Islamic Banking and Finance

Dr. Irum Saba

 ISLAMIC CONTRACT

• There are three basic types of undertaking and

contract
1. Wa’’ da
2. Muwa’ida or Mua’hida
3. Aqd
 WA’DA
• It means promise. It refers to a unilateral undertaking or
promise extended by one person to another in which he
offers to act or omit to do something in future.
– Example:
• A promises to sell his car to B within the next 3 months for Rs.
500,000; this is a unilateral undertaking or Wa’da.
– Enforceability
• It is enforceable under the present conventional law in Pakistan
• The fuquha have differed on whether wa`da is enforceable by law or
not:
• According to Imam Abu Hanifa Wa’da is not enforceable by law
(Qada’an) however he is of the opinion that Wa’da puts a moral
obligation (Diayanat’an) on the promisor. However, some of the
Hanfi jurists write that some of the promises can be made enforceable
under the necessity.
• According to Imam Malik, Wa’da is enforceable by law.
 WA’DA
• The consensus of present Ulama is that Wa’da is enforceable by law
unless the promisor is not in a position to fulfill his or her promise. In
this case, if it is not due to the negligence of the promissor, then he
has to make good the loss to the promisee. For example, where A
promises to sell a horse to B and the horse dies without any
negligence on the part of A, then no damages are due from A to B.
But if the horse dies due to A’s negligence then A has to make good
the loss to B. This will be the case where A promises to sell a horse to
B for Rs. 10,000 within the next month and subsequently sells it to C
before the month elapses.
 Muwa’ida or Mu’ahida (Agreement)
• It means bilateral undertaking (mutual promises) or agreement.
• According to the majority of the Sharia Scholars, Mua’ida is not
allowed in situations where Aqd (see below) is not allowed (e.g.
forward contracts), and thus is not enforceable by law.
• According to the some Scholars of the Sub-continent, Mua’hida is
enforceable by law, unless the Mua’hida covers transactions like
short selling of currencies or shares that are not allowed per se.
• The rationale of those who support enforceability, is that in some
cases Muwa’ida required, where it is used to hedge the risks in
actual trades not used for any speculative transactions. For
example, an importer needs to hedge foreign exchange, but since
future contracts are not allowed in Islam they could do so through
forward contracts however, now, they can achieve the same effect
through bilateral promises. The difference between future contract
and bilateral promise is that unlike Aqd, the ownership of assets
covered by the Mua’hida is not transferred at the time of signing
the Mua`hida agreement.
 AQD’
• An Aqd’ or contract is a transaction which has been executed
between two or more parties.

– Example:
• A sells his mobile to B for Rs. 5,000.

– Types of Aqd’
• Uqood e Muawadha
• Uqood e Ghayr Mu`awadha

– Uqood e Mu`awadha
• These are regular contracts where one person sells something to
someone else for a price or compensation, for example sale of a
pen by A to B for Rs. 50.

– Uqood e Ghayr-Muawadha
• These are contracts where one person gives something to someone
else without any compensation, for example an aqd of, guarantee
Aariyah, Wadia and Loan.
 Essentials of `Aqd
• The Following elements are required to constitute a valid aqd.
1. Muta’qidin (contractors)
2. Alfaz e Aqd (Wording of Contract)
3. Ma’qood Alaih (Subject Matter)
4. Ma’qood Bi’hi (Consideration
The fourth element is not applicable in Uqood e Ghayr-Muawadha

– Muta’qidin (Contractors)
• The contractors must not be mahjoor i.e. unable to make a contract.
Islamic Shariah identifies 3 types of people as mahjoor.
– Alfaz e Aqd’ (Wording of Contract)
• The wording of the contract should be instant and immediate, and
not contingent on a future event, as a future sale is not allowed in
Islam. Also the wording should either be unconditional, or if
conditional then the conditions imposed should not be against the
contract,
 Essentials of `Aqd
– Ma’qood Alaih (Subject Matter)
• It should be existing, valuable, usable under Shariah, capable of being
owned and delivered & possessed. Furthermore, it should be specified
& quantified, and at the time of sale the seller must (i) have title to it,
and (ii) be liable for all risks associated with its ownership.

– Ma’qood Bi’hi (Consideration)

• It should be quantified and specified & certain. For example, a price
of Rs. 300. It should be noted that Ma’qood Bi’hi (consideration) is
not necessary for Uqood Ghair Muawadha.
– Other Issues in Aqd
• We will discuss two more issues in Aqd’ here.

1. Safqatain fi Safqa (Two contracts in one contract)

2. Tawkeel fil Aqd’ (Agency in contract)
 Other Issues in Aqd
– Safqatain fi Safqa (Two contracts in one contract)
• It means accumulation or mixing up of two different contracts in
such manner that the execution of one becomes contingent on the
execution of the other. This is not allowed by the Holy Prophet
(SAWS) in a famous Hadith and it renders a contract void. This is
why, Hire-Purchase contract in not allowed in Islam.

– Tawkeel fil Aqd’ (Agency contract)

• It means the appointment of an agent (wakil) on behalf of a
contractor. There are two types of contracts:
• One, in which all the rights and obligations remain with the
principal (Muwakkil) or the contractor. For example, in the aqd of
Nikah (Contract of marriage), if a person A makes B his agent to
marry him to a lady C, after the marriage no rights, responsibilities,
or benefits accrue to B, if the Nikah (Marriage) is between A and
C. Hence, C can claim her dowry (Mehr) and other expenses only
from A.
• Two, in which they can remain with the agent. For example if A
appoints B as his agent and B buys a car from C for Rs. 500,000 on
credit and does not disclose this to C that he is acting as an agent for
A then C can claim his money from only B. However if B discloses
this, then C can claim his money from A as well.

• If we apply the above mentioned rules of agency in Islamic banks,

when the banks appoint their agents to procure specific goods on their
behalf from suppliers, and acting their agents, they buy the goods
from suppliers, and they do not disclose the names of bank
(Muwakkil or principals) for whom they have bought these
commodities, the banks are not responsible to the suppliers for the
price of the goods purchased. Therefore, the Suppliers cannot claim
the price from the banks.