Islamic Civil Law Q Attempt

Prep for MJ 23
‘To be “shari’ah-compliant” all the products and financing modes in Islamic
banking must not be contrary to certain Islamic principles.’ Discuss with
relevant examples.
Islamic Civil/Contract law is focused is derived from the surah 5 verse 1 of the Holy
Quran in which Almighty States that “Muslims must abide by their obligations”
which means that the stress is placed upon the principle of ‘pacta sunt servanda’ and
lead to its interpretation being consideration of contractual obligation in terms of
ethical and moral values and sentiments when trading with each other. This because
at its core the Islamic Contract law places a strict requirement as to charging of
interest or unjust enrichment which can also be contented as a restriction on freedom
of contract which you see in the English Legal System. For Islam the underlying
principle behind the trade and commerce should be abide by all Muslims as per the
guidance provided by Holy Quran in surah 2 verse 275 which states that “God has
permitted trade and prohibited Usury (Also known as Riba)” Likewise All schools
of Islamic Law have agreed upon the prohibition of taking Usury (i.e. the exchange
of money for money with excess and delay) and to keep in check the principle of
Uncertainty as to the Contract (Known as Gharar).
In order to analyze the statement of the question further it is important to the types
of contract which are offered under the domain of Islamic law and whether they are
stringent in their compliance towards principles of shari’ah and discussion of case
laws in relevance to these principles.
Islamic Banking promotes interest free banking since charging of surplus interest
other than the profit which needs to be disclosed beforehand is considered haram in
light of Islamic Contractual Law and therefore places stringent requirements as to
modes of financing to its consumers.
Musharakah is one of the Islamic Contract or Mode of Financing and in the context
of trade and business this term refers to a joint venture which means that all the
partners must share the profit or loss incurred during the duration joint venture. In
the modern Islamic world it has been considered one of the ideal alternative for those
banks who provide financing on the basis of interests being charge. As Islam has
placed a prohibition on the interest system, there this mode of Islamic finance cannot
be used as a way of providing funds of any kind, this is the reason that this mode of
Islamic banking places stress upon being shari’ah compliant and to not go away from
the Islamic Contract Principles and the guidance provided by Holy Quran and
Sunnah. As Musharakah does not consist of fixed rate of return, it is more catered
towards return which have the basis of actual profits which the joint enterprise has
gained and furthermore the profit and loss in this mode of financing is as per agreed
proportions. Furthermore in accordance with Islamic Principles which have been
laid down for the financier it is to determine whether the purpose of providing the
loan is the assistance of the debtor on the basis of humanity or wishes to share his
gains, this is because he feels the need to assist the debtor then it must not have any
excess amount charged on the principal loan provided and the goal should remain to
assist him. In the classical Islamic terminology Musharakah was known as Shirkah
and it consists of further two types which were Shirkat-ul Aqd (Joint Enterprise) and
Shirkat-ul-Milk (Joint Ownerhship). Likewise Shirkat-ul Aqd (Joint Enterprise) was
further subdivided into three forms namely: Shirkat-ul Wujooh (Partnership in
goodwill), Shirkat-ul A’mal (Partnership in Services) and Shirkat-ul Aqd
(Partnership in trade); The later two subdivisons of the Joint enterprise in Islamic
represents the modern day Musharakah and the main ingredient which completes
this form of Islamic Financing was through mutual contract between the parties and
without any sinful intentions of duress, fraud or misrepresentation. According to
Holy Prophet (PBUH) in one of his famous Hadith laid down the principle of
Upholding between Muslims in relation to all the conditions laid before, except
where one of the condition is prohibited in the ambit of Islam.
Moving forward to the other Mode of Islamic Financing which is Mudarabah (where
one partners provide the other with the capital to invest in a commercial business).
It is also necessary for in the case of Mudarabah to that parties beforehand agree on
to the specific distribution of the actual profit to which they would be entitled to,
because Shari’ah does not provide specifics on it and is left at the discretion of the
partners mutual understanding. As far as the termination of this contract is concerned
then the view of Islamic jurists shows a difference of opinion on the matter of
whether the contract of mudarabah can be held for a time period which has been
specified in order for it to result in termination automatically at the end of the period.
For Hanafi and Hanbalis, there can be a specific period duration set for the contract
of mudarabah to expire for instance one year or 6 months, after which it would
automatically it would result in without notice termination. However on the other
Hand Maliki and Shafi reserves the opinion of non-existence of a specific time
period requirement for this contract. Therefore it is important for the parties to have
a mutual agreement before entering the contract of mudarabah as to the rights of
specific duration termination, so it does not violate any shari’ah principle and shows
that in order to be compliant with shari’ah how much emphasis is placed on the
stringent requirements for Islamic Banking.
Likewise the concept of Contract of Murabahah as the modern Islamic Mode of
Financing refers to s type of sale in which a seller provides the buyer with a
commodity with a declared profit at time of purchase and thus such transaction is
referred to as Murabahah transaction and this profit can be in the form of lump sum
or percentage basis. As far as the payment of this contract is concerned then it can
be on the spot or on deferred basis in accordance with the mutual understanding
between the parties. Furthermore as far as this method of Islamic Financing is
concerned the if a person is selling one of the commodity for a lump sum price and
does not quote or attribute a certain cost reference here even though there is some
profit on it then it is known as “musawamah”. However in order for a Contract to be
Murabahah certain principles as to sale have been established by Islamic Jurists in
order to comply with the Shari’ah principles which consists of existence of subject
of sale, Sale must be in the ownership of the seller, must be physically or
constructively possessed by the seller at time of sale, instant and absolute, Having
some value, subject to identification provided to the buyer of the product, delivery
of the commodity to the buyer must be certain and specific and not on chance basis,
there must be certainty as to price, must be unconditional. Therefore Murabahah as
a Mode of Islamic Finance has been permitted by the modern day Shari’ah experts,
however subject to certain conditions such as the use of Murabahah on deferred
payments, but the there are two specific things which should be kept in mind as far
as its Shari’ah compliance is concerned: one is that it not completely a mode of
financing rather a tool in order to deviate away from interest based system such as
seen in the west and to carry out interest free financing with the aim of achieving the
modernization of Islamic economy; Secondly it has been allowed by the Shari’ah
scholars with conditions placed and unless these have been respected and complied
with Murabahah is not permissible and becomes an invalid transaction under
Shari’ah principles.
The other types of Financing Modes are Ijarah (Leasing) and Salam. Ijarah is of two
types one is the employability of persons on wages for the use of their services and
this type of Ijarah is known as “ujrah”, whereas on the other hand another type is
provide assets and properties on rent, however whether or not Ijarah can be used as
a mode of financing depends upon its contractual terms and conditions and whether
it follows the shari’ah principles. Likewise refers to the full payment paid in advance
and delivery permitted at a future date and this was allowed by the Holy Prophet
(PBUH) subject to certain conditions.
Therefore it can be concluded that all the Products and Islamic Banking cannot go
against the principles of Shari’ah as it would be consider not permitted and going
against the very Islamic Law principles and results in imposition of penalties such
as that of imprisonment and fines.
Feedback Received by Sir M: “Kindly add examples from the Western Side and
Add some cases from Pakistan as well”,