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FINANCIAL SECTOR TALENT ENRICHMENT PROGRAMME

FUNDAMENTALS OF SHARIAH
presented by

Ahmad Sanusi Husain

CONTENTS

1. Participating Contracts
- Types of Participating Contracts
- Essential Elements
- Necessary Conditions
2. Supporting Contracts
- Types of Supporting Contracts
- Essential Elements
- Necessary Conditions

TYPES OF PARTICIPATING CONTRACTS


Shirkat (Partnership)

Shirkat Milk
(Holding Partnership)

Shirkat Uqud
(Contractual Partnership)

Inheritance (Faraid)
Will (Wasiyyat)
Mudharabah
(Trustee Partnership)

Shirkat Amwal
(Partnership in capital)

Shirkat Mufawada
(equal shares)

Shirkat Aamal (Abdan)


(Partnership in work)

Shirkat Wujuh
(Receivable partnership)

Shirkat Inan
(unequal shares)

PARTICIPATING CONTRACTS
Definitions of Musharakah and Mudharabah

Musharakah is a general partnership whereby


two or more parties enter into a contract to exploit
their labour and capital jointly and to share the
profits and loses of the partnership.

Mudharabah is a contract where the owner of


capital entrusts his funds to an entrepreneur who
contributes skills is business and the profits
generated is to be shared between them.

There are five essential elements of Musharakah and


six of Mudharabah as follows.
Musharakah
(i)
partners
(ii)
capital
(iii) business
(iv) profit sharing and
(v)
contract

Mudharabah
(i) owner(s) of capital
(ii) entrepreneur
(iii) capital
(iv) business
(v) profit sharing
(vi) contract

(1)

Musharakah

its

There are 16 necessary conditions relating to


essential elements.
(1)

i.e.:
the
tense nor
and
one and

Contract
There are three necessary conditions,
(i) in definite and decisive language. In
present or past tense, not future
imperative
(ii) acceptance must agree with offer
(iii) offer and acceptance made at the
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(2)
Partners must meet
necessary conditions:
(i)

the

following

four

capable of taking responsibility, i.e.


- of sound mind
- reached the age of puberty
- reached majority (18 years old)

(ii)
not prohibited from dealing
properties:
- not declared bankrupts or
- not declared prodigals
(iii)

with

their

no coercion is exerted on them

(iv)
capable
appointed as

of appointing
agents.

agents

and

be

(3)

Capital
There are five necessary conditions:
(i)
(ii)
(iii)
(iv)
(v)

any asset valued in money


not debt
specific amount
from all partners
paid into capital fund

(4) Business
There are two necessary conditions:
(i)
(ii)

halal and
managed by all the partners

(5) Profit/ Loss Sharing


There are two necessary conditions:
(i)

according to proportion of shares or


according
to
agreement
in
fraction, ratio
or percentage, not in absolute amount.
(ii)
loss born by all partners according to
proportion of shares
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(2)

Mudharabah

its

There are 16 necessary conditions relating to


essential elements.
(1)

i.e.:
the
tense
and

Contract
There are three necessary conditions,
(i)

in definite and decisive language. In

present or past tense, not future


nor imperative
(ii) acceptance must agree with offer
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(iii) offer and acceptance made at the

(2) and (3)


Owner(s) of Capital and Entrepreneur must meet the
following four necessary conditions:
(i)

capable of taking responsibility, i.e.


- of sound mind
- reached the age of puberty
- reached majority ( 18 years old)

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(ii)
not prohibited from dealing
properties:
- not declared bankrupts or
- not declared prodigals
(iii)

with

their

no coercion is exerted on them

(iv)
capable
appointed as

of appointing
agents.

agents

and

be

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(4)

Capital
There are five conditions:
(i) money only
(ii) not debt
(iii) specific amount
(iv) from owner(s) of capital only
(v) paid to entrepreneur

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(5)

Business
There are two necessary conditions.
(i) halal
(ii) managed by entrepreneur only

(6)

Profit Sharing
The two necessary conditions are:

(i) profit shared according to agreement in


fraction, ratio or percentage, not in
absolute
amount.
(ii) loss borne by owner(s) of capital only
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Application of Musyarakah and Mudharabah


Contracts
Musharakah and Mudharabah contracts may be
used by
corporate as well as individuals. They may be
applied in
all sectors of industry i.e. agriculture,
manufacturing,
trading, banking, transportation and other
services.
In corporate sector they are used to create equity16

SUPPORTING CONTRACTS
Supporting contracts most often used in connection
with debt financing are as follows:
-

rahn (pledge)
dhaman (guarantee)
wakalah (agency)
wadiah (safe custody), and
ibraa (rebate)

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(1) Rahn (pledge)


There are five essential elements of pledge as
follows:
(1)
(2)
(3)
(4)
(5)

Pledgor
Pledgee
Obligation or right to a claim (debt)
Pledge (property pledged)
Contract : offer and acceptance

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(1) and (2) Pledgor and Pledgee


Pledgor and Pledgee must meet three necessary
conditions as follows:
(i) They must be capable of taking responsibility.
(ii) They must not be prohibited from dealing with
their properties.
(iii) No coercion is exerted on them.

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(3) Obligation (debt)


There are two necessary conditions that must be
met:
(i) A debt must have been established.
(ii) The debt must be known.

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(4) Pledge (property pledged)


Anything that can be bought and sold can be pledged and
this must meet six necessary conditions as follows:
(i) It must exist (can be perceived by sense of touch).
(ii) It must be pure (halal) according to the shariah.
(iii) It must be of use according to the shariah.
- It must not be too little as to be of no use.
- It must not distract from remembering Allah.
- It must not be used for haram purposes.

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(iv) It must be owned by the pledgor.


(v) It must be capable of being delivered; it must
be free from encumbrances.
(vi) It must be known and specific by address,
description or specification.

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(5) Contract
There are two necessary conditions of contract of
pledge :
(i)

A pledge becomes a concluded contract by the


offer and the acceptance of the pledgor and
pledgee. The offer and acceptance must be
absolute and in definite and decisive language.
(ii) The acceptance must agree with the offer.

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Other features relating to the pledged


property:
(i) One pledge may be exchanged for another.
(ii) It is lawful to increase the debt that is secured
by the pledge.
(iii) One pledge can be taken as security for two
different debts from two different creditors.
(iv) A borrowed property can be used as a pledge

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(v)
(vi)

(vii)

The pledgee has a right to possession of


the pledge until its redemption.
A pledge does not become necessary to
be returned when the debt is partly paid
off. The pledgee has a right to hold it
until the debt is paid in full.
It is invalid for the pledgor or pledgee to
sell or pledge a pledged property without the
others consent.

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(viii)The pledgor is forbidden from uplifting the


pledge.
(ix) The pledgee may on his own accord, release the
property from the pledge.
(x) On maturity of the debt and the pledgor refuses
to make payment, the pledgee may apply to the
court to compel the pledgor to sell the pledge in
order to pay the debt. If the pledgor still refuses
to make payment the court may sell the pledge
to pay the debt.

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(2) Kafalah or Dhaman (guarantee)


The term Dhaman is usually used in respect of debt
(money or property) and there are five essential
elements, namely:
(1)
(2)
(3)
(4)
(5)

Dhamin (guarantor)
Madhmun lah (creditor)
Madhmun anh (debtor)
Madhmun bih (debt)
Contract

There are seven necessary conditions that must be met in


Dhaman.
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(1) Guarantor
Guarantor must meet two necessary conditions as
follows:
(i) He must be capable of taking responsibility.
(ii) He must not be prohibited from dealing with
his
property.
(2) and (3) Creditor and Debtor
- Creditor and debtor must be known to the
guarantor.

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(3) Debt
There are three necessary conditions of debt as
follows:
(i) The debt must have been established and certain
(ii) It must be obligatory, i.e. an obligation on the
debtor
(iii) It must be known in amount
(4) Contract
- Contract must be absolute and in definite and
decisive language.

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(3) Wakalah (agency)


Wakalah has four essential elements as follows:
(1) Muwakkil (principal)
(2) Wakil (agent)
(3) Muwakkal bih (business or work for which the
agent is
appointed to do), and
(4) Contract
There are seven necessary conditions relating to the
essential elements.
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(1) and (2) Principal and Agent


There are three conditions relating to principal and
agent
as follows:
(i) They must be capable of taking responsibility
(ii) The principal must be competent and have the
right to do in person what he authorises his agent
to do
(iii) The agent must himself be capable of doing on his
own account what he is appointed to do for another

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(3) Business or Work


The business or work that is to be done by the
agent
must meet three necessary conditions as follows:
(i) The property or right must belong to the
principal
(ii) The business or work may be performed by
another person
(iii) The property, right, business or work must be
known

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(4) Contract
There is only one necessary condition relating to
contract.
- The contract must be in definite and decisive
language.
Types of Agency
- The property, right , business or work concerning
which the agent is to perform may be general or
specific. If it is specific, it must be specified in
the
contract.
- An agent may receive fees for his services.
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Duties of An Agent

- An agent is a safe custodian for the things that is


entrusted to him before delivery to the principal
or a third party.

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Contracts of an agent is incumbent on his


principal in
the following matters:
-

Hibah (git)
Lending and borrowing
Debt (deferred payment sale)
Wadiah (safe custody)
Rahn (mortagage)
Musharakah, and
Mudharabah

In these contracts the agent must mention that


he acts on behalf of his principal.
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(4) Wadiah (safe custody)


Wadiah has four essential elements, namely:
(1)
(2)
(3)
(4)

Depositor
Custodian
Deposit, and
Contract

There are four necessary conditions to the


essential elements.

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(1) and (2) Depositor and Custodian


- Depositor and custodian must be capable of
taking responsibility.
(3) Deposit
- Deposit must meet two necessary conditions,
namely:
(i) It must be capable of being managed by the
custodian.
(ii) It must be capable of being stored; it must
not be
perishable.
(4) Contract
- It must be in definite and decisive language.

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Types of Wadiah
There are two types of Wadiah:
1. Wadiah Yad Amanah (trustee safe custody)
2. Wadiah Yad Dhamanah (guaranteed safe custody)
In Wadiah Yad Amanah the custodian must safeguard the
deposit by
these three ways:
(i) Not mixing or pooling the deposits of the different
depositors under his custody
(ii) Not using the deposits; and
(iii) Not charging any fees for safe custody
If he failed in any of the above Wadiah changes to Yad
Dhamanah
where:
He has to guarantee (return or replace) the deposits to the
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owners if they were lost or destroyed.

(5) Ibraa (rebate)


Ibraa arises out of a deferred payment sale where the
buyer makes an early redemption.
Ibraa has five essential elements, namely:
(1)
(2)
(3)
(4)
(5)

Creditor (seller)
Debtor (buyer)
Debt (deferred selling price)
Ibraa (the partial refund of money paid)
Contract

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(1) and (2) Creditor and Debtor


The necessary conditions of creditor and debtor are the
same as those of buyer and seller in a contract of sale.
(3) Debt
The debt as the selling price must meet these two
necessary conditions:
(i) Absolute in amount
(ii) Known currency

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(4) Ibraa
There are two ways of dealing with Ibraa, i.e:
(i)
(ii)

It must not be stated in absolute amount or


percentage in the asset sale agreement; or
It may be stated in the ASA in an absolute amount
and a known currency. When this is done there will
be two prices in the contract and the seller (creditor)
is entitled to the lesser of the prices only. It is then
invalid and forbidden for the seller to withdraw the
Ibraa

(5) Contract
- It must be in definite and decisive language.

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FINANCIAL SECTOR TALENT ENRICHMENT PROGRAMME

Thank you

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