5. islamic law of contract
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5. Islamic Law of ContractTRANSCRIPT
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Essentials of Islamic Banking and FinanceIQRA University Gulshan Campus
TALHA SALEEM [email protected]
Islamic law of contract
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Contents of the lecture
Definition of contract; Types of contract;
Basics of the contract;
Conditional contract;
Application of law of contract;
Types of sale;
Q & A;
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Islamic law of contract andtypes of sale
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Definition of contract
Legally a contract is an agreement between two or more persons orparties for doing something;
According to Islam every action or work that takes place betweentwo or parties is a contract;
Therefore, exchange of goods, receiving a gift, accepting a woman
as wife through Nikah and agreement on partnership etc. etc. comeunder the umbrella of 'contract';
Contract has different types for which the rules and law aredifferent;
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A contract can be of two nature: Compensatory or financial contract;
This is a contract in which there is exchange of either goods or servicesagainst an agreed compensation / price / fee / charges;
Non Compensatory or social contract;
This is a contract in which there is exchange of either goods or servicesagainst an agreed compensation / price / fee / charges;
Types of contract
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Basics of a contract
A Financial Contract is allowed in Islam with some conditions: The contract should not contain any element of Riba (explicit or implicit);
The contract should not have element of Gharar (excessive uncertainty);
The contract should conform to the rules laid down by Shari'ah forexecution of contracts;
The contract should not be for those activities which have beenconsidered impermissible (Haram) i.e. general prohibitions;
Element of Riba can easily be recognized and eliminated;
Similarly compliance to the ruling about general prohibition can
also be achieved easily;
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The conformity with laws of Shari'ah and the element of Gharar areimportant points that need elaboration;
Every contract has some basic elements which should conform torules of Shari'ah;
The elements of a contract are:
Parties/persons to contract (those who enter in a contract);
Wordings of contract;
Subject matter of contract (the thing/task meant by the contract);
Compensation (remuneration/price for exchange);
Mechanics of the contracts (rights and responsibilities);
Basics of a contract
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Parties to contract should be: Eligible to enter in such a contract;
Sane;
Mature enough to understand the nature of transaction;
Legally allowed for executing of such transaction (licence/permitrequirement etc. etc.);
Basics of a contract
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Wordings of a contract should: Contain Offer from one party and Acceptance from other ( Ijab-o-Qobool)
in session of contract (Majlisul A'qd);
This Offer and Acceptance can be:
Oral/verbal (Qauli), purchase through bargaining;
Implied/understanding (Ishsraa), purchase in super market;
Be Present i.e. they must create sense of immediate effect (words givesense of future are not allowed, I will buy it does not make sense ofimmediate effect);
Unconditional and Non-contingentconditional wording do not createimmediate effects, I will accept if my father allow it is a conditionalwording;
Basics of a contract
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Subject matter of a contract should be: Lawfullegally and Islamically allowed;
Subject matter and the underlying cause must be lawful;
The transacted object must be legally owned by the parties to a contract;
Existentsomething that exists, contract of supply of mangoes in
January;
Deliverablecan be transacted and exchanged, sale of fish in water orbird in air;
Specified in clear manner, Toyota corolla, XLi, engine # and chassis #;
Quantified if quantifiable, X1000 kg of wheat;
Basics of a contract
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Compensation (remuneration/price for exchange): Conditions apply to Subject matter also apply here;
In case of barter system the application becomes important;
Lawfulness, Existence, Deliverability, Specifiability and Quantifiabilitybecome important;
In normal trade specification of currency is enough;
Basics of a contract
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Mechanics of the contracts (rights and responsibilities) should beclear;
Both parties should bear the responsibility and have the rightswhich are required by the nature of transaction;
In case of sale ownership related risks should be born by owner
during the ownership, after its transfer the owner is notresponsible, (reason behind the secured nature of credit sale);
Any condition inserted which is against the mechanics of thecontract is invalid, (making a lessee in a lease transaction
responsible for ownership related expenses is not allowed.Guaranteeing of principle in a partnership is not allowed whetherboth parties agree on it or not);
Basics of a contract
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Conditional contract
Conditional contract are not permissible in Islam; However, business norms allow conditional contracts especially in
current business scenario;
Ulema and scholars have described the method for inserting acondition in a contract;
Three types of conditions are allowed while one type is not allowed;
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Conditional contract
A condition, which is not against the basic objective of thecontract, is a valid condition, e.g. a condition of free delivery tobuyers premises;
A condition, which is against the basic objective of the contract,but is in the market practice, is also a valid condition, e.g. condition
of five-year warranty and one year free service; A condition, which is against the basic objective of the contract,
not in the market practice and not in favour of any contractor, is avalid condition, e.g. a charity imposed on a transaction;
A condition that is against the basic objective of the contract andnot in market practice and favours one of the contractors or subjectmatter 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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Summary
A contract, whether it is a sale contract or Ijarah contract orpartnership contract, should conform to these basic rules;
Violation of these rules make the contract unacceptable to Shari'ah;
As a matter of principle a contract in one sector may differ inapplication of these rules from other contract in other sector;
Oil sector has different meaning for specification and quantificationfrom what sugar industry has;
Market norms of every sector are the decisive factors in this regard;
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Application
Islamic law of contract applies on all types of contracts;
Here we will see its application to sale (being the vast mode offinancing in Islamic banking industry);
According to Islamic laws of sale these are key elements of a saletransaction:
Contract of sale:
Wordings i.e. Offer & Acceptance ( Ijab-o-Qobool) Oral/verbal (Qauli) orImplied (Ishsraa);
Parties to contract (buyer and seller) [Mutaaquadain] must be Sane andMature;
Does not contain any unacceptable element i.e. sale must be non-contingent,immediate and unconditional;
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Application
Subject Matter (sold good) [Mabee']:Should be Existing, Valuable and Usable, Capable of ownership/title;
Deliverable, Specified and Quantified;
Seller should have title and risk.
Price:
Quantified [Maloom]Specified and certain [Mutaayyan];
Time and mode of payment should be well known;
Delivery and Possession of the sold goods:
Delivery and possession either Physical/Actual or Constructive;
Place and method of delivery should also be known;
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Types of sale
The application of the law of contract into Sale and Purchaseelaborates to us the way an Islamically acceptable sale should be;
A sale sometimes does not comply with these laws and misses someor one of the important elements;
In such case the sale is considered unacceptable to Islam;
There different levels in unacceptability to Shari'ah;
Coming slide elaborate these levels and types;
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Types of sale
According to the nature of contract the sale has four types: Valid sale ( Bai Sahih):
A sale that meets all requirements laid down by Shari'ah for its contractualnature;
Void/Non existing Sale [Bai'-e-Baatil];
A sale that does not meet basic requirements of its contractual nature;
Existing sale but void due to defect (hung sale) [Bai'-e-Fasid];
A sale that meets basic requirements of its contractual nature but containsan impermissible element;
Valid but disliked sale (Bai Makrooh):
A sale that meets basic requirements of its contractual nature but executedin bad/unethical manners.
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Types of sale
Valid sale ( Bai'-e-Sahih): A sale that meets all requirements laid down by Shari'ah for its
contractual nature;
A sale that executed by:
Eligible parties;
With proper wordings;
For exchange of a permissible thing which is identified, quantified and wellknown to both parties;
With specific price; and
Delivery of the sold goods
Exchange of a 'Citizen cx200 golden chain with black dial' watch againstcash payment of PKR 10,000/= with immediate delivery is a Valid Saletransaction;
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Types of sale
Void/Non existing Sale [Bai'-e-Baatil]; A sale that does not meets some or all basic requirements laid down by
Shari'ah for its contractual nature;
A sale that executed:
By ineligible parties; or
For exchange of a impermissible thing; or
For a thing which is not owned by seller; or
For a thing which is not deliverable;
Sale of stolen watch is an invalid (Baatil) sale which does not benefit increation of ownership for buyer nor the price received by seller is Halal
for him;
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Types of sale
Existing sale but void due to defect (hung sale) [Bai'-e-Fasid]; A sale that meets basic requirements of its contractual nature but
contains an impermissible element;
A sale that executed:
With element of Gharar;
For an unspecified thing; or
With unknown price;
Conditionally or contingently;
Sale of one Toyota corolla from a lot of cars with explaining thespecifications;
Such sale is a hung sale meaning the ownership transferred if the buyertakes delivery but the status will be hung unless the element is removed;
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Valid but disliked sale (Bai'-e-Makrooh): A sale that meets basic requirements of its contractual nature but
executed in bad/unethical manners.
A sale that executed at the time of Azaan for Jum'ah;
Sale of grapes to wine maker;
Sale of tranquilizer to addictive person; Interruption in an ongoing deal between two;
Such sale is allowed but disliked by Shari'ah and sometimes highlydiscouraged;
Types of sale
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Questions?