Group Members Muhammad Farooq

M. Usman Yasir

M. Khalil Hussain

Zubair Abdullah Khan

Muhammad Ali

Islamic Business

Transactions

ContentsTakafulRahnMudarabahMusharikahIjarahMurabahahSalamIstasna

Takaful(An Islamic Alternative to Insurance)

Takaful refers to the agreement among the group of people called participants to guarantee jointly that, should any of them suffer a catastrophe, he would receive certain sum of money to meet the loss or damage.

Thus it is a method of mutual help.

The contribution in takaful business is invested on the basis of mudarabah business. It is also known as Solidarity Mudarabah.

The profits are shared among the takaful company and the participants according to the agreed ratio.

A participant, while entering into the takaful Business, concludes two contracts, i.e.

I. Contract of Tabarru or Donation

II. Contract of Mudarabah

Two Types of Takaful Business:

Life Takaful

General Takaful

Contract of Rahn

Definition:

According to the Mujallah “Rahn is the security that can be lawfully employed for satisfaction of a claim in respect of a debt.”

According to Lane, “Rahn means to pledge or lodge a real or corporal property of material value in accordance with the law as security for a debt or pecuniary obligation.”

Legitimacy of Rahn

From Quran:

“If You are on journey and can not find a person to write (your debt) then pledge in hand (shall suffice).”From Sunnah:

Hadrat Qatadh narrated that Anas (r.a.t.a) went to the prophet (s.a.w.s) with barley bread with some dissolved fat on it and he (s.a.w.s) had mortgaged his armor to a jew in Madinah and took from him barley for his familyHadrat Aisha narrated that the prophet (s.a.w.s) bought some foodstuff on credit from a jew for a limited period and mortgaged him armor for it.Legal Status of Pledged Property

Conditions to the Pledged PropertyIt should be a thing having some monetary worth as well legal value.It should be in accordance with the shariah standards.It should be existent at the time of the contract.It should be deliveredIt should be precisely determined with regard to its essence, quality and value.Any article conjoined can not be pledged separately.It is not allowed to pledge the usufruct of the thing.It should be handed over to the pledgee.It should entail sufficient value to cover the debt.

Maintenance of the Pledged Property born by the Pledger/Owner:

Holy Prophet (s.a.w.s) has said that ”To the Pledger return its profits and he is held responsible for its losses.”Types of Expenses on Pledge:Expenses on SubsistenceExpenses on its conservation and Safe Keeping

Benefits from Pledged Property

By Pledger

By Pledgee

Benefits under Bay-al-Wafa

Legal Consequences of PledgePledgee has the right to keep the possession until redemption of the pledgeSale of Pledged Property by the Pledgee with the Permission of the Pledger.Pledger can not sell pledge without consent of PledgeePledgee as an attorney for the sale of pledge on behalf of PledgerReturn of surplus money after sale if anyHeirs right on pledge after the death of the Pledger

SALAM SALAM CONTRACTCONTRACT

What is Salam contractWhat is Salam contract In Arabic the word Salam means to In Arabic the word Salam means to

advance .This is a contract whereby the advance .This is a contract whereby the purchaser pays the price in advance and purchaser pays the price in advance and the delivery of the subject matter is the delivery of the subject matter is postponed /deferred for a specific future postponed /deferred for a specific future time.time.

Some journalists says that the legality of Salam is Some journalists says that the legality of Salam is derivable from the Quranic Verse. derivable from the Quranic Verse.

"O you who believe when you contract a "O you who believe when you contract a debt for a fixed term record in it writing"debt for a fixed term record in it writing"

CONDITIONS OF VALID SALAM:CONDITIONS OF VALID SALAM:

Paid the price Paid the price Should be defined by description Should be defined by description Fungible things. Fungible things. Period of delivery Period of delivery

DIFFERENCE BETWEEN SALAM DIFFERENCE BETWEEN SALAM AND ORDINARY SALEAND ORDINARY SALE

Fix a Period Fix a Period Identical Goods. Identical Goods. Payment Mode. Payment Mode.

REVOCATION OF SALAM REVOCATION OF SALAM CONTRACT:CONTRACT:

A seller is bound to deliver the good as A seller is bound to deliver the good as stipulated. There may however the situation stipulated. There may however the situation when it is not possible for him to honor his when it is not possible for him to honor his commitment commitment

Death Of The Buyer Death Of The Buyer Damage To The Good Damage To The Good

ISTISNA:ISTISNA:

Istisna consist in ordering an manufacturer to Istisna consist in ordering an manufacturer to make certain goods answering a given make certain goods answering a given description. By Istisna one may engage.description. By Istisna one may engage.

CONDITIONS OF ISTISNA:CONDITIONS OF ISTISNA:

Precisely Mentioned Precisely Mentioned Work Involved Work Involved Time Of Completion Time Of Completion Price Consideration Price Consideration

DIFFERENCE BETWEEN ISTISNA DIFFERENCE BETWEEN ISTISNA AND SALAM :AND SALAM :

Subject Matter Subject Matter Price ConsiderationPrice Consideration Time Of The Delivery Time Of The Delivery RevocationRevocation

Time of DeliveryTime of Delivery

As pointed out earlier, it is not necessary in As pointed out earlier, it is not necessary in Istisna that the time of delivery is fixed. Istisna that the time of delivery is fixed. However, the purchaser may fix a maximum However, the purchaser may fix a maximum time for delivery that means that if the time for delivery that means that if the manufacturer delays the delivery after the manufacturer delays the delivery after the appointed time, he will not be bound to appointed time, he will not be bound to accept the goods and pay the price. accept the goods and pay the price.

MurabahahMurabahah المرابحةالمرابحة

Murabahah is derived from the root word Murabahah is derived from the root word ربحربح which literally means profit. Murabahah sale is which literally means profit. Murabahah sale is defined as selling a commodity for its defined as selling a commodity for its purchase price plus a specified mark-up or purchase price plus a specified mark-up or profit agreed upon.profit agreed upon.

Condition of Murabahah:Condition of Murabahah:

Disclosure of original priceDisclosure of original price Fixation of ProfitFixation of Profit Ascertainment of priceAscertainment of price Validity of first contractValidity of first contract

Modern Applications of MurabahahModern Applications of MurabahahIslamic bank use this technique to finance project. Islamic bank use this technique to finance project. In Islamic banks murabahah is practiced in the In Islamic banks murabahah is practiced in the following way.following way.

The client approaches the bank with the request to The client approaches the bank with the request to purchase for him certain goods.purchase for him certain goods.

Bank asks the client to give undertaking to purchase the Bank asks the client to give undertaking to purchase the goods with a stated profit margin.goods with a stated profit margin.

Bank makes purchase of required goods.Bank makes purchase of required goods. Bank enters into a murabahah contract with its client.Bank enters into a murabahah contract with its client. Bank may ask the buyer to furnish a security in the form of Bank may ask the buyer to furnish a security in the form of

mortgage.mortgage.

Murabahah Practice in Pakistan:Murabahah Practice in Pakistan:

In Pakistan Murabahah is used as credit vehicle. It In Pakistan Murabahah is used as credit vehicle. It enables a buyer to finance his purchase with deferred enables a buyer to finance his purchase with deferred payment as against accepting a mark-up on the payment as against accepting a mark-up on the market price of the commodity.market price of the commodity.

The Muslims scholars look at Murabahah as practiced The Muslims scholars look at Murabahah as practiced

in Pakistan with suspicion.in Pakistan with suspicion.

Modes of MurabahahModes of Murabahah First Mode:First Mode:

Purchase of goods by Banks and their sale to clients at Purchase of goods by Banks and their sale to clients at appropriate markup in price on deferred payment basis.appropriate markup in price on deferred payment basis.

Shariah Appraisal:Shariah Appraisal: The mode mentioned above is,infact, combination of The mode mentioned above is,infact, combination of

bay’ al-murabahah and bay’ al-muajjal, because the bay’ al-murabahah and bay’ al-muajjal, because the bank charge an increase over and above the original bank charge an increase over and above the original price which is payable in future.price which is payable in future.

It is bay’ al muajjal also because the payment is made It is bay’ al muajjal also because the payment is made on specified dates in future.on specified dates in future.

The objections raised by the Muslim The objections raised by the Muslim scholars are as followscholars are as follow1.1. The bank does not purchase the commodity needed The bank does not purchase the commodity needed

by the client. It only provides him finance for its by the client. It only provides him finance for its purchase.purchase.

2.2. The bank charges a predetermined increase over the The bank charges a predetermined increase over the amount of finance.amount of finance.

3.3. It does not bear any risk.It does not bear any risk.

4.4. the bank is not concerned with the purchase of the bank is not concerned with the purchase of commodity.commodity.

5.5. Murabahah financing represent sale of a thing, which Murabahah financing represent sale of a thing, which is not owned by the seller.is not owned by the seller.

Second Mode:Second Mode:Purchase of moveable and immoveable property by Purchase of moveable and immoveable property by the banks from their clients with buy-back the banks from their clients with buy-back agreement:agreement:

Purchase of Property:Purchase of Property:1.1. The customers negotiate the purchase of property The customers negotiate the purchase of property

from its owner from its owner 2.2. The customer sells the said property for a known The customer sells the said property for a known

sum paid immediatelysum paid immediately3.3. The customer simultaneously buys back the same The customer simultaneously buys back the same

from the bank for a sum greater then the sum at from the bank for a sum greater then the sum at which he is sold to the bank. The amount is paid on which he is sold to the bank. The amount is paid on monthly installmentsmonthly installments

4.4. The customer declares that he has examined the said The customer declares that he has examined the said property and assures the bank that the property cost is property and assures the bank that the property cost is fair and reasonable and the said property is free from fair and reasonable and the said property is free from any structural or other defectsany structural or other defects

5.5. The customer obtains possession of the said property The customer obtains possession of the said property from the seller on or before registration of from the seller on or before registration of

conveyance.conveyance.

Construction of Property:Construction of Property:The procedure for obtaining finance for the purpose The procedure for obtaining finance for the purpose of construction of property is as follow:of construction of property is as follow:

1.1. Customer approaches the bank and submits a building Customer approaches the bank and submits a building plan.plan.

2.2. The parties fix the property cost.The parties fix the property cost.3.3. The bank buys from the customer all building materials The bank buys from the customer all building materials

required for constructing.required for constructing.4.4. Bank’s investment ranges between 30% to 60% of the Bank’s investment ranges between 30% to 60% of the

value of the said property.value of the said property.5.5. Customer buy back the building material for the sum Customer buy back the building material for the sum

that is higher than the price at which bank purchased that is higher than the price at which bank purchased building material from the customer.building material from the customer.

Shariah AppraisalShariah Appraisal

The buy-back practice has been a target of grave The buy-back practice has been a target of grave criticism by the religious scholars.criticism by the religious scholars.

In buy-back arrangement no real sale takes place. In buy-back arrangement no real sale takes place. They consider it a deception to avoid the prohibition They consider it a deception to avoid the prohibition

of “Rof “Riba”iba”.. It is a fictitious deal that ensures a predetermined It is a fictitious deal that ensures a predetermined

profit to the bank without actually dealing in goods or profit to the bank without actually dealing in goods or sharing any real risk sharing any real risk

Contract of Ijarah (leasing)Contract of Ijarah (leasing)

The word Ijarah means 'to give something on rent'.The word Ijarah means 'to give something on rent'.The definition of Ijarah according to Hanfi schoolThe definition of Ijarah according to Hanfi school““It is contract on usufructs for a known consideration.”It is contract on usufructs for a known consideration.”

The term 'Ijarah' is used for two different situations.The term 'Ijarah' is used for two different situations.1.1. It means 'to employ the services of a person on wages It means 'to employ the services of a person on wages

given to him as a consideration for his hired services." The given to him as a consideration for his hired services." The employer is called 'musta’jir' while the employee is called employer is called 'musta’jir' while the employee is called 'ajir'.'ajir'.

2.2. The second type of Ijarah relates to the usufructs of assets The second type of Ijarah relates to the usufructs of assets and properties, and not to the services of human beings.and properties, and not to the services of human beings.

Definition and salient Feature of Ijarah Definition and salient Feature of Ijarah (By (By Meezan BankMeezan Bank)) Ijarah is an Islamic alternative of Leasing.Ijarah is an Islamic alternative of Leasing. ““Ijarah is a contract whereby the owner of an Ijarah is a contract whereby the owner of an

asset, other than consumable, transfers its asset, other than consumable, transfers its usufruct to another person for an agreed period at usufruct to another person for an agreed period at an agreed consideration.”an agreed consideration.”

CUSTOMERISLAMIC BANK

The customer approaches the Bank with the request for Ijarah financing and enters into a promise to lease agreement.

The Bank purchases the item required for leasing and receives title of ownership from the vendor

The Bank makes payment to the vendor

VENDOR. .

Agreement-1

Process of Ijarah

CUSTOMERISLAMIC BANK

The Bank leases the asset to the customer after execution of lease agreement.

The customer makes periodic payments as per the contract.

At the end of the tenure customer can purchase the asset from the bank with the help of separate Sale agreement.

VENDOR. .

Agreement-2

Process of Ijarah

Legitimacy of Ijarah:Legitimacy of Ijarah:Quran:Quran: Allah Says: “And if they suckle your (offspring) give them Allah Says: “And if they suckle your (offspring) give them

their ‘recompense’”their ‘recompense’” ““Said one of the (damsels): “O my father: engage him on Said one of the (damsels): “O my father: engage him on

wages. Truly the best of men for thee to employ is the man wages. Truly the best of men for thee to employ is the man who is strong and trusty.”who is strong and trusty.”

Sunnah:Sunnah: Said the Holy Prophet (s.a.w.s). “Give wages of the person Said the Holy Prophet (s.a.w.s). “Give wages of the person

hired before his sweat dries up.”hired before his sweat dries up.” ““If someone hires a person, let him inform him about the If someone hires a person, let him inform him about the

wages he is to receive.wages he is to receive.

Ijma:Ijma: All the companions of the Holy Prophet (s.a.w.s) unanimously All the companions of the Holy Prophet (s.a.w.s) unanimously

held that Ijarah is a lawful contract.held that Ijarah is a lawful contract.

Kinds of Ijarah:Kinds of Ijarah:

There are two main kinds of Ijarah, namely ijarat al-There are two main kinds of Ijarah, namely ijarat al-ashya and ijarat al-ashya.ashya and ijarat al-ashya.

1. Ijarat al-ashya refers to hiring of things such as houses 1. Ijarat al-ashya refers to hiring of things such as houses shops, lands, animals and beasts etc. this is also known shops, lands, animals and beasts etc. this is also known as ijarat al-ayn.as ijarat al-ayn.

2. Ijarat al-ashkhas refers to hiring of service, such as to 2. Ijarat al-ashkhas refers to hiring of service, such as to hire a painter to paint a house. This kind is also called hire a painter to paint a house. This kind is also called ijarat al-dhimmah. ijarat al-dhimmah.

Ijarah in Islamic Banks:Ijarah in Islamic Banks:

Ijarah wa Iqtina (Hire Purchase)Ijarah wa Iqtina (Hire Purchase)It is a combination of leasing movable or immovable It is a combination of leasing movable or immovable property with granting the lessee an option of eventually property with granting the lessee an option of eventually

acquiring the object of the lease.acquiring the object of the lease. Direct Leasing:Direct Leasing:

This is a mode whereby the Islamic banks allow the This is a mode whereby the Islamic banks allow the customer to use the capital assets owned by the banks for a customer to use the capital assets owned by the banks for a limited period of time.limited period of time.

MUSHARAKAHMUSHARAKAH

DEFINITIONS:DEFINITIONS:

The Muslims jurists have offered various The Muslims jurists have offered various definitions of partnerships with regard to its definitions of partnerships with regard to its important features.important features.

1: MALIKI DEFINITION:1: MALIKI DEFINITION:

2: HANBALI DEFINITION:2: HANBALI DEFINITION:

3: SHAFI DEFINITION:3: SHAFI DEFINITION:

4: HANAFI DEFINITION:4: HANAFI DEFINITION:

CONDITIONS FOR CONDITIONS FOR CONTRACTUAL PARTNERSHIPCONTRACTUAL PARTNERSHIP

Offer And AcceptanceOffer And Acceptance Competences Of Parties Competences Of Parties Subject MatterSubject Matter

SHARIKAT AL_AMWAL:SHARIKAT AL_AMWAL:

Definition:Definition: It is an agreement between two or parties to It is an agreement between two or parties to

invest a sum of money in a business and share invest a sum of money in a business and share its profits according to agreement its profits according to agreement

KINDS OF SHARIKAT AL_AMWALKINDS OF SHARIKAT AL_AMWAL::

INAN SHARIKAT AL_AMWALINAN SHARIKAT AL_AMWAL

It is a contract between two or more persons It is a contract between two or more persons to work in any particular trade with to work in any particular trade with determined capital and to share profit and loss determined capital and to share profit and loss with determined rates.with determined rates.

MUFAWADHAH SHARIKATMUFAWADHAH SHARIKAT AL AL AMWALAMWAL

Mufawadhah literally mean the participation Mufawadhah literally mean the participation in each thing with equality in each thing with equality

Equality in wealth, profit and loss. Equality in wealth, profit and loss. Equality in contractual capacity and religion.Equality in contractual capacity and religion. Each partner is an agent of other partner s Each partner is an agent of other partner s responsible responsible

CONDITIONS OF MUFAWADAH CONDITIONS OF MUFAWADAH PARTNERSHIPPARTNERSHIP

EQUALITY IN CAPITALEQUALITY IN CAPITAL INCLUSION OF CASH CAPITAL INCLUSION OF CASH CAPITAL

INJOINT INVESTMENTINJOINT INVESTMENT EQUALITY IN PROFIT AND LOSSEQUALITY IN PROFIT AND LOSS EQUALITY IN RELIGIONEQUALITY IN RELIGION

SHARIKAT AL A MAL WORK SHARIKAT AL A MAL WORK PARTNERSHIPPARTNERSHIP

It is partnership in which the partners It is partnership in which the partners contribute investment in the form of labor and contribute investment in the form of labor and shills it is also called sharikat abdan.shills it is also called sharikat abdan.

The work partnership can take the form of The work partnership can take the form of limited partnership or unlimited partnership limited partnership or unlimited partnership namely “namely “

Inan work partnership Inan work partnership Mufawadah work partnership Mufawadah work partnership

CONDITIONS FOR ACCEPTANCE CONDITIONS FOR ACCEPTANCE AND PERFORMANCE OF WORK:AND PERFORMANCE OF WORK:

RIGHT OF ACCEPTANCE WORK AND RIGHT OF ACCEPTANCE WORK AND PERFORMING ITPERFORMING IT

RIGHT TO DELIGATE WORK RIGHT TO DELIGATE WORK ACCEPTEDACCEPTED

MUDARABAH MUDARABAH CONTRACTCONTRACT

The word mudarabah is derived from the phrase “ Al The word mudarabah is derived from the phrase “ Al Darb Fil ard” which means to make journey . We say Darb Fil ard” which means to make journey . We say because worker strive in the mudarabah .because worker strive in the mudarabah .

The word Qirad and mudarabah are derived from the The word Qirad and mudarabah are derived from the Qirada that means to “cut off” because the investor the Qirada that means to “cut off” because the investor the sum of moony to the agentsum of moony to the agent

Definition of different school of thoughtDefinition of different school of thought

Hanafi.Hanafi.

“ “It is a partnership for participation profit in which a capital It is a partnership for participation profit in which a capital is provided from one side and labour or skill is provided from is provided from one side and labour or skill is provided from other side”other side”

Shafi.Shafi.

“ “ It is an agreement whereby the owner of the capital hand over It is an agreement whereby the owner of the capital hand over the capital to worker a who trade with it and profit is share the capital to worker a who trade with it and profit is share among them”among them”

Modern definition of mudarabahModern definition of mudarabah

Ali al KhafifAli al Khafif

“ “ contract of sharing profit of business in which one party contract of sharing profit of business in which one party contributes with capital and other with his skills”contributes with capital and other with his skills”

Legitimacy of mudarabah Legitimacy of mudarabah

Quran Quran SunnahSunnah Ijma Ijma

Quran.Quran.

“ “ And other who journey through the earth seeking the bounty ”And other who journey through the earth seeking the bounty ”

Sunnah.Sunnah.““The Holy Prophet ( SAW) reported to have said “ There is great The Holy Prophet ( SAW) reported to have said “ There is great

blessing in three things credit sale , mudarabah and mixing the blessing in three things credit sale , mudarabah and mixing the wheat and barley for domestic consumption”wheat and barley for domestic consumption”

Ijma. Ijma.

Mudarabah practice is also proved from the consensus opinion of Mudarabah practice is also proved from the consensus opinion of Muslims jurists. Hazrat Umar ( r a t a) use to invest orphans Muslims jurists. Hazrat Umar ( r a t a) use to invest orphans property of the basis of mudarabah. property of the basis of mudarabah.

Element of mudarabahElement of mudarabah

According to shafi.According to shafi. Parties to mudarabah contractParties to mudarabah contract Work/ labour Work/ labour ProfitProfit CapitalCapital The form( offer and acceptance)The form( offer and acceptance)

Conditions of mudarabahConditions of mudarabah

Condition relating to the contracting partiesCondition relating to the contracting parties Condition relating to capitalCondition relating to capital Condition relating to profit.Condition relating to profit.

Types of the mudarabah. Types of the mudarabah.

Restricted mudarabah. Restricted mudarabah.

Unrestricted mudarabah.Unrestricted mudarabah.

Dissolution of mudarabah.Dissolution of mudarabah.

Unilateral termination.Unilateral termination. By the expiry of time period.By the expiry of time period. By death of any of the partner.By death of any of the partner. By insanity of any of the partner. By insanity of any of the partner. By destruction of capital.By destruction of capital. By disregard of express direction.By disregard of express direction.

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