Business & Finance Contracts

in Islam

Prof. Dr. Ashfaq Ahmad (HEC Approved PhD Supervisor)

Professor, Hailey College of Commerce
 ISLAM & Components of Shariah

I`tiqadiyah `Amaliyah Akhlaqiah

(Belief) (Dealings) (Morality)

Ibadah Muamalah
(Human with Creator) (Human with human)

Economics/Finance Family Law Criminal Law Politics

Islamic Principles of Business & Finance

Basis of Sharia'h
 Formulation Of Legal Rulings
Shari’ah (Quran & Sunnah) Primary Sources

Decisive texts Non-Decisive texts

Undergo interpretation
Applied directly as (ijtihad)
legal rulings according to recognised
(hukm shari`i) Methodology
(usul al fiqh)

Legal rulings (hukm fiqhi) Secondary Sources

ISLAMIC LAW
 Development of Rulings in Transactions

AL-QURAN
Islamic law of contract starts with Quranic verses which contains
both rudimentary elements of several types of nominate contracts
& certain contractual maxims {40 verses on 12 types of contract
(exclude contract of marriage)}

AL-SUNNAH
Al-Sunnah supplement the Quranic groundwork &
expand the application of general injunctions

IJTIHAD OF MUSLIM JURISTS

The law (general principles) were later developed
by jurists using the mechanism of usul al-fiqh
FUNDAMENTALS OF CONTRACT (AQAD)
IN ISLAMIC LAW
 Theory of Contract In Islamic Finance
Any transfer of wealth or property has to be made
through a valid contract or `aqad
Underlying rule : all contracts are deemed
permissible except when there is contravention of
any established principles of Islamic law
The parameter : Avoidance of any contravention of
the established principles and prohibitions in
Islamic law

The Quran says:

“O you who believe! Eat not up your property among yourselves unjustly except
it be a trade amongst you, by mutual consent…” (4:29)
 Surah Al-Nisaa 4:29

‫َيا َأُّيَها اَّلِذ يَن آَم ُنوا اَل َتْأُك ُلوا َأْم َو اَلُك ْم َبْيَنُك ْم ِباْلَباِط ِل ِإاَّل‬
‫َأْن َتُك وَن ِتَج اَر ًة َع ْن َتَر اٍض ِم ْنُك ْم َو اَل َتْقُتُلوا َأْنُفَس ُك ْم‬
‫ِإَّن َهَّللا َك اَن ِبُك ْم َر ِح يًم ا‬
O ye who believe! eat not up your property among
yourselves in vanities: but let there be amongst
you traffic and trade by mutual good-will: nor kill
(or destroy) yourselves: for verily Allah hath been
to you Most Merciful.
 Any transfer of wealth or property has to be made
through a valid contract or `aqad

Divine Sources Mutual Consent

(Quran & Sunnah)
 Definition of a contract in Islam
• Contract in Islamic law is termed as `aqd or `uqud
(plural)
• `Aqd literally means: bond or knot
• `Aqd legally means: the linking of offer and acceptance,
resulting in legal effects on the subject matter of the
contract.
• In Islamic law, `aqd includes both bilateral as well as
unilateral contracts
 Islamic Law of Contract

1.Wa’d (Promise)
2.Muwaada (bilateral promises)
3.Aqd (contract)
 Components of Contract (Aqad)
1. Contracting Parties (mature and sane)
2. Subject matter
o Valuable
o Existence
o Ownership
o Ability to deliver
o Specific
3. Offer and Acceptance
 Classification of Contracts
(with respect to validity)

1.Sahih (valid), Nafiz and Mawqoof

2.Fasid (voidable)
3.Batil (invalid)
 Classification of Contracts
(with respect to Benefit)

1.Unilateral contracts
2.Bilateral contracts
PILLARS OF CONTRACT
Contractual expression or sighah, i.e. offer &
acceptance (ijab wa qabul)

Parties to the contract (`aqidan) i.e. offerer &

offeree

Subject matter of the contract (mahall al

‘aqd) i.e. goods & price/consideration
 Contractual Expression

Clear &
Unambiguous

Unity of
Conformity contractual
between Offer - session may be
Acceptance actual/
constructive

Offer and Acceptance

made in 1 contractual
session
 Parties to Contract

Fully competent to
enter & execute
contract

Observe
Understand contract’s
impediments to
implication
legal competency

Possess legal
power/authority to
conclude the contract
 Subject Matter of Contract

In existence or
capable to be
delivered

Known to the parties A valuable item

Legally recognized
material
 ESSENTIAL CONDITIONS OF A VALID CONTRACT

CONTRACTUAL CONTRACTING SUBJECT

EXPRESSION (Sighah) PARTIES MATTER
(Aqidan) (Mahall al `aqd)

Offer Acceptance Offeror Offeree Goods/ Price/

asset consideration
• Clear • Of full contractual capacity
• Consensus ad idem (ahliyyah al-ada’ al-kamilah) • Something of value
• Corresponding offer • Legal authority to contract • Ascertainable
• As owner & in possession • Legal
& acceptance
of asset
• legal representative
(agent, guardian etc.)
SHARI`AH COMPLIANCE: MAIN PRINCIPLES

CONTRACTS

Mutual
Void Lawful
Lawful Contractual
Contractual
Mutual consent
consent Objective
Objective

Interest Uncertainty Gambling Other prohibitions

(riba) (gharar) (maysir/qimar) e.g. Liquor, pork
 KEY ISLAMIC COMMERCIAL CONTRACTS

Gratuitous
Gratuitous Trading
Trading Investment
Investment Supporting
Supporting
Contracts
Contracts Contracts
Contracts Contracts
Contracts Contracts
Contracts

Gift
Gift Leasing
Leasing Sale
Sale Mudarabah
Mudarabah Kafalah
Kafalah

Waqf
Waqf Musharakah
Musharakah Rahn
Rahn
Operational
Operational Bay`
Bay` Bithaman
Bithaman
Loan
Loan Lease
Lease Hiwalah
Hiwalah
Ajil
Ajil (BBA)
(BBA)
Ibra’
Ibra’ Wadiah
Wadiah
Financial
Financial Lease
Lease Murabahah
Murabahah
Wakalah
Wakalah
Salam
Salam
Jualah
Jualah

Istisna’
Istisna’ etc.
etc. Muqasah
Muqasah
 Principles of Islamic Business

1.Islamic Values
2.Islamic teachings to business
3.Major prohibitions
 Islamic Values
1. Integrity

2. Principle of stewardship of humanity on earth

3. Sincerity

4. Piety

5. Righteousness and perfection at work

 Islamic Business Teachings
1. Avoid Riba
2. Avoid Gharar
3. Honesty and fair trade
4. Disclose faults
5. Avoid misrepresentations
6. Avoid selling over and above the sale of another
7. Avoid selling forbidden items
8. Avoid hoarding
9. Sale of commodities in open market
10.Avoid Bai’ al-Mudtar
 What to do and what to avoid
• Conclusion of contract by mutual consent
• Avoidance of riba’
• Avoidance of gharar
• Avoidance of transactions involving maysir (gambling)
• Avoidance of transactions involving prohibited
commodities
 SHARI`AH COMPLIANCE?
• In Islamic jurisprudence, main source of law is Shari`ah or
Islamic law as contained in the Quran & Sunnah

• Underlying rule: all contracts are deemed permissible except

when there is contravention of any established principles of
Islamic law / Shari`ah

• Legal maxim (qa`idah fiqhiyyah):

“Al Asl fi al `Uqud al Ibahah”
-“the original rule in contracts is permissibility”
• The parameter: Avoidance of any contravention of the
established principles and prohibitions in Islamic law
Importance of Trade in the Holy Quran

‫َو َجَع ْلَنا الَّلْيَل َو الَّنَهاَر آَيَتْيِن َفَم َح ْو َنا آَيَة الَّلْيِل َو َجَع ْلَنا آَيَة‬
‫الَّنَهاِر ُم ْبِص َر ًة ِلَتْبَتُغ وا َفْض اًل ِم ْن َر ِّبُك ْم َو ِلَتْع َلُم وا َعَدَد‬
17|12| ‫الِّس ِنيَن َو اْلِح َس اَب َو ُك َّل َش ْي ٍء َفَّص ْلَناُه َتْفِص ياًل‬
We have made the Night and the Day as two (of Our) Signs;
the Sign of the Night have We obscured, while the Sign of the
Day We have made to enlighten you; that ye may seek
bounty from your Lord, and that ye may know the number
and count of the years: all things have We explained in detail.
(Al Israa': 12)