03 lecture islamic law of contract

8/17/2019 03 Lecture Islamic Law of Contract

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Essentials of Islamic Finance – IU Gulshan Campus, Slide # 1

Islamic law of ContractIslamic law of Contract

Essentials of Islamic Finance

IQRA University Gulshan Campus MBA Spring, 21!

Muhammad [email protected]


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Islamic law ofIslamic law ofContractContract


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Essentials of Islamic Finance – IU Gulshan Campus, Slide # "

ContractsContracts

It is compulsorily need for human being to themutual contracts & transactions to met there needs& necessities, therefore we have found the contractwith its all types in pre Islamic era.

inancial contracts, li!e "rading, #easing, and$uarantee contracts, Mortgage, Marriage contractetc were normally practiced.

#aw of contract is the gateway to understand the

Islamic %conomics & iba free ban!ing systemaccordingly.

It is more important the understanding law ofcontract for correct situation and authori'ation of

any transaction by Islamic (urisprudence.


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#egally a contract is an agreement between two ormore persons or parties for doing something)

"herefore, e*change of goods, receiving a gift,accepting a woman as wife through +i!ah andagreement on partnership etc. etc. come under theumbrella of contract)

Contract has di-erent types for which the rulesand law are di-erent)

e/nition of Contracte/nition of Contract


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A contract can be of two nature:

C%mpensat%ry %r &inan'ial '%ntra't(

)his is a '%ntra't in *hi'h there is e+'hange %& either g%%ds %r servi'es

against an agreed '%mpensati%n pri'e &ee 'harges(

-%n C%mpensat%ry %r s%'ial '%ntra't(

)his is a '%ntra't in *hi'h there is n% e+'hange %& either g%%ds %r servi'es

against an agreed '%mpensati%n pri'e &ee 'harges(

"ypes of Contract "ypes of Contract


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"ypes of Contract "ypes of Contract

Trade

Leasing

Employment

Partnership

Paid agency

Commission agency

Gift

Nikah ?

Money lending

Guarantee (Damanat

Non!paid agency

"ights transfer (#a$alah

Non Compensatory / ocial ContractCompensatory / Financial Contract

C!N"#AC"


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0asics of Contract0asics of Contract A Financial Contract is allowed in Islam with some

conditions:

– "he contract should not contain any element of iba1e*plicit or implicit2)

– "he contract should not have element of $harar 1e*cessive

uncertainty2) – "he contract should conform to the rules laid down by

3hariah for e*ecution of contracts)

– "he contract should not be for those activities which havebeen considered impermissible 14aram2 i.e. generalprohibitions)

Element of Riba can easily be recognized andeliminated;

Similarly compliance to the ruling about general

prohibition can also be achieed easily;


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Eery contract has some basic elements whichshould conform to rules of Shari!ah;

"he elements of a contract are:

– 5arties6persons to contract 1those who enter in a contract2)

–

7ordings of contract) – 3ub(ect matter of contract 1the thing6tas! meant by the

contract2)

– Compensation 1remuneration6price for e*change2)

– Mechanics of the contracts 1rights and responsibilities2)

0asics of Contract0asics of Contract


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$echanics of contract

Contract

%arties &or'in(s ub)ect $atter Compensation




#arties to contract should be: – 3ane)

– Mature enough to understand the nature of transaction)

– #egally allowed for e*ecuting of such transaction1licence6permit requirement etc. etc.2)

0asics Contract0asics Contract



$ordings of a contract should: – Contain 8-er from one party and 9cceptance from other

1 I(ab:o:;obool2 in session of contract 1Ma(lisul 9qd2)

– "his 8-er and 9cceptance can be<%ral&erbal '(auli)* purchase through bargaining;

Implied&understanding 'Ishsraa)* purchase in supermar+et;

– 0e 5resent i.e. they must create sense of immediate e-ect1words give sense of future are not allowed, =I will buy it>does not ma!e sense of immediate e-ect2)

– ?nconditional and +on:contingent conditional wording donot create immediate e-ects, =I will accept if my fatherallow it> is a conditional wording)




Sub,ect matter of a contract should be: – #awful legally and Islamically allowed)

"he transacted ob,ect must be legally owned by the partiesto a contract;

– %*istent something that e*ists,

– 5ossession: constructive or physical

– eliverable can be transacted and e*changed, sale of /shin water or bird in air)

– 3peci/ed in clear manner for instance )"oyota corolla, A#i,

engine B and chassis B) – ;uanti/ed if quanti/able, ADDD !g of wheat)



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Compensation 'remuneration&price for e-change): – Conditions apply to 3ub(ect matter also apply here)

– In case of barter system the application becomesimportant)

– #awfulness, %*istence, eliverability, 3peci/ability and;uanti/ability become important)

– In normal trade speci/cation of currency is enough)



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Mechanics of the contracts 1rights and responsibilities2should be clear)

0oth parties should bear the responsibility and have therights which are required by the nature of transaction)

In case of sale, ownership related ris!s should be born byowner during the sale, after its transfer the owner is notresponsible.

9ny condition inserted which is against the mechanics of thecontract is invalid, 1ma!ing a lessee in a lease transactionresponsible for ownership related e*penses is not allowed.$uaranteeing of principle in a partnership is not allowed

whether both parties agree on it or not2



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Essentials of Islamic Finance – IU Gulshan Campus, Slide # 1$

ConditionalConditional

ContractContract

Conditional contract are not permissible in Islam)

4owever, business norms allow conditional contractsespecially in current business scenario)

?lema and scholars have described the method forinserting a condition in a contract)

"hree types of conditions are allowed while one type is notallowed)


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ConditionalConditional

ContractContract

9 condition, which is not against the basic ob(ective of the contract,is a valid condition, e.g. a condition of delivery to buyerEs premises)

9 condition, which is against the basic ob(ective of the contract, butis in the mar!et practice, is also a valid condition, e.g. condition of/ve:year warranty and one year free service)

9 condition, which is against the basic ob(ective of the contract, notin the mar!et practice and not in favour of any contractor, is a validcondition, e.g. a charity imposed on a transaction)

9 condition that is against the basic ob(ective of the contract andnot in mar!et practice and favours one of the contractors or sub(ectmatter or price, is a void and invalid condition, e.g. selling a carwith a condition from seller of its free use for two days everymonth)


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Essentials of Islamic Finance – IU Gulshan Campus, Slide # 1.

3ummary3ummary

9 contract, whether it is a sale contract or I(arah contract orpartnership contract, should conform to these basic rules)

Fiolation of these rules ma!e the contract unacceptable to3hariah)

9s a matter of principle a contract in one sector may di-er inapplication of these rules from other contract in other sector)

8il sector has di-erent meaning for speci/cation andquanti/cation from what sugar industry has)

Mar!et norms of every sector are the decisive factors in thisregard;


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3ale3ale

4ere we will see its application to sale 1being the vastmode of /nancing in Islamic ban!ing industry2)

9ccording to Islamic laws of sale these are !ey elements ofa sale transaction<

– Contract of sale<7ordings i.e. 8-er & 9cceptance 1 I(ab:o:;obool2 8ral6verbal

1;auli2 or Implied 1Ishsraa2)

5arties to contract 1buyer and seller2 GMutaEaquadainH must be3ane and Mature)

oes not contain any unacceptable element i.e. sale must be non:

contingent, immediate and unconditional)


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"ypes of 3ale "ypes of 3ale

"he application of the law of contract into 3ale and5urchase elaborates to us the way an Islamicallyacceptable sale should be)

9 sale sometimes does not comply with these laws and

misses some or one of the important elements)

In such case the sale is considered unacceptable to Islam)

"here di-erent levels in unacceptability to 3hariah)

Coming slide elaborate these levels and types)


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According to the nature of contract the sale hasfour types:

– Falid sale 1 0ai 3ahih2<A sale that meets all re.uirements laid down by Shari!ah

for its contractual nature;

– Foid6 G0ai:e:0aatilH)A sale that does not meet basic re.uirements of its

contractual nature;

– Falid sale but void due to defect 1hung sale2 G0ai:e:asidH)A sale that meets basic re.uirements of its contractual

nature but contains an impermissible element; – Falid but disli!ed sale 10ai Ma!rooh2<

A sale that meets basic re.uirements of its contractualnature but e-ecuted in bad&unethical manners/


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0alid Sale ' 1ai!2e2Sahih): – 9 sale that meets all requirements laid down by 3hariah for

its contractual nature)

– 9 sale that e*ecuted by<Eligible parties;

$ith proper wordings;For e-change of a permissible thing which is identi3ed*

.uanti3ed and well +nown to both parties;

$ith speci3c price; and

4eliery of the sold goods

– %*change of a Citi'en c*DD golden chain with blac! dialwatch against cash payment of 5J D,DDD6K withimmediate delivery is a Falid 3ale transaction)


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Essentials of Islamic Finance – IU Gulshan Campus, Slide # 2"


0oid&51ai!2e21aatil6; – 9 sale that does not meets some or all basic requirements

laid down by 3hariah for its contractual nature)

– 9 sale that e*ecuted<1y ineligible parties; or

For e-change of a impermissible thing; orFor a thing which is not owned by seller; or

For a thing which is not delierable;

– 3ale of stolen watch is an invalid 10aatil2 sale.


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E-isting sale but oid due to defect 'hung sale)51ai!2e2Fasid6;

– 9 sale that meets basic requirements of its contractualnature but contains an impermissible element)

– 9 sale that e*ecuted<

$ith element of 7harar;For an unspeci3ed thing; or

$ith un+nown price;

Conditionally or contingently;

Sale of one "oyota corolla from a lot of cars with e-plaining

the speci3cations;

– 3uch sale is a hung sale meaning the ownership transferredif the buyer ta!es delivery but the status will be hungunless the element is removed)


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Essentials of Islamic Finance – IU Gulshan Campus, Slide # 2$

0alid but disli+ed sale '1ai!2e28a+rooh): – 9 sale that meets basic requirements of its contractual

nature but e*ecuted in bad6unethical manners.A sale that e-ecuted at the time of Azaan for 9um!ah;

Sale of grapes to wine ma+er;

Sale of tran.uilizer to addictie person; Interruption in an ongoing deal between two;

– 3uch sale is allowed but disli!ed by 3hariah andsometimes highly discouraged)



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Rule of Sales


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Essentials of Islamic Finance – IU Gulshan Campus, Slide # 2.

L 3ale is de/ned in 3hariah as

=%*change of a thing of value, by another thing ofvalue, with mutual consent>

ule of saleule of sale


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Rule "he sub(ect of sale must e*ist at the time of sale.

For E-ample*


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Rule ? "he sub(ect of sale must be in the physical or constructive

possession of seller at the time of sale.

Constructie #ossession= means where the buyer hasnot ta!en physical delivery of goods, but the goods are

under his control. 9nd all rights and liabilities of thegoods have passed to him,i.e. the goods are at his ris!.

or %*ample, =9> has purchased a car from =0>, =0> has notphysically handed over the car to =9> but has placed it ata garage which is in control of =9>. =9> can access the car

whenever he wants to do so. "he ris! of the car haspractically passed to =9>, the car is in the =Constructive5ossession> of =9>,now =9> can sell the car to third party.

ule of 3aleule of 3ale


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Rule @

"he sale must be instant and absolute. "hus a saleattributed to a future date or a sale contingent on afuture event is void.

or %*ample, =9> says to =0> on the st of anuary I sell

my car to you on the st of ebruary>. "he sale is void,because it is contingent on a future event.



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Essentials of Islamic Finance – IU Gulshan Campus, Slide # "1

Rule "he sub(ect of sale should be an ob(ect of value. 9 thing

having no value according to the usage of trade cannot besold.

"hus a thing having no value according to the usage of trade

e g) a leaf or a stone on a roadside cannot be sold orpurchased.

Rule B

"he sub(ect of sale should not be a thing used for a 4arampurpose, e.g. por!, wine etc. "he sub(ect should be Maal:e:mutaqawwam



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Rule "he sub(ect of sale should be speci/cally !nown and

identi/ed to the buyer. "he sub(ect of sale must beidenti/ed by pointing out or by detailed speci/cationwhich can distinguish it from other things not sold.

or %*ample, =9> points to a building and says to =0>< NIsell one of the apartments in this building to youE. "hesale is void unless the apartment is speci/cally

identi/ed to the buyer.



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Rule D

"he delivery of the sold commodity to the buyer shouldbe certain and should not depend on a contingency orchance.

or %*ample, =9> sells his stolen car to a person in hopethat he will manage to get it bac!, the sale is void.



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Rule "he certainty of price is a necessary condition for the

validity of sale.

or %*ample, =9 says to =0>< NIf you pay in one month, the

price is sOD, but if you pay in months the price issOOE. "he price is uncertain and the sale is void.

=9> can give the two options to =0>, but then =0> mustselect one option to validate the sale.



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Rule

"he sale must be unconditional. 9 conditional sale isinvalid, unless the condition is recogni'ed as a usualpractice of trade

or %*ample, =9> buys a refrigerator from =0> with acondition that =0> underta!es its free service for years. "he condition, being recogni'ed as a part of thetransaction, is valid and the sale is lawful.



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03 lecture islamic law of contract

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