CHAPTER 2

SHARIAH PRINCIPLES /
CONTRACTS IN ISLAMIC
FINANCE

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 LESSON OUTLINES
At the end of the lessons, the students would
be able to explain on the Shariah principles in
Islamic finance such as the following:

® 3.1 Contracts of Exchange

® 3.2 Contracts of Charity
® 3.3 Contracts of Security
® 3.4 Contracts of Partnership
® 3.5 Contracts of Pertaining to the Utilization of
® Usufruct
® 3.6 Contract of Safe Custody (wadi’ah)
® 3.7 Contracts Pertaining to Work
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 INTRODUCTION
® Quranic verses and ahadith contains
general concepts and principles on contracts;

i - Conclusion of contract by mutual consent

ii -Prohibition of riba’
iii- Prohibition of gharar
iv- Prohibition of dealing with prohibited
commodities.
v- No oppression towards others

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 CONT’D

® The focus of contract was on contract

of sale (‘aqd al-bay’)
® Treated it as a model for other
contracts
® Hence, all features and principles of
contracts are explained via contract of
sale

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 CONTRACT (‘AQD) IN ISLAMIC LAW
® ‘Aqd literally means ties (al-rabt), guarantee (al-
daman) or promise (al-ahd).
® As for its fiqhi meaning, it can be classified into
two meanings as follows;

® 1) General meaning:
® Everything which is determined to be performed
and materialized by someone.
® This definition envisages each and every contract
in sale and purchase, marriage and all other
contracts in transfer of ownership (mu’awadah) as
parties who participate and transact will give full
commitment for its execution.
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 CON’TD
® 2) Specific meaning:
® It is a contract created on the basis
of desire of two or more parties.
® As said by Al-Jurjani:
® “’Aqd is a tie of an act through
process of ijab (offer) and qabul
(acceptance).

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 CONTRACT (‘AQD) IN THE QURAN
AND SUNNAH

® Al-Quran
® Allah SWT said in al-Maidah: 1;
® “O ye who believe! Fulfill (all)
obligations..”

® Al-Sunnah:
® “Muslims are bound by their conditions”.

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OTHER DEFINITION OF CONTRACT
® Connection of an offer with acceptance in a
lawfull manner which marks its effect on the
subject of that connection (Majallah: Art. 104)

® Modern Codification: “A contract is the

coming together of an offer made by one of
the contracting parties with the acceptance of
the other, together with the agreement of
them both, in such a manner to determine the
effect thereof in the subject matter of the
contract, and from which results an obligation
upon each of them with regard to that which
each is bound to do for other (JCC (1976)
and UAELCT (1985)) 8 8
ESSENCE OF THE DEFINITION

® Defining
contract as a communication of
offer and acceptance, rather than
concordance/agreement of mutual
consent

® Preferringoutward expression rather

than inward intention

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FORMATION OF CONTRACT

® 1) Expression : Offer & Acceptance

® 2) Contracting parties : seller & buyer
® 3) Subject Matter: commodity/object &
consideration (price)

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 1) OFFER AND ACCEPTANCE
- No specific means
- Agreed & Understood
- Correspondence of the acceptance to the offer
- Some forms
- spoken words
- writing agreement
- sign, etc.
- sequence of the contract

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 2) CONTRACTING PARTIES

® Prudence – rushd (intelligence)

® Puberty - baligh
® Full consent

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 3) SUBJECT MATTER &
CONSIDERATION

® Specification of the object & consideration

® à genus, characteristic, amount
® Legality
® Deliverability
® Rules of the existence of the subject matter if not
it will fall under bay’ al-ma’dum

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 TYPES OF CONTRACT
® 1) Contracts of exchange (‘uqud al-
mu’awadat)
® 2) Contracts of security (‘uqud al-tawthiqat)
® 3) Contract of save custody (wadi’ah)
® 4) Contracts of gratuity (‘uqud al-tabaru’at)
® 5) Contracts pertaining to utilization of
usufruct (‘uqud al-manfa’ah)
® 6) Contracts pertaining to do a work (e.g.
wakalah, ju’alah)
® 7) Contracts of partnership (‘uqud al-
shirkat)
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 1) Contracts of Exchange
(uqud al-mu’awadat)
® Mainly, contract of sale and its subdivision.
® Considered as the core of the commercial
contracts à because it stands on its own and
other contracts serve to facilitate its
execution.
- e.g. contract of kafalah (guarantee) or rahn
(mortgage) are meant to provide security to
the parties in a contract of sale

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 Cont’d

® Bilateralcontract à rules of gharar and riba’ applied

extensively on contract of sale (compared to unilateral
contract, such as contracts of gratuity (‘uqud al-
tawthiqat)
® Main purpose of contracts of sale: Transfer of
ownership and possession from one party to another.

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 Contract of sale
® Involves
the exchange of:
- commodity for another commodity (barter trading)
- commodity for money (trading activities)
- money for money (sarf – currency exchange)

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 Exchange of commodity for
money (trading activities)
® Can be classified into various classifications, based on
a) The time of the delivery of the thing sold
b) The nature of profit agreed upon in the contract
c) The manner of payment

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a) Based on the time of the
delivery of the thing sold
® Sale with immediate delivery
- e.g. bay’ al-murabahah

® Sale with deferred delivery of the thing

sold
- Bay’ al-salam (forward sale) & bay’
al-Istisna’ (sale on order)

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2) Based on the nature of profit
agreed upon in the contract

® a) Regular sale (Bay’ al-musawamah)

® b) Trust sales (‘uqud al-amanah)

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 a) Regular Sales (Bay’ Al-mutlaq/Al-
musawamah)

- Common sale, sale at negotiated prices.

- No reference
- to the original price of the commodity.

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b) Trust Sales (Uqud al-amanah)
n Because the buyer trusts the seller to
correctly reveal the initial price at which
the acquired the good without need of
proof or oath.
n Mark-up (Murabahah)

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 3) Based on the manner
of payment
® Cash sale (thaman hal). Sale by immediate
payment. Hence, the price must be paid
during the conclusion of the contract
® Deferred payment sale (thaman ajil).
- This deferment can be:
I - by installment basis
ii - Lump sum payment in the future
iii – periodically
iv- according to the method agreed upon
by the parties.
- Not applicable to some contracts, e.g.
bay’ salam and bay’ istisna’. 23 23
END_CHAP 2_PART 1

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