goods include profit margin as agreed by both parties.

Kuwait Finance House, Malaysia Bank Kerjasama Rakyat Malaysia Bank Islam Malaysia Berhad

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OTHER “AQAD AMANAH” CONTRACT

Contract Tauliyyah Sales transaction at cost price. Amanah is important to the seller to show the

cost price. e.g: grand sale

Contract al-Wadziah Sales transaction below cost price e.g: old stock item, clearance sale, less unit left

Contract al-Ishrak A contract sharing. Partner to reveal their details between them e.g: reveal the actual price

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CONTRACT BASED ON “AQAD TABARUAT”

A contract to give benefit to another party only

Comprise of gift on facility to another party without stating the additional value

There are 6 type of contract based on “Aqad” Tabaruat

Hadiah / Gift A gift of one party to another party

without hoping for any repayment. A gift as an encouragement of

achievement.

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CONTRACT BASED ON “AQAD TABARUAT”

Hibah A contract of giving wealth without

repayment from the receiver Voluntary giving things with no

condition to do work. A gift of one party to another party

without hoping Waqaf

A gift in accordance to Allah s.w.t that will benefit all

Waqaf usually used for public used Ji’alah

A reward – promise gift

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CONTRACT BASED ON “AQAD TABARUAT”

Derma/Sadaqah A sadaqah from one party to another To get baraqah from Allah s.w.tgift in

accordance to Allah s.w.t that will benefit all

Al-Qardhul Hassan A transaction in muamalat – financing

scheme. Al-Qardhul means financing /loan Al-Qardhul Hassan – financing without

interest or welfare loan (to help people in need)

To fulfill social responsibility A gift in accordance to Allah s.w.t that will benefit all

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CONTRACT BASED ON “AQAD MUSAWAMMAH”

Musawammah basically means can be negotiate. Most of the contract in this aqad, can be market. Contract listed under Musawammah are:

a) Al-Baib) Bai Bithaman Ajilc) Musharakahd) Bai’ Al-Inahe) Bai’ Al-Wafaf) Mudharabah

g) Al-Wadiahh) Ar-Rahnui) Bai Al-Istisna’j) Al-Sarfk) Ijarah

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Tutorial Questions Case Study

Gotham Trading imports item X regularly from United Kingdom under Letter of Credit (Short Term Financing). The company’s sales each month amounts to RM500,000 and cost of sales constitutes 65%. The business cycle (lead time) needed for the importation of the goods is 3 months. Based of the above the amount of letter of credit/ short term financing needed by the company is RM975,000 in 3 months.

How Al Murabahah contract can be applied for the above situation.

How Al Musharakah contract can be applied for the above situation.

List the differences between interest based financing and Musharakah.

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Tutorial Questions Case Study (con’t)

IJHM Consultant & Services was incorporated few years ago. The company want to expend their business by going to the bank & require financing. The company wants to buy an office outlet, more equipment, lorries & other materials.

You are require to provide consultation on muamalah procedures that can be use by the company to execute in expending their business.

Contract Al-Murabahah known as Contract “Cost+Profit”. In the banking industry, Contract Al-Murabahah is a short term financing. Kindly provide example on practices of business contract in banking based on Al-Murabahah