.

Fiqh for Economist 2

ECON 3511

1- Usury or Interest (Riba)

The Quran and the Hadith have forbidden
usury and all usurious transactions in the
strongest terms.
Types of Riba:
- There are two categories of riba which are
Riba on credit (riba al- naseea )
and riba on cash (riba al- fadhl).

Prohibited elements in transactions

A- Riba on Credit (riba al- naseea)

- Riba al- nasiyyah refers to: a stipulated
increase over the loan which a debtor agrees
to pay to his creditor in relation of a specific
period of time.
- It is a fixed charge payable by the borrower
to the lender irrespective of what the loan
money produces.
- Thus, any gain that comes from a loan
transaction is usurious.
- This type of riba is prohibited by the Quran
(30:39; 4: 160-1; 3: 130; and 2: 275-281).

-The hadith of the Prophet p.b.u.h. states:

Jabir said that Allah's Messenger (may
peace be upon him) cursed the accepter of
interest and its payer, and one who records
it, and the two witnesses, and he said: They
are all equal.)Bukhari and Muslim)
-Since the verses of Quran has directly
rendered this type of riba as haram, it is
called riba al-Quran.
- Similarly, since only this type was considered
riba in pre-Islamic era it has earned the
name of riba al-jahiliyya

Riba usually arises when the parties

to a certain transaction deal with
properties which are perishable and
homogeneous. E.g: gold, silver,
money, dates, salt, etc. While lending
these properties the creditor is not
allowed to charge the debtor for their
use. In contrast, a person may charge
another for the use of his usable
property such as house or a car as
their future benefit is certain.

B- Riba on Cash, Barter (Riba al-fadhl)

Riba al-Fadhl is prohibited by the hadith of
the Prophet p.b.u.h.
- This type of riba is specifically prohibited by
the Prophet (pbuh). It gives a more
comprehensive implication to riba and is not
merely restricted to loans.
Riba Al-fadhl applies to certain types of sales
transactions, both immediate exchanges as
well as credit exchanges. It is commodity
specific and results in what is known as riba
Al-Fadhl.
Also known as riba al-Sunna or riba
alhadeeth

Riba al-Fadhl is described as an unlawful excess in the

exchange of two counter-values where the excess is
measurable through weight or measure.
The basis for the prohibition of riba in the exchange of
commodities is the famous hadeeth of the Prophet on
six commodities:
1- The hadith states: Abu Sa'id al-Khudri (Allah be
pleased with him) reported Allah's Messenger(may
peace be upon him) as saying:

.
Gold is to be paid for by gold, silver by silver,
wheat by wheat, barley by barley, dates by dates,
salt by salt, like by like, payment being made
hand to hand. He who made an addition to it, or
asked for an addition, in fact dealt in usury. The
receiver and the giver are equally guilty
(Muslim).

2- In another hadith it is narrated: Abd Sa'id

reported: Bilal (Allah be pleased with him)
came with fine quality of dates. Allah's
Messenger (may peace be upon him) said to
him: From where (you have brought them)?
Bilal said: We had inferior quality of dates and
I exchanged two sa's (of inferior quality) with
one sa (of fine quality) as food for Allah's
Apostle (may peace be upon him), whereupon
Allah's Messenger (may peace be upon him)
said: Woe! it is in fact usury; therefore, don't
do that. But when you intend to buy dates (of
superior quality), sell (the inferior quality) in
a separate bargain and then buy (the superior
quality).

Gold, silver, wheat, barley, dates, and salt

are also called ribawi properties.

Illah

in Riba (The underlying cause)

- Fiqh Schools are of the opinion that the
Hadith is of general application and is not
necessarily confined to these six items but
could be extended to other commodities
through Qiyas.(Except Zahiris)
- However, they differed among themselves on
the cause (illah) for the prohibition:

- Malikis the unequal exchange of gold

against gold and silver against silver is
prohibited as they belong to the class of
money. They also say that the four other
commodities which are mentioned by the
Hadith are types of foodstuffs, which can be
stored or preserved. They argue that the
illah is the quality of storability therefore all
foodstuffs that can be stored are covered by
the Hadith.

The Shafiis and One of the narrations

for Imam Ahmad: while agree with the
Malikis on gold and silver contend that
storability is not necessary and the Hadith
could be extended to all foodstuffs.
One narration for Imam Ahmad restrict
the prohibition
to the two; money and
foodstuffs measured by volume or weight.
The Hanafis, however extended the Hadith
to all commodities that are normally sold by
weight or measurement

The combined effect of these two Hadith is

that when ribawi properties are exchanged
against each other they should be exchanged
on equal basis and any such exchange
should be immediate.
Riba al-fadhl arises when:
1- one of these commodities is exchanged for an unequal
amount of the same commodity or
2- when the amounts are equal the delivery of one of
them is deferred
For example, it is usurious to sell or exchange one
measure of wheat for two measures of wheat or one kg
of dates for two kg of dates or one measure of wheat for
two measures of barley deliverable at a future period.

-If the parties are not willing to exchange their

commodities such as dates on equal basis
then one of them should sell his dates and
use the money to purchase the dates from
the other party.

15-9-15
Equality is not a condition where different ribawi
commodities are exchanged against each other.
However, such an exchange should take place
immediately and from hand to hand.
For instance, the sale of ten grams of gold for
fifty grams of silver, and the sale of two loads of
barley in exchange for one load of wheat are not
usury because these commodities are not of the
same type.
However, the exchange should be immediate. It
is not lawful to sell ten grams of gold for fifty
grams of silver or one measure of wheat for two
measures of barley payable at a future time.

The conditions of equality or immediateness

of delivery are not applicable to properties
that
fall
outside
ribawi
commodities.
Properties that are not sold by weight,
measurement,
or
counting
could
be
exchanged based on the agreement of the
parties.
For instance, the parties may agree to
exchange one car for two cars or one sheep
for two sheep.

-The differences between riba al- naseea and

riba al-fadhl:
1- Riba al- naseea is prohibted by The Quran and
the Sunnah while riba al-fadhl is prohibted by the
Sunnah only.
2- Riba al- naseea may happen in cases of loan
while riba al-fadhl may happen in a sale contract.
3- In cases of debt it is possible that a debtor
voluntarily returns an additional amount to the
creditor while in exchange of ribawi commodities
against each other any addition is prohibited.
4- Riba al- naseea is bad in itself( muharam lidhatihi), but riba al-fadhl (muharam li ghairihi) for
the sake of others as it leads to riba al-nasiyah .

2- Ambiguity (Gharar)
Gharar literally means uncertainty, danger.
Technically: it refers to a sale contract which
is attractive to the purchaser in its form but
unknown and ambiguous in its substance.
The parties or one of them may not know
what could be achieved from the contract
The Quran prohibits all those dealings where
the intention is to deceive one of the parties
in a contract.
The Quran states that Muslims should not
devour one anothers property wrongfully

-The Sunnah of the Prophet p.b.u.h. has

specifically prohibited transactions which
involved elements of gharar.
These include transactions determined by
throwing stones, by mere touching without
proper inspection, or by chance.
The main reasons for the prohibition of
gharar are:

the contracts involving gharar are

fraudulent.
They amount to obtaining the property of
others unlawfully.
lead to disputes and disagreements between
the parties.

Causes of gharar
Gharar may arise when:
The subject matter of a contract is non-existent,
not deliverable, cannot be acquired or is not
clearly defined.
Thus the sale of fish in the water, the sale of bird
in the air, the sale of a foetus in the womb of an
animal, and the sale of runaway animal are
prohibited.
- In all these cases the sale is void due to the
existence of uncertainty as the seller may not be
able to deliver the sold item and the purchaser
does not know whether the item will later come to
his possession or not.

- Gharar may also arise when the effect of a

certain contract is not known and one of the
parties may not know what he would achieve
from the contract.
I.e: a contract of employment (ijarah) may
contain elements of gharar when the rights and
duties of the parties are not clearly defined.
Similarly, a musharakah or a mudharabah
contract may suffer from gharar if the
percentage for the division of profit is not
clearly defined.
Such contracts are, therefore, considered void
on the ground of gharar or uncertainty as they
may cause harm to one of the parties and
unjustified enrichment to the other.

- usually, ambiguities in a certain contract are

designed to commit fraud and cheat one of the
parties and lead to unlawful profit to the other.
They are therefore distinguished from
uncertainties that may exist concerning the
possibilities of loss or profit in a lawful
business. These are not meant to cheat others.
Gharar is also distinguished from uncertainty
or risk that is naturally associated with certain
business ventures.
I.e: manufacturers, importers, exporters, and
traders are uncertain whether their products
and goods could find a suitable market or not.

 They

are uncertain about the amount of profit

and the possibility of loss. This type of
uncertainty is not intentionally created by the
parties neither are they designed to commit
fraud.
The parties make all the efforts to minimise
losses. However, they cannot totally eliminate
the possibilities of loss and guarantee profit.
The parties also do not leave success of the
business to chance. Unlike gambling where
pure chance decides the winner and the loser,
in business the parties have to render all the
necessary efforts in order to make profit.
This type of risk is combined with efforts that
may eventually lead to profit.

How to avoid GhARAR IN

TRANSACTIONS?

In order to eliminate the possibilities of gharar,

Muslim jurists have laid down various conditions for
different contracts:
Generally in a certain contract all conditions
concerning offer and acceptance, the parties, and
the subject matter should be fulfilled.
For instance, in order to prevent gharar the quality
and quantity of the subject matter, its price, the date
of payment if the payment is deferred, the date of
delivery.........must be agreed on by the parties.
I.e. in an ijarah contract the usufruct or the service
and the rent or wage should be clearly defined. In a
musharakah or a mudharabah contract the parties
should agree on a clear distribution of profit.

Tolerated

uncertainty :
There are certain transactions where the degree of
uncertainty is minimal and are customarily
accepted.
I.e: in some parking areas all users are charged
equally irrespective of the time they take.
The parking time is the subject matter of the
contract which is not specified. However, since this
is customarily accepted Fiqh also tolerates it.
Similarly, in mudharabah contract the amount of
efforts put in by the mudharib cannot be known
and defined in advance neither they can be
quantified. The uncertainty is tolerated and is left
to the trust and agreement between the parties.

- Consequently Gambling leads to hatred and enmity

between the winners and losers .
For these reasons all agreements and contracts which
involve elements of chance or maysir are prohibited .
Prohibition of Gambling in the Quran:










O you who believe, verily wine and game of
chance, ungodly shrines, and divining devices are
abominations of the devil; you shall avoid them,
that you may succeed. Satan only wants to cause
between you animosity and hatred through
intoxicants and gambling and to avert you from the
remembrance of Allah and from prayer. So will you
not refrain? (91)

4- Prohibited Properties
-

Any contract which involved a prohibited

property is void.
i.e contract involving wine, intoxicants, pigs,
blood, idols are not valid.
The prophet stated in one hadith: When Allah
prohibits a thing, he prohibits the price of it as
well.
- It is also prohibited for a Muslim to become a
shareholder in a company that indulges in
prohibited activities. If the primary activity of a
company is based on riba, gambling, gharar and
the production and sale of goods that are
prohibited then it is also prohibited to sell and
purchase the shares of those companies.

It is not permitted for a Muslim to purchase

the share of conventional banks, companies
that run casinos , companies that produce
alcoholic beverages or supply non halal meat
or companies that provide immoral services
like prostitution and discos .

Supplication

for one whose affairs

have become difficult

O Allaah, there is no ease except in

that which You have made easy, and
You make difficulty, if You wish, easy.

Supplication of today

The Contract of Sale (Bay')

Literally means mubadalah or exchange
Technically :it refers to an exchange of one property for
another.
(property: object, the other: price)
Legality:
}

The Quran says: }

But Allah has permitted trade and forbidden usury )

2:275(.

The Prophet said:
The best earning is where a person earns through his
own efforts and all sale transactions that are free from
deception and cheating. (Ahmad)

- The effect of a sale contract is to transfer the ownership

of the property from one to another (seller and buyer).
The pillars of the contract of Bay':
1. Buyer
2. Seller
3. The product and its exchange
4. Sigha (expression)

When the prophet would enter upon a sick

person he would say:

Never mind may the sickness be
purification, if Allah wills

I ask Allah The supreme, The Lord of the
magnificent throne to cure you

Supplication of today:
When visiting the sick

A sale contract must satisfy four sets of conditions

1- Condition of conclusion
2- condition of execution
3- condition of validity
4- condition to render a sale binding
Wisdom behind the fulfillment of
conditions:
to avoid disagreement and protect rights of
parties to the contract

Conditions of sale

1) Conditions for the conclusion of Sale

- Conditions relating to contracting parties:
1- Legal capacity : contractors must be able to run
his affairs.
2- Should be more than one person: except for
father, a legal guardian, a judge.
- Conditions relating to the expression:
1- Acceptance must correspond with the proposal: if
one party says: I sold you this house with all
contents for such a price , and the buyer replies: I
accept buying the house alone without its contents
for such a lower price , the contract is not
concluded.

2- Unity of session: the offer and acceptance be in one

session , without break.
Acording to this condition , if one party made an offer
and the other party left the session before accepting or
was occupied with another business then he later
accepted , the sale is not concluded.

- - Conditions relating to the counter-values:

1- the subject matter and the price must be of valuable
properties: they can be used to benefit people.
I.e.: sale of dead animals (mayta) or an insignificant amount
of good such as one grain of wheat is not concluded.
2- the object of sale is permissible: only objects from which it
is legal to derive benefit may be sold.
I.e. the sale of wine and pork may not be concluded since
their use is prohibited.
3-Subject matter must be in existence: it is not permitted to
sell a non existent object like: selling the offspring of
animal, or selling the fruits of three before they appear.

4- it is private property: the sale of what is not owned by

any person such us a grass for public is not permissible.
5- Deliverability: the sale of what is not possible to deliver
is not concluded even if owned by the seller, like: fish in
a sea, ocean, escaped or stolen animal.

2) Conditions for the Execution of Sale

1- Ownership of object: possession of the item.
a contract concluded by fudhuli (unauthorized agent):
- Hanafis and Malikis: depends on approval of the owner.
- Shafiis and Hanbalis: not valid.
2) No third party should have rights over the object of sale.
I.e. the sale of pawned or rented object is not executable since
others have right in the item that is owned by the seller.



How perfect The King The Holy one
And on the third time he would rise his
voice, and add:

Lord of the angels and the ruh: Jibrail

Supplication of today
After salam of the witr prayer

3) Conditions for the Validity of Sale

1-The sale should not be limited in respect of time .

a sale is defective if it has expiration period, as in saying:
I sold you this dress for one month. In this case the sale is
invalid
2- Both subject matter and price should be specified: It is
not allowed, for instance, to sell a car which is not defined
or to sell a car for the current price and the current price is
not defined. This constitutes uncertainty or gharar that
may
lead to dispute between the parties.
3-A sale should be free from coercion (ikrah), mistake, and
fraud.

4) Conditions to render a sale binding

For a sale to be biding the contract must be devoid of all
options that allow one of its parties to void the contract
(i.e.: option of condition ( ) ,identification
( ) , defect.
In the absence of options a contract of sale is made
obligatory.

Conditions that may be put by the parties

The parties are free to choose a particular
form of contract.
However, they are not free to add new effects
to a contract. The effects and consequences
that a certain contract may lead to are
already determined by the Shariah.
These effects and consequences result and
apply automatically.

According

to fuqaha conditions put by the parties

can either be valid or void.
Valid Conditions
Valid conditions are sub-divided into three categories.
The first group: includes those conditions which
confirm the effects already attributed by the
Shariah to a certain contract.
i.e. a condition in a contract of sale stipulating that
the object of sale be delivered by the buyer is valid.
The seller may insist that he shall keep the sold item
until total payment is made.
These conditions do not change the effect of a sale
contract and do not impose additional obligations on
either of the contracting parties.

The

second category: refers to those

conditions which agree with the effect and
purpose of a contract, to which they are
added. For example the seller may require
pledge, or a guarantor if the buyer wants to
pay the price later.
The third category: includes those conditions
which are customarily accepted. For example
the purchaser may require certain services of
little importance that according to customs a
seller may provide while concluding a
contract of sale. (like guarantee period during
which the sold item would be repaired.

Void Conditions
Shariah

prohibits all those conditions that

may favour one of the parties at the expense
of another or conditions that may lead to
usury.
Shariah, also prohibits a sale contract which
comprise two agreements one of which is a
condition for the other.
For example, a person is not allowed to sell
an item on the condition that the purchaser
sells him something else to replace it.

when a loan is given on the condition that

the borrower should buy a certain item
from the lender.
Such conditions are null and void whether
they are imposed by the seller or by the
buyer.

Contentious Sales
Those sales on which there exist difference of
opinions
among
the
various
school
concerning their permissibly or prohibition.

The Definition:
Literally: means down payment
Technically:
it is a sale contract in which a person who
wants to purchase a certain property would
first pay earnest money to the seller on the
condition that, if the sale is executed , the
advance payment would be a part of the
price of the goods , otherwise , the seller
1- Earnest
money
(bay
al-urbun)
would
forfeit the
advanced
money.

Legality of bay al-urbun

- Malikis and Shafiis :invalid contract .
Hanafis: Voidable (fasid)
Causes of prohibtion:
1- the hadith in which the prophet prohibited bay
al-urbun. (it is proven to be a weak hadith).
2- It contains Guarar
2- it is form of Maysir or Gamling
3- A way of devouring others money without
proper compensation.
- Hanbalis: valid contract .
- The condition is valid condition. (condition that
can be put by the contracting parties)
- The practise of Qualifha Umar

urbun

can be viewed and justified as:

An exclusive right given by the seller to
the purchaser. (selling right)
- Penalty due to loss incurred when the
seller has proceeded for the preparation
and production and breach of promise.
- To cover the loss of opportunities.

Bay al-Dayn
The definition:
Dayn means debt .
Bay al-Dain: refers to the sale of debt arising from a
loan
transaction.
The sructure of Bay al-Dain : It happens when a
person who has a receivable debt sells it at a discount.
The traditional Muslim jurists are unanimous that bay aldayn with discount to a third person is not allowed.
However, it might be sold to the debtor himself for a
lower price.
If a debt is sold at its par value to a third person who has
the same amount of debt to the debtor then the
contract falls under Hawalah contract ( transferring
debt) .

The Prohbited elements in the sale of debt

Muslim Jurists have argued that Bay al-dayn is prohibited
on four grounds:
1- Due to riba (riba on sale and riba on credit) .
Sale of debt is in fact the sale of money for less money ,
and as such the transaction violates the conditions of
equality and spot delivery . A purchaser of debt pays
rm900 and receives rm1000 later at the maturity of debt.
Furthermore, the purshser of the debt, who buys the debt
at a discount, later claims the full amount from the debtor,
which may amount to riba al-nasiyyah.
2- Guarar (uncertainty)
The seller of debt cannot deliver the debt to the
buyer. Because delivery of the debt is not certain due to
its intangible nature. This the transaction suffers from the
element of gharar.

3- Absence of qabadh possession:

possession of debt is not possible and as
such the purchaser cannot own it.
4- The risks to the purchaser of debt: as the
debtor may not be able to settle the debt.

Note:
There is an argument that a debt that arises from
a sale contract can be sold to a third person at a
discount .
This view distinguished between two types of
debt :
1- Debt created through a contract of loan
2- Debt created through the sale
of
commodity .
baial-dayn is permissible where the debt
is created through the sale of a commodity.
The proponents of this argument contend that
a debt represents the sold commodity and its
sale may be taken as the sale of a commodity.

1-

A Sells a car to B
2- B agrees to pay at specified time or by
installment
3- C agrees to buy the debt from A at
RM29.000
4- C pays RM29.000 to A
5- B pays RM.30.000 to C on maturity or
installments

 The

opponents make a counter argument.

They said that once the commodity is
sold, its ownership is transferred to the
purchaser and it is no longer owned by the
seller. What the seller owns is nothing other
than the debt.
Therefore, if he sells the debt, it is no more
than the sale of money and it cannot be
termed by any stretch of imagination as the
sale of the commodity.

Bay al-Inah (same-item sales)

Definition:
Bay Ina defined as: a sale of a
commodity on credit and repurchase it
for a lesser amount in cash from the
same person
-Specifications of bay al-inah:
1- 2 transactions in the one time.
2- 2 sellers
3- 2 purchasers
4- 2 prices
5- 2 mode of payment

Al- INAH

1- The seller sells an item to the purchaser for a deferred price of

rm1100.
2- The purchaser agrees to pay the price of rm 1100 either by
installment or lump sum at a future specified time.
3- The purchaser next sells the same item to the seller for cash
payment.
4- The seller pays rm1000 in cash.
Purchaser

Deferred
payment
Cash payment

Seller

The following are the forms of Bay

alInah:
1- Parties make an explicit statement of their
intention to enter into a twin contract. Here,
parties expressly declare through the
contract that the vendor in the first contract
that takes place on deferred payment will
repurchase the asset at a cash price lower
than the former deferred price.
TYPES
of Bay
alInah
This
is invalid
and impermissible
by
consensus of all jurists.

2- Parties enter into a twin sale where

commodity is sold to 2nd party on credit and
seller repurchases it at a cash price lower
than the former credit price without any
condition in the contracts that necessitate it
Hanafis and Shafii valid, though
reprehensible (makruh).
Other jurists invalid.

The original cause of deference:

The relationship between the hidden intention and
the purpose of the contract
Q: At any contract should we look behind the
intention of the contracting parties and investigate
whether the intention was lawful or not ?
Does the existence of unlawful motive behind a lawful
contract make a contract invalid?
To Hanafis and Shafiis, motive is something
hidden and is left to God.
They say that the Shariah requires that all the pillars
and conditions of the contract should be fulfilled.
The motives of the parties do not affect the
validity of a contract, as long as all other conditions
are fulfilled.

Malikis and Hanbaliis, on the other hand,

have prohibited them emphatically.
They take into account not only the
contractual requirements but also the hidden
intention or the motive of the parties while
deciding on the validity of bay al-inah.
The intention could be indentified trough
indications and circumstances surrounding
the contract and the intention could be
judged from their subsequent actions.
- inah is similar to charges added to loan=
riba

1- Hadith reported by Abu Hurairah:

One who effects 2 sales in a single sale
should take the lower of the two, or riba
This includes the sale of inah because in inah,
2 sales take place with same contractors.
2-
:

:
Arguments

against
. validity of inah

Al-Aliya said: The wife of Zayd, the

mother of his child and I visited
Aisha, then the mother of his child
said: I sold a slave to Zayd ibn
Arqam in exchange for 800 dirhams
deferred, then I bought him back for
600 dirhams in cash, Aisha said:
Woe to what you sold and what you
bought, tell Zayd that he has voided
his fighting with the Prophet (pbuh)
unless he repents .

3- inah is a fake or fictitious contract which

meant to be of an exchange of money in
unequal quantities with the commodity acting
only as a formality therefore contract = riba.
4- The seller and the purchaser do not enter
into the sale contract for the sake of the sold
item , but rather they want to use the sale
contract as a means to provide cash to one of
the parties. It is a legal trick (hilah) to provide
cash and receive an extra amount
- They used the juristic method of blocking the
means( a permissible means could be
prohibited if it is expected to lead to unlawful
end).

1- Two individual sale contracts that are valid

and not conditional on each other
permissible.
2- A person is free to sell what belongs to him
to any person he wishes, therefore, a sale to
the person from whom it was bought
originally would be permissible.
3- The hidden intentions of the parties which
is not expressed or referred to in the
Arguments
for validity
inahwhen
contract
is irrelevant
for a of
judge
deciding on the validity of the contract.

3- Tripartite
(tawarruq).

arrangement

of

inah

Based on exchanging the counter

values:
1- the subject matter is delivered immediately
while the payment of the price is deferred to a
future date. (by instalment or bba)
2- the price is paid on the spot while the
subject matter is delivered at a future date.
(assalam or forward sale)
3- Both subject matter and price are delivered
immediately. (normal sale).

Classification of Sale

 Based

on disclosure of the original price:

1- Bay almusawamah Bargain sale: the seller
does not refer to the cost of the sold item ,
and the price of the sold item is determined
by the seller . And it could be a bargain on
the price. This is the general type of sale.
2- Bay al-amanah Trust sale: a property is
sold with reference to its cost price .
There are three types of trust sales (buyu al-amanah):
1- Murabahah (Cost-plus sale)
2- Tawliyah (at
price sale)
3- wadhiah (sale at loss)

Literally: Murabahah is derived from the root word

which literally means profit.
Technically: selling a commodity for its purchase price
plus a specified mark-up or profit agreed upon.
Ex: I bought this for 10, and you pay me 2 as profit.
Murabahah is a trust transaction. The price and profit
should be known.
If the seller in a murabahah transaction is guilty of
any deception, the purchaser is entitled to cancel
the contract provided the property is not destroyed
or damaged
before he returns
it.
1-Murabahah
(Cost-plus
sale)

Conditions for Murabahah

1) The

purchaser has to know the original price including

all the expenses.
2) The purchaser should know the amount of the profit
(ex: fixed amount or a percentage of the cost price).
3) The first sale contract must be valid. (Ex: if the first
seller was bankrupt or sold a pledged property the
murabahah sale is void).
4) A seller should inform a buyer about defects, however,
he also should not betray his buyer. Otherwise he can
ask for a compensation or a cancellation of the sale.
5) No Murabahah is allowed in ribawi properties unless if
they are exchanged like for like and on the spot.
Ex: 10 kg of rice for 15 kg rice is not allowed. Any
increase or delay in exchange of ribawi commodities
amounts to usury.

- Tawliyah means appointment as a Wali or delegation.

- It refers to non profit sale or resale for the same price
at which the seller obtained.
- Thus its name suggests that the seller lets the buyer
takes his place (yattawalla) in the original price.
- In case of deception, the purchaser may deduct the
amount from the price.
Tawliyah or Non-profit sale (at price sale)- 2

Al-Wadhiah
(Sale
at loss)
It3is a
resale of a thing
with some
loss to
the seller

Definition: it is a sale contract in which the

sold property is delivered to the purchaser
immediately , whereas the price is postponed to
a future.
The date for future payment , the duration of
instalment , and the amount payable in each
instalment should be known to the parties.
A deferred sale contract could either be a bargain
(Musawamah) sale, in which the cost price is not
Deferred
Sale be
(Bay
Bi-thaman
Al-Ajil)
disclosedPayment
, or it should
a trust
(Amanah)
sale,
BBA
in which the cost price
is disclosed.

The Question here :

Can the seller increases the price if the buyer asks for deferred payment or
instalments?

There are two views on this issue:

1- The proponents : argue that the basic
principle in transactions is permissibilityIbahah.
- There is no clear prohibition from the Quran
and the Sunnah for such type of contract
They added: the seller and purchaser are
free to agree on a price as long as it does
not amount to exploitation or clear injustice.

2- The Opponents say that the a sale

transaction in which the deferred price is
higher than the cash price is similar to a loan
contract in which a borrower has to pay an
additional amount to the lender due to
differed time.
- They argue that the price increase is due to
the time delay that resembles interest as
interest is also a price for time. the
transaction, therefore, amounts to riba.

Islamic Banks and Sale Contracts

(Murabahah in Islamic Banking)

A customer identifies a property and

requests the seller to send a quotation. He
then approaches an Islamic bank and
requests the bank to purchase the property
for subsequent sale to him. The bank
studies the request and negotiates the
selling price, mode of payment, duration of
instalments, and other conditions and
securities.
The
bank
undertakes
to
purchase the property as requested by the
customer and resells it to him.

The BBA contract between an Islamic bank and a

purchaser is based on the following steps:
1- a promise made by the purchaser. The promise
is needed as the customer may refuse to purchase
the property.
2- Specification of property: the bank does not
purchase a property unless the purchaser specifies it
and promises to buy it. .
3- Possessing of property: the bank cannot enter
into a valid sale with customer as it does not have
the property. The bank undertakes to purchase the
commodity as requested by the purchaser
4- Resell of property : the bank resells property it to
customer for the cost price plus a margin of profit
previously agreed upon during the promise stage.
5- Mode of payment: The payment would be settled
by the purchaser within an agreed time frame either
in lump sum or instalments.

Conditions:
The

bank would have to sign two separate contracts,

one with the seller and the other with the purchaser.
It is necessary that the bank should own the
commodity and possess it prior to its sale to the
purchaser.
The bank must curry the risk of loss before delivery.
The bank must bear the consequences of rejection of
the goods by the buyer if he exercise his option to
cancel the contract because of concealed defects.
The bank should act as a trader and not a financier.
Profit in this context is justified since it is derived
from the buying and selling transaction as opposed to
interests accruing from lending money.

Comparison of Murabahah as Practised by Islamic

banks and Interest-based Loans

Murabahah (risk)

Loan (no risk)

Sale contract : The relationship

between Islamic bank and the
customer is one of seller and
purchaser

Based on interest charges:

conventional banking it is one of
creditor and borrower.

The price of the sold asset is

fixed
In case of default payment: Bank will
sue the buyer and cannot increase the
price.

Depends on the rate of interest which

may fluctuates.

The customer has only one

contract with the bank, and no
direct contractual relationship
with a seller, if a murabaha is
declared void the bank would
have to suffer the
consequences.

The customer has two

contracts : the contract of loan
with bank and the contract of
sale with seller.
If murabaha is declared void ,
the customer still has to settle
his debt to the bank , the bank

Additional charges (interest on interest)

Salam/Salaf
forward contract

Literally: pre-payment or forward payment

Technically: transaction in which specific price is paid in
advance and specific goods are delivered later.
The purchaser pays the seller in cash and fixes
a certain time for the delivery of the goods.
Ex: RM 1000 now - 500kg of grade A rice upon harvesting
time or specified future time.
(Salam/Salaf was practiced in pre-Islamic period but without
specifying measure, weight and time of delivery) .
The contract as such containes elements of
gharar and was prohibited. The Prophet (S.A.W)
said:
whoever engages in a salam, let him specify a known volume
or weight, and a known term of deferment .

 Salam

is permitted as an exception to
prohibition (the Prophet (S.A.W) said :
that a man should not sell what he does not
have .
based on need, especially in agriculture,
where a farmer may need advance payment
of the price to finance his activities.
Pillars of Salam contract:
1- forward seller : rabb al-salam or al-muslim
2- forward buyer : al-muslam ilayhi
3- object of forward sale: al-muslam fih
4- price of forward sale: ras mal al-salam

1)
2)

3)

4)
5)

The price of the goods must be known.

Price should be paid during the session. The purchaser
is not allowed to defer the price or to consider his debt
on the seller as the price of the Salm commodity.
The commodity sold should be as an obligation on the
seller. (Salam involves commodities that are not
specific (ain) but homogonous. It is not permitted to
specify the fruit of a specific acreage of land)
The seller should be able to deliver the commodity on
the specified date.
Conditions
The place of delivery
shouldof
besalam
specified.

6) The commodity should be described precisely by type,

quantity and quality.
7) The price and the commodity should not belong to the
same group of Ribawi commodities.
8) The purchaser cannot dispose of the salam commodity
by reselling it to a third party prior to its possession.
The Hadith states:
Whoever buys foodstuff (or anything), he should not sell
it (to others) until he has taken possession of them .

 Literally:

request to make some thing.

In fiqh: it is a contract with a manufacturer who
provides both raw materials and labour to manufacture a
specifically defined product for a determined price and
deliver it at a specific time.
Between Istisna and Bay:
Istisna involves raw material and labour whereas Bay
does not. .
Furthermore, in Istisna a nonexistent thing that will be
produced later is sold,ISTISNA
in sale a nonexistent thing cannot
manufacturing sale
be sold.

 Between

Istisna and Ijarah (employment):

In Istisna the manufacturer provides both the raw
materials and the labour.
In Ijarah a person provides raw materials, and
the manufacturer as an employee contributes
his labour and skill to make the required item.
Between Istisna and murabahah
Commodities in Murabaha already produced and
in existence.
- Istisna' Commodities are not yet in existence.
It will be manufactured or produced later.
- Murabahah is a trust sale where the cost price
should be known to the purchase while in
Istisna the price is determined based on the
agreement between the parties.

Between Istisna and salam

Istisna is distinguished from Salam;
- Istisna involves both raw materials and
labour, whereas Salam is applicable to
commodities only (Homogeneous property).
- Salam is an obligation (dayn) on the seller,
without being from his manufacturer while
Istisna is a contract on a certain specific
thing (ain) from his manufacturer and price
not necessary to be paid in advance .

Legality of Istisna:
Hanafis said: the contract of Istisna is based
on Istihsan. for it includes both: labor (manufacture)
and commodity so it is (ain) while Salam includes
commodity only, therefore, it is (dayn) And it is an
independent contract that has its own
features.
Majority of schools: it is similar to Salam .
They consider Istisna as a Salam sale and
apply on it all the requirements and
conditions of Salam that among other others
include advance payment.

Conditions of Istisna:
1- Nature of the item to be manufactured should be known,

type, quality, quantity, and all other descriptions.

2- Istisna is valid with respect to those goods which are
customarily sold based on prior order.
3- Date of delivery should be specified in the contract.
4- The process of manufacturing should be stated in
contract.
5- Istisna contract is a binding contract for both any party
cannot cancel the contract and is obliged to fulfil its
obligation at all times.
6- Payment can be either deferred or paid by instalments.

7- Penalties can be stipulated in contract in case if either

party does not fulfill its obligation, however, it must be
according to the damages caused (Unavoidable events
are excluded).
Hadith says: Muslims are bound by their conditions.
8- It is not a condition that the seller should him self
manufacture the commodity, He can fulfil his obligation
by bringing a commodity with an exact prescribed
description that could have been manufactured by a third
party.

This may provide a role for Islamic banks to enter

into a contract of Istisna with a buyer and a
manufacturer .

Options of Istisna:
Option is defined as: a choice for one of the
parties whether to conclude the contract or to void
it.
Two major options could be exercised in istisna
1- The option of defect
2- The option of desired description
The option of defect refers to a defect in the object
of sale or any attribute that is normally part of
goods and that would result to reduction in price.
The option of desired description refers to an
absence of the description stipulated by the
contracting parties in the subject-matter of
contract. For example the customer ordered a red
car and the supplier delivered a blue one.

The buyer has two choices:

1- He may permit the contract to continue
Since the violation of a description may
not necessarily affect the price.
2- return the goods and void the contract.

Istisna' as applied by Islamic banks

The Bank may enter into Istisna contract with a
manufacturers for the production of certain
specifically prescribed commodity for which it has
got an order by the buyer.
After the bank receives the commodity, it can be
sold to buyer based on:
A- Murabahah, and B.B.A.
B- It is also possible for the bank to enter into
istisna' contract with a buyer, and then enter into
a parallel Istisna contract with the manufacturer.
The payment in the both Istisna' contracts can be
immediate or deferred. Any disagreements that
may arise between the parties are settled under
each contract separately.

currency Exchange
Historically gold and silver were used as moneys and
references for defining prices, although they are stores of
wealth , they can also become a medium of exchanges.
Money (thaman) is not commodity but a medium of
exchange and price for goods and commodities. The main
function of money is to be used for pricing different
properties.
Muslim jurists have treated them differently from other
commodities. Later paper currencies were introduced,
which replaced gold and silver . The contract of sarf is
also applicable to paper currencies.

Definition:
Sarf is the exchange of a price for a price in
the same or different currency..
Ex: gold could be exchanged for gold, silver
for silver, gold for silver..
Conditions of sarf:
The contract of sarf is directly linked to Riba
al-fadhl in which the prophet stipulates the
equality of counter values and spot of
delivery:

gold for gold , in equal amounts, hand to

hand, and silver for silver , in equal
amounts, hand to hand.. so whoever
adds or demands increase he has
practised usury. The giver and taker are
the same.
in another narration He said: do not trade
one of them absent for the other
immediately delivered.

Conditions for sarf

1- The parties should take mutual possession
of the prices during the session of the
contract their separation .
2- There should not be any deferment in the
exchange of one of the currencies. The
principle concerning moneys is that it cannot
be sold or bought on credit but should be
exchanged on the spot. (Money can only be
exchanged on a cash basis)
3- An option of condition cannot be stipulated.
(binding contract) .However, the option of
defect is allowed.

4- When both the money exchanged are of the

same kind , then equality and is necessary.
(gold for gold, ringgit for ringgit). then
equality is necessary. It is because the price
of RM 1 can only be RM 1.
-If moneys are not of the same kind unequal
exchange of gold for silver and vice versa is
allowed provided it is on the spot . (Usd1 for
rm3 ).

THE CONTRACT OF LEASE

Definition:
Literally: it derived from the word ajr ()
which means compensation ().
Legally : It is a sale of usufruct or services in
return for compensation.

Between Ijarah and sale:

1- Ijarah is a contract to possess the usufruct
but in sale it is a contract to possess the
property in general.
2- Ijarah is a contract for a limited time but
sale is unlimited contract.
3- perishable properties or those things that if
used could be consumed cannot be leased
.like fruit, food, money , but they can be
sold.

The subject matter of Ijara:

it is the usufruct of an asset or the services
that is rendered by an employee.
Usufruct (manfaah) refers to: intangible
benefit that is derived from a certain property
such as the shelter from house or a lift from a
car, or service rendered by an employee.
Usufruct is derived from useable property,
whereas service, which also comes under the
category of usufruct , is rendered by persons
who are employed.

Legality of Ijara:
Allah says:

And if they suckle your children for you give
them their due payment 6: 65
,
Said one of them (the two women), oh my
(dear) father; hire Him : truly the best of
men for you to hire is the strong and trusty

Hadith says:

Give a servant his fee before his sweat
dries up.

He who hires a person should inform him
of his fee.

Pillars of Ijarah
They are four:
1- Expression which includes both offer
and acceptance.
2- The parties ( )which include both the
landlord /Employer ( )and the
tenant/employee ()
3- wage/ salary/ rent ()
4- usufruct, service ( )

Types of Ijarah
Ijarah could generealy be divided into two types:
1) Lease for the usufruct of property :the subject matter in
this type of lease is usufruct like movables and
immovable assets such as car, jewellery, and
cloth, house, and buildings
2) Lease for the services (Employment): the subject
matter in this type of lease is a job, which can be skills
and efforts of the employee.
The contract of Employment is also divided into
two:

Types of
employment contract : two
types
1- Special employee who works for
one employer for a specific wage.
During the period of the contract:
- He is not allowed to work for another
employer.
- He is completely subject to the control of his
employer.
- He is entitled to payment based on contract.

2- Public or general employee: He

is his own master and works for himself.
Ex: A tailor, a carpenter, a shoe-maker, a
dentist.
They may work for more than one employer.
An employer cannot stop them from working
for others.
- He must provide the service which he has
undertaken.
- He is entitled to payment based on his work.
- General employee needs many customers in
order to run his business.

Conditions for the service/Usufruct

1- The manfaah should be known. leased asset is
known, usufruct or the service and duration
should be clearly defined and the duration is
clearly mentioned. This is to avoid uncertainty.
2- Asset from which manfaah is derived should be
delivered.
3- The usufruct should be attainable .Perishable
properties from which usufruct cannot be
obtained cannot be rented like money or a house
that is not suitable for stay.
4- The service should be permissible and be used
for lawful purposes. For instance: employment in
Haram industries is not allowed or leasing a
house for gambling.

5-The leased asset should be a permissible

and valuable (Mutaqawwim) property. Ex:
The leased asset should not stolen car.
6- Service should not be obligatory on the
person who rendered it.
For instance: person cannot rent another
person to pray on behalf of him. And wife
cannot demand wages for doing household
jobs or for breast-feeding the child.
7- The usufruct should be used for the same
purpose for which the asset is rented.

Conditions for the Wage

1- The payment ( )should be declared to
the employee .

Anyone who employs an employee should
make known to him his salary.
Payment can be deferred, paid partially or in
advance.
The Hadith of the prophet states that Muslims
are bound by the lawful conditions.

2- The wage should not be a part of the proceeds of

his work. (According to Majority). If the employee
gets his wage from the service he renders the
contract of Ijarah is void.
Ex: When a person is employed to pick fruit on the
condition that he would be paid in fruit or to grind a
certain measure of wheat and he would be paid in
flour.
They base this ruling on:
- The employee may not need the fruit and he has to
sell it for lower price.

- They also refered to the following Hadith:

.
- They added: The employer should posses the ability of delivering
the wage of his employee prior to commencing the job failing
which renders the contract of Ijarah voidable.

To

Malikis : it is permissible provided the

measure or the weight is well known.
The did not consider the previous hadith as authentic.

Maintenance of the Leased Asset

Has to bear the risk of undeliberate loss or destruction of
the asset. He also has to bear the risk of depreciation of
the leased asset, and payment taxes and insurance and
the cost related to current expenditure that may be
necessary for utilizing the asset during the leasing
period.
- There is no liability on a lessee, employee
or tenant, except if he transgressed or
wasted and damaged the property. In such a
case he is liable repair or replace the
property.

Sale of Leased Asset

The leasing contract is considered binding and
irrevocable. The lessor may sell the leased
asset provided, the purchaser knows and
agrees to the continuity of the lease
contract, as the leasing contract is
considered binding and irrevocable. All terms
and conditions, rights, and liabilities agreed
upon in the lease contract will be transferred
to the new owner.

Termination of ijarah
1)
2)
3)
4)

5)
6)

If the asset is not capable of giving the usufruct.

If the tenant ( )fails to pay the rent or adhere to
other conditions.
If the asset is destroyed.
In case of death of either parties:
Hanafiis: the contract is not valid anymore
because usufruct is not property and as such cannot
be inherited.
Majority of Schools: usufruct is a form of property,
therefore, Ijarah continues until its stipulated time.
By the mutual agreement of the parties (Iqalahrevocation).
Lapse of the appointed time (if the contract is for one
year it is terminated at the end of that period).

Islamic Banks and Leases

Islamic banks use the lease for the usufruct as an

instrument of financing. The bank purchases the
asset and rents it out to the customer in return for
rental. The bank uses two models of Ijara.
1) Operational lease
- Operational lease is suitable for assets which are
expensive and their purchase requires a great
amount of money such as aeroplanes, ships,
industrial equipments and agricultural machineries.
- The bank benefits from this transaction by
retaining the ownership of the asset while at the
same time gets a return by leasing it. The lessee
saves himself from buying the asset at a much
higher cost.

2) Lease purchase (Hire-purchase)

It refers to a type of ijarah that ends with
ownership.
Al-Ijarah Al-Muntahhia bittamleek. Or
al-Ijarah thumma Al-Bai AITAB.
- It comprises two separate contracts: a contract of
lease and a contract of sale at the end of leasing
period.
The bank purchases the asset based on promise of a
customer to own the asset through lease.
The asset will not be returned to the bank at the end
of the lease period, as is the case in operational
lease, but will be bought by the lessee through new
contract.
The rental rate is calculated based on the value of
the asset lifespan, its maintenance expenses, and
some profit to the bank .

The bank owns the assets throughout the

lease period and should take ownership risk.
Issurance coverage should be borne by the
bank because of the possibility of theft or
total loss due to accident.
The lessee (client) may purchase the asset
during the lease period, the existing lease
contract will be cancelled and new contract
will be concluded.
All the lease rentals previously paid will
constitute part of the price.

THE CONTRACT OF REWARD for

service (AL-JUALAH)
Literally: means reward that is given to a
person on the condition to perform a certain
action.
Legally: it is a binding promise to pay a certain
reward to any person who performs a certain
known task.
In Jualah the person who offers a reward binds
himself to give a certain known payment for a
specified action.
Ex: a person may make an offer that anyone who
returns his lost horse will be rewarded rm1000.

Forms of Jualah:
A person may declare that he would pay
rm10,000 to any one who develops a plan
for an new information system.
A Reward given to winners in certain lawful
competition .
A Reward declared for the discovery of a
certain medicine for a disease .
Reward is based on performance:
In Jualah the risk of nonperformance is
shifted to the worker , since he earns
nothing if the task is not completed.

Legality of Jualah:
Majority of jurists : It is a legal contract.
They rely on:
.
They said: "We have missed the (golden) bowl
of the king and the man who brings it will
get a camels load; I will be bound by it."
- The Hanafis jurists do not approve it , as it
involves Gharar, where the amount of the
service and the duration are not known.

Conditions for Jualah:

1- The offerer ( ) and doer ( ) should have
complete legal capacity.
2- The reward ( )should be known.
Ex: who finds my car will have rm1000.
The amount of reward cannot be left uncertain or
conditional on later events.
3- The service ( )should be lawful. Like Jualah
for prohibited service such us serving alcohol .
4- The Malikies and Shafiis stipulate that there
should not be any deadline for the completion of
the task.
Others argue that it is possible to set a deadline.
Ex: who sews a dress for me in a day will get a
reward of rm 500 .

Conditions for the offer and acceptance

-Jualah is not valid unless an offer is made by
the Jail which would indicate his request for
the performance of a certain action in return
for a certain payment.
If a person ( )does an action without such
an offer he is not entitled to any reward.
Ex: repair a car without an offer.
- Acceptance by the doer ( )is not a
condition. (Jualah is not binding on the
offeree).

- According to Malkis, shafiis and Hanbalis the

offeror may withdraw his offer or reward
prior to the commencement of the work by
the offeree. Once the offeree begins the
work the contract is binding on the offeror,
while the offeree may still withdraw from the
contract

The differences between Ijarah and Jualah

1- In jualah a worker is not paid in advance unless
the action is completely done. While in ijarah an
employee is paid in advance for his work even if
the job is not completed.
2- In jualah the guarar about the amount of
service or its duration is tolerated , but in Ijarah
they should be known.
3- Jualah is a non-binding contract which can be
revoked at any time while ijarah is a binding
contract.
4- in jualah the person by whom the service is
performed may not be identified. In ijaarah the
employee should be identified.

The differences between the contract of

Jualah and Hiba
1- A gift is given to appreciate someones past
deeds, whereas in jualah, the reward is
offered for a service to be performed later..
2- A gift is gratuitous contract, whereas
Jualah is not.

 the contract of agency

Literally: means protection, delegation, or

authorization.
Legally: a contract where a person who is
fully competent authorizes another equally
competent person to do a certain welldefined permissible contract on his behalf.
An agent (wakil) establishes contractual and
commercial relations between the principal
(asil/muwakkil) and a third party for which
he can receive a commission.

How Wakalah works?

o An agent performs a service for his principal. He
represents the principal and through this
representation he can acquire rights for his
principal and subject him to liabilities.
o An agent may obtain a certain wage for his
services. If payment is not mentioned, in this
case reference is made to the common practice
of the people.
For example: a broker is entitled to their wages
based on the practice common among the
people .
o - Wakalah is a non-binding contract. The
principal or the agent may withdraw at any time.

The purpose of the contract of wakalah:

The need for agency arises when a person has
no ability/time to perform a certain action.
For example: a broker can be authorized to sell
or purchase a certain commodity.
to facilitate economic exchanges between a
principal and third parties where such
exchanges are hindered by distance, size, and
numbers or where the principal is unable or
unwilling to act personally.
Commerce could come to a standstill if
businessmen and merchants could not employ
the services of agents and were expected to
do everything themselves.

According to majority it is based on four

pillars:
1- The principle (muwakkil).
2- The agent (wakil)
3- The subject matter of an agency.
4- Offer and acceptance.

The pillars of agency

The Conditions of Wakalah

1- The principal should have the required legal

capacity .(insane or minor cannot appoint
agents to act on their behalf as the need
guardians).
2- The agent should also be a competent
person and He must understand the nature of
the contract he is concluding.
3- The thing or the act should be known in
order to avoid uncertainty (gharar).(request
from agent to borrow rmx)
4- The act for which an agent is authorised
should be permissible. (Agency for instance
is not allowed in usurpation).

5- the subject matter of agency should be an

act that admits of representation. (agency is
not permitted in pure act of worship (praying
and fasting). However agency in acts of
worships that have financial dimensions is
permissible: paying or receiving zakat,
slaughtering sacrificial animals.
6- To Hanafis it is not permissible to appoint
an agent to gain ownership over public
properties because of the rule of first
possession which entitles the agent to be the
owner.
To Other Jurists it is permissible.

The Types of Al-Wakalah

Wakalah can be divided into the following types:

1- Particular Wakalah or Special Agency
Particular wakalah is made only for a certain known
transaction (ex: buying or selling a certain known
house or a car) The agent is bound to sell or buy that
particular house or car .
2- General Wakalah :It is a general delegation of
power.
The agent is authorized to act and enter into a series
of transactions on behalf of his principle : to
purchase a house, lease it , collect its rental, and
maintain the house in good condition. In this case
the agent owns all the power which the principal has.
(ex: a director of a company appointed by the owner
of the company)

3- Restricted Agency The principle specifies a condition

for the transaction. A restricted agent has to act within
certain conditions.
(Ex: purchasing a house at such a price, or until such a
time or based on instalments...)
If the conditions are not met the agent concludes the
transaction for himself and it is not binding on the
principal.

4-Absolute agency
The principle does not specify any condition for the
transaction.
Ex: The principle may assigns an agent to purchase
house and he does not specify its price , the method of
payment or other conditions. however, an agent is still
bound to act within the prevailing practices and customs.
Abu Hanifah: agent is not bound by the customs for
they differ from place to place.
Majority, Abu Yusuf and Shaibani: agent must act
according to commercial customs (urf tijari) , otherwise
the transaction will need approval of the principal.

Wakalah in Sale
A principle appoints an agent - with or without restricted
conditions - to sell a certain property for him. If the
agent concludes a contract that contravenes
the terms and conditions of the agency, the
validity of the contract depends on the
principals approval unless if it is beneficial to him
(ex: selling the property at a higher price).
The agent is also required to observe the
commercial customs common among the
people and cannot act on his discretion.
Ex: he cannot pay for stamp duty and other
expenses for the transfer of ownership if the
commercial customs of the locality require the
purchaser to pay for them.

Can the agent purchase the

property for himself?

The agent in sale is not allowed to buy the property for

himself or to his wife , father , son , or other because this
may involve clash of interest.
How conflict of interest may arise ???
1- A principle normally wants to sell the property for higher
price , while the agent would like to purchase it for lower
price.
2- The agent may be tempted not to sell the property to a
purchaser who is ready to pay higher price, and he may
hide this fact from the principal because the agent wants to
buy the property.

3- An agent is usually an expert about market conditions

and may know that the market price will increase and the
property could be sold for higher price, the agent could be
tempted to purchase the property and later sell it to others
for higher price
4- An agent may know about the principal's
need for a quick sale and the fact that the
principal is willing to sell the property below
the market price. There is possibility that the
agent may use this opportunity to inflict harm
to his principal.
As a Conclusion: The agent should not take undue
advantage from his position. But if he still wants to buy
it he should withdraw himself from agency.

Wakalah in Purchase

A principal appoints an agent- with or without restricted

conditions - to purchase a property for him.
If a restricted agent goes beyond his
authority, the purchase is not binding on the
principal, unless it is beneficial to him.
An agent in purchase is not allowed to sell his
own property to the principal or to buy it
from his wife, father, or other close relatives.
The following conflict of interest may arise :

1- A principle naturally wants to purchase the property for

lower price , while the agent would like to sell it for
higher price.
2- An agent may hide the defects of the property.
3- An agent in purchase may not try to purchase the
property for lower price because he has his own interest
to sell his property to the principal.
4- An agent may be tempted to sell his property to a
principal knowing that the value of the property will go
down.
As a Conclusion: if the agent wants to sell his property to
a principal he should withdraw from the agency and
should not take undue advantage from his position.

The Effects, Rights and Liabilities of the

Contracting parties
All scholars agree that all legal effects (ahkam)
that result from a contract concluded by an agent
go directly to the principal (ex: the ownership of a
certain property bought by an agent is
automatically transferred to the principal)
- But the ensuing rights and liabilities that may
result from a certain contract should be enforced
by the principal or the agent? (for instance; taking
possession of the sold item, collecting the price,
and exercising the option of defect and other
options in a sale contract: two views

1ST View: Hanbalis:

the ensuing rights and liabilities should also be
attributed to the principal who may perform
them
The agent is only representing the principal
party and facilitates the conclusion of a
contract. Once the contract is concluded the
agent withdraws and all the legal effects,
rights and liabilities should be attributed to the
principal.

2nd View: The Hanafis, Malikis and Shafi

differentiated between two types of contracts:
1- Types of contracts in which physical presence
and the actual transfer of the subject matter are
necessary such as the contracts of gift (hibah),
borrowing
(iarah),
loan
(qardh),
deposit
(wadiah), and pledge (rahn) the ensuing rights
and liabilities of the contract should be exercised
by the principal.
In these contracts the agent should specifically
attribute these contract to the principal and
mention the principal's name.
Ex: he should say that he has given a gift from the
property of the principal, or he has deposited the
property of the principal, or he has borrowed for the
principal.

Subsequently, the ensuing rights and liabilities

should be attributed to the principal and
could be enforced by and against him.
The principal should deliver the gift to the
donee; he should claim the deposit; the
creditor can directly claim the settlement of
debt from him.
if the agent does not attribute these contracts
to the principal then he concludes them for
himself.

2- Types of contracts in which physical presence and

the actual transfer of the subject matter are not
necessary: regardless of whether an agent directly
attributes them to the principal or not the rights
and liabilities should be exercised by the agent
only.
Ex: The agent is liable to deliver the sold itme,
collect the price principal, exercise the options of
defect and other options.
The principal has to exercise these rights through
his agent.
The Reason: is that the purpose of the agency is
to relieve the principal from doing acts which he
personally has no ability or time to do. If the
principal is to perform these acts he may not
benefit from the contract of agency

Can an agent appoint another agent?

There is an agreement among Jurists that, in a
restricted agency , an agent is not allowed to
appoint another agent.
Exceptions are made for cases in which the
commissioned
task
could
not
be
accomplished by a single agent and requires
the help of other agents . In such cases, an
agent may appoint another agent with the
permission of the principal.
If an agent is fully authorized (absolute
agency): an agent may appoint another
agent, and the new agent is considered as an
agent of the principal together with first
agent.

Termination of an Agency
According to Hanafis and Malikis agency contract in
which an agent is paid commission is binding but to
Shafies and Hanbalies it is non binding and may
come to an end in the following cases:
1- When the purpose for which an agency is made no
longer exist.
2- When the principal himself performs the
transaction for which he has appointed an agent.
3- When either the principal or his agent is
disqualified or do not have the necessary
competence.
4- When the agent withdraws from the agency.
5- When the object for which an agency is made is
destroyed.
6- When the principal terminates the services of an
agent.

The Differences between ijarah and wakalah

1)
2)
3)
4)

5)

6)

Ijarah is a binding contract while wakalah is not.

An agent is representing the principal while an
employee is not.
An agent is given authority while an employee is
under his employers control.
An agent may represent several principals at the
same time but an employee has to work only for a
single employer.
An agent receives his commission upon performance
of the job while an employee is entitled to his salary
whether the job is done or not.
An agent can choose his own way of doing a work
while an employee is completely under his
employers control

THE CONTRACT OF LOAN

Islam has prohibited riba and allowed al-qard
al-hasan.
loan enables Muslims to help fellow Muslims
who are in need of financial assistance.
Prophet (saw) said: in the night of the
journey, I saw on the gate of heaven written,
reward for sadakah is ten times and reward
for qard is eighteen times. So, I asked the
angel, how is it possible? The angel replied:
Because beggar who asked had already had
something but a borrower did not ask for loan
unless he was in need."

- Therefore, it is not only a financial assistance but

it is also a praiseworthy act before Allah (SWT).
AL-Qardh: means cutting off, it is called quardh
because a lender cuts off his property and gives to
the borrower.

Technically: it refers to a contract through which a

lender gives a certain homogenous property to a
borrower on the condition that the latter is
responsible
to
return
a
similar
property
immediately upon a demand or at a specified time.

The effects of the contract of loan is to transfer the

ownership of the loaned property to the borrower.

Conditions

1)
2)
3)
4)

5)

Legal capacity of both parties

Actual possession of the borrowed property
Absolute and unconditional right of the
borrower over the borrowed property.
The repaid/returned property must be of the
same quantity and type (ex: RM 100 for RM
100)
Any stipulations of increase for delay is
prohibited, however, if the lender is willing to
accept his property in lower quality or
quantity
it
is
Halal
besides
it
is
commendable.

6) It is not permitted to put any pre-condition in a

qard contract.
7) Either of the contracting parties may rescind the
contract at will.
Waiting or giving time to a borrower is a
commendable act:
If a debtor is defaulting in payment due to poverty
then he must be given respite until he is in a position
to pay. However, it is more virtuous to forgive him
altogether.
The Quran says:





{

}
"If the debtor is in a difficulty, grant him time till it is
easy for him to repay. But if ye remit it by way of
charity, that is best for you, if ye only knew" (2:280).

No extra charges even if the debtor has no

excuse as this will constitute riba.
However, the Hadith says:

Deliberate delay of a rich borrower to settle
the loan is injustice.
Upon death of borrower the debt becomes
current loan.
- The Quran commands (4:12) that the debts
of the deceased debtor must be paid before
any distribution of the estate should take
place. The heirs of the deceased are
responsible to pay his/her debts from his/her
property.

The contract of safekeeping Wadiah

Literally: deposit
Legally: It is a contract whereby a person leaves his property for
safekeeping to another person.
Legality: The Quran says:
}
{

And if one of you deposits a thing on trust with another, Let the
trustee (Faithfully) discharge His trust, and let him fear his Lord.
Wadiah is a gratuitous and recommended contract
for which a depository could be rewarded by Allah
for helping keep deposit.
However a depository may charge the depositor if
the deposited property needs special protection.
Ex: a deposited property may occupy a large space
which may necessitate payment of rent or require
special boxes

Pillars of Wadiah contract

Hanafis: Offer and Acceptance only.
Majority:
1) Offer and Acceptance. It can be verbal or by indication.
2) The two parties
3) The deposited property.

Conditions of Wadiah
3)
4)

5)

6)
7)

Full competency of both parties

The capability of the property to be deposited For
instance, fruits and vegetables which could not be kept
for a long time cannot be deposited.
Any benefit of the deposited property belongs to the
owner (ex: the young, milk, wool of the deposited
animal)
Any other suitable conditions put by the owner should be
observed (ex: worming up engine of a car once a week)
The contract can be annulled by both parties at any time

The satus of Depository is a trustee and

not a guarantor.
As a trustee, his duty is: to guard the interests
of the depositor and to protect the deposited
property in the same way as he protects his
own property.
He must take the necessary care expected
from him as a trustee (Ameen).
Accordingly, a depositary is not obliged to
guarantee the deposited property
unless
there is an evidence of negligence or
usurpation on his part. However, if the
damage is caused due to the negligence or
transgression , he is liable to replace the
object or to pay a compensation.

When is the depository held liable ?

In some situations, the status of a depository as a
trustee could be changed top a guarantor .
These situations are:
1- Intentional failure or negligence that would
expose the property to loss ,theft, fire, and other
destructive causes.
2- The depository deposited the property with
another
person
without
the
depositors
permission.
3- In situation where The depository used the
property for rent or lend without permission of
the depositor.
4- If deposited money was used by the depository
in his own business he is liable for any loss

5- If a deposit is returned to someone else

other than the depositor.
6- A depository should not travel with the
deposit. In this case he either should return
it to the owner or to leave the deposit to a
trusted person with the permission of the
owner

Wadiah and Islamic Banks

In conventional banking system, banks pay interest to their
customers. Creditor + borrower = return with interest. (The
relationship between parties is one that exist between a lender
and a borrower)
But Islamic banks accept deposit from customers not based on
interest but on contract of wadiah.
Depositor + depository = return with no interest. (The
relationship between parties is one of a depositor and
depostory).
However, based on the fact that Islamic banks use the deposited
money (usually through saving or current accounts and with
permission of depositor) in Halal investment the status of
Islamic banks is changed from depository to guarantor.

Customers may withdraw their money or part of their

deposit at any time and the bank is under an obligation to
return it.
All profits from the invested money belong to the bank.
In case of loss, the bank is held liable.

The differences between the Wadiah and

Qard
1- In Wadiah the ownership of the deposit is not
transferred to the depository , but in Qard the
ownership of the borrowed money is transferred.
2- A depository in a wadiah is trustee, but in
Qard the borrower is a guarantor.
3- The depository should produce the deposit on
demand, whereas a lender is recommended to
give respite to borrower who is in financial
restrains.
4- The purpose of wadiah is the safekeeping and
the protection of property .Loan is given to help
a person in need

Sharikah literally : mixing of two properties

in a manner that they could not be
distinguished from each other. It also means
sharing, and participation.
Technically: it is a participation between
tow or more persons in the asset or the
capital and profit.
Legality: In a Hadith Qudsi it is stated that
ALLAH s.w.t is the third of two partners as
long as
they do not betray
each other. If they
Partnership
(Al-sharikat)
betray each other ALLAH s.w.t withdraws His
blessings from the partnership.

Division of Sharikah
- Two types of Sharikah: generally al-sharikat
can be divided into two broad divisions:

AlSharikat
Sharikat alAmlak
Partnership in
ownership

Sharikat
al-Uqud
Contractual
partnership

1) Sharikat al-Amlak or Partnership in

ownership
It is a type of sharikah where two or more
persons become joint owners of a property
without entering into a partnership contract.
This joint ownership could be established
either by operation of law, such as through
inheritance, or through other contracts, such
as wasiyyah or gift(hibah) or purchase.
The partners have to share the property or
its income based on their respective shares
until they decide to divide it (if it is divisible
for e.g. land) or to sell it (if it is indivisible
for e.g. a house, flat or a car).

Types of Sharikat al-amlak:

Voluntary partnership: two or more persons jointly buy
a property or receive a certain property as a gift or as a
result of a will (wasiyyah) because , in all these cases the
acceptance of the parties is needed.
b) Involuntary partnership: two or more persons acquire
the ownership over something without any action on their
part (ex: through operational law = inheritance).
The features of this sharikah
1 - In Sharikat al-Amlak a partner is not allowed to interfere
in the property of another partner without his permission.
2- None of them is an agent for another. It is a common
ownership of property.
3- No profit and loss sharing is applicable in this partnership.
a)

Sharikat al-Uqud Contractual partnership

It is considered a proper type of partnership

because the parties concerned have willingly
entered into a contractual agreement for joint
investment and sharing of profit and loss.
It can be defined as: a contract between
two or more partners in the capital and
profit.
- In this type of contract the parties have
willingly entered into a contractual agreement
for joint investment and sharing of profits and
loss.
- In contractual partnership each partner is
considered an agent for the other.

Types of contractual partnership

The partners in contractual partnership may
contribute money, goods, reputation or services.
Based on the form of capital : There are four
main types for contractual partnership:
A- Partnership of capital or sharikat al -amwal:
1- Sharikah al-Mufawada Equal
Contribution Partnership.
2- Sharikah al-Inan unequal Contribution
Partnership.
b- Partnership of services Sharikat al-Abdan
c- Partnership of reputation Sharikat al-Wujuh

1- Sharikat al-Abdan (services)

It is a partnership where two or more workers who
agree to contribute their labour or service to a joint
enterprise and share the earning .
Ex: shoe-makers, tailors, barbers, lawyers, physicians,
dentists...)
The partners contribute their skills and efforts without
contributing to the capital.
A profit is distributed among the partners according to
an agreed ratio.
To Shafiis: it is invalid : Due to :
The absence of capital contribution by the partners.(the
labour alone cannot form the capital)
The labour and efforts contributed by the parties cannot
be quantified, consequently, they argue that the
partnership suffers from ambiguity, and sharing of profit
among the partners in this case would lead to injustice.

To Hanafis , Malikis and Hanbalis: it is a

valid contract.
They argue that the contract is designed to
gain profit, which is possible to attain.
Human beings since time immemorial used
partnership of services to jointly undertake
the performance of a certain task that was
difficult for a single individual to perform.
By analogy to a mudarabah in which a
mudarib only contributes his efforts and
labour.

2- Sharikat al- Wujuh (Reputation)

- Wujuh refers to goodwill, credit worthiness, and

good reputation.
-The Muslim jurists have regarded creditworthiness
as a form of wealth.
-It is refers to two persons become partners
by agreeing to purchase goods jointly upon
their personal credit (without immediately
paying the price) and to sell them on their
joint account.
-Both partners do not contribute any capital.
-They purchase commodities at a lower deferred
price and sell them for cash.
-Partner will equally share the profit and loss or
based on an agreed ratio.

Ex: Two or more retailers may purchase goods

from several wholesalers on credit and jointly
sell them for cash.
- Two or more students may form a partnership
of creditworthiness by agreeing to purchase
various types of clothes or books on credit for
a lower price then sell them for cash, after
sale they will pay the outstanding amount to
their creditors.
- It is beneficial for companies who do not have
sufficient capital to purchase goods in cash.
- Malikis and Shafiis : it is not allowed.(it is
not based neither on services nor capital)

3- Sharikat al-Mufawadha (Equal Contribution Partnership.)

literally : it means equality or delegation.

Technically it refers to: a partnership where two or
more persons become partners in a venture on the
condition to equally contribute to the capital and
management and equally share profits and losses
-Equality in religion: In this partnership all partners
should have the same religion .
- Equality in capital: Neither of them must be richer than
the other.
Equality in disposition: Each partner is an agent as well
as a guarantor for the other partners. A partner is liable
for the actions of other partners and an undertaking by
one of the partner binds all other partners.
Equality in Profit and debt.

It gives absolute right to one of the partners

to act without permission from the other
partner.
It is permissible to Hanafis only

The Shafiis, Malikis and Hanbalis: do not

agree with version of this type of partnership
and argued that the exact equality required
by the Hanafis is certainly impossible.

4- Sharikahtul Inan (limited partnership)

- It is a partnership in which two or more

partners contribute capital and share the profit
and loss .
- Equality in the capital, management, or in the
distribution of profit is not a condition (ex:
70% + 30%...)
-Managing the business by one partner without
others is also allowed.
- Partners are considered agents for each other.
- Partners are not guarantors, and their liabilities
towards third parties outside the partnership
business are individual and not joint.
- All scholars agree upon this partnership.

Conditions related to the Capital

The capital should be a type of property on

which agency is possible
2.The contribution of each partner to the
capital should be known.
3.Profit or losses are based on the respective
ratio of each partner in capital
4.The capital should be present (Debt cannot
become the capital).
5.The capital contributed should be mixed
together in such a way that the capital of one
partner cannot be distinguished from that of
the other.
1.

5- The capital should be in form of cash

- Majority of schools: capital should be in liquid form
(in cash) and not in kind (ex: A contributes in cash
and B a car). due: to
1- on the ground that the asset contributed by a
partner is always distinguishable from the asset
contributed by the other partner. A may remain the
owner of the money and B the owner of the vehicle.
2- It will lead to a dispute when the distribution of
profit and loss take place due to fluctuation of prices.
- To Maliki School: a partner may contribute in kind
which will be evaluated according to the market
price. Besides, all partners become co-owners of the
combined capital irrespective of whether they have
contributed in cash or in kind.

Shafiis: homogeneous properties also can

be a capital for musharakah (ex: oil, wheat,
rice...) while non-homogeneous properties
such as house or land, or car cannot form
part of the Musharakah capital.

The Conditions for the Distribution of Profit and Loss

1) Profit

for each partner should be specified in the contract.

2) Profit should be assigned in percentage not in a fixed
amount.
Maliki and Shafiis: each partner should get the profit
according to his investment (ex: if 40% invested then 40%
profit is received) Not more and not less.
Abu Hanifah and Imam Ahmad: the ratio could be
decided based on the agreement.
3) All schools: loss is suffered according to contribution.
4) Losses are paid first out of the profit then from the capital,
and if the capital is not sufficient to cover the losses the
partners must pay, in proportion to their shares in the
capital, out of their own private means.

Dissolution of Musharakah
1)When

a partnership fulfils its obligation or when its

duration is expired.
2)By request made of one of the partners , which is
subsequently approved by other partners .
3)By death or incapacity of one of the parties whose
heirs decide to discontinue the partnership
4)The bankruptcy of the partners.
In

case of liquidation the assets of the musharakah

will be converted into liquid money: First,
outstanding obligation of the partnership is
discharged. Then capital shares are paid.
In case of loss, the parties will bear the loss in
the same ratio in which they contributed to the
capital.

Musharakah Products Developed by Islamic Banks

1)The Continuous Musharakah:
Islamic bank and a client enter into

a joint venture to
establish and run an industrial, agricultural or a
service project.
There may be one or more than one bank or client.
The parties may contribute in cash or assets (ex:
land, building, machinery, and equipment..) which will
be evaluated and registered as their agreed upon
value will be registered as the share of a particular
partner who contributes them. All the parties would
become the co-owners of the liquid money and fixed
assets in accordance with their ratio in the total
capital irrespective of who paid in cash and who paid
in kind.

- Client may manage the partnership, and in

return, he would be entitled to a percentage
of the profit.
The bank may reserve the right to supervise
the management.
Both the bank and the client may jointly
manage the business or they may choose to
appoint an executive body to manage it.
All forms of administration may be chosen,
provided the parties agree and approve it.
Percentage of the profit is according to
contract.

The losses are distributed in accordance with

the respective shares of the partners.
Throughout the period of partnership , both
the bank and the client stay as partners. The
partnership does not end with the ownership
of the client.

2- Decreasing Partnership (Musharakah

Mutanaqisah)
Bank and customer sign a musharakah contract to
finance certain investment activity, a project, or jointly
purchase a house.
Each partner will contribute to the capital of this
activity with a certain share.
The profit will be distributed between them based on
the agreement.
When the activity starts and profits are realized, the
bank may withdraw gradually from the project by
selling part of its share to its partner (the customer).
The share of the bank in the profits shall also diminish
with the same proportion by which its share in the
capital is reduced while the share of the other partner
in both the project and the profits will increase at the
same time

The share of the bank in the profits shall also

diminish with the same proportion by which
its share in the capital is reduced while the
share of the other partner in both the project
and the profits will increase at the same time
- This type of partnership is also called
decreasing musharakah

The entrepreneur has the option to purchase.

However he cannot be forced to buy the
shares.
The price of shares is negotiable.
It should be based on the market price,
which may be more or less, or the same with
the nominal price.
- The bank may benefit from this type of
musharakah by making profit and the
entrepreneur
acquires
a
productive
enterprise, which may be developed or
expanded.

MUDARABAH (silent partnership)

It is derived from the word daraba which

means travelling for trade.
Technically: It is when one of the parties
provides capital and the other expertise,
labour, and entrepreneurial skill to
conduct a particular business where both
parties would share profit.
Necessity to MUDARABAH: There are people
who have capital but do not know how to use
it or where to invest it. There are others who
have the entrepreneurial skills but have no
capital. Mudharabah enables both parties to
make profit.

It was a common practice among Arabs in preIslamic period. The Prophet (p.b.u.h) himself
before his Prophet-hood entered into such a
contract with Khadijah (r .a.).
After the advent of Islam , Mudarabah was
approved and continued to be practised.
Pillars of Mudarabah
Hanafis: Offer and Acceptance only
Majority: 1) Two parties (the owner of the capital
sahib al-mal and the manager of the fund
mudharib)
2) Subject matter (capital/mal and
efforts and the profit)
3) Expression (offer and acceptance)

Conditions of Mudarabah
Full competency of both parties to become
agents (wakil).
2) The capital according to Majority - should be
in liquid or cash form . The majority of the Fiqh
schools argue that it may lead to uncertainty as
to the real amount of capital and the profit. This
is because the price of the goods may fluctuate.
However , it is permissible if a sahib al-mal gives
goods to mudarib and instructs him to sell them
and use the price as the capital of mudarabah
To Imam al-awzaee and ibn Abi-laila argue that
goods also can be used as capital provided their
price is known at the time of contract is
concluded to avoid any gharar.
1)

The amount of the capital should be known, as it

leads to clear distinction between the capital and
the profit.
4) The capital should be present (no mudarabah
based on debt).
5)The capital should come to the complete
possession of the mudarib.
6) The division of the profit should be clearly defined
and based on percentage and not on fixed amount.
A fixed return and guaranteed capital to sahib almal will change mudarabah into an interestbased
loan. A fixed return to the mudarib will change the
mudarabah into employment contract.
7) All losses must be paid out of the capital.
Therefore, the losses should be solely born by the
sahib al-mal.
3)

Division of the Profit

Any division of shares (profit) should be done

in the presence of both parties.
Distribution of profit takes place only after
deduction of capital and losses.
If there was a loss in one business and profit
in the another, then the two should be
combined together and counted as one
business to deduct the capital and loss.
The payment of zakat is on the owner of the
capital.

Types of Mudarabah

Hanafees and Hanbalis:

1) Restricted: is a type of mudarabah where
a mudaribs choices about place or type of
business are restricted. In case of its
violation the mudarib will be held liable.
Ex: An investor may stipulate that the capital
should be invested in a particular business ,
business to be made in particular place, or
with certain persons.
2) Unrestricted: is a type of mudarabah
where no restrictions are imposed on the
mudrib.

Malikis and Shafiis:

No restriction in Mudarabah because imposing
such restrictions will limit the mudaribs choices
and may result to certain disabilities for him.

The advantage of imposing restrictions: could be

that the mudarib will not invest in high risk
ventures.
The disadvantages: could be that sahib al-mal
may require the mudarib to engage only in low
risk business, which could yield low profit,
business will not expand, and the growth rate
will be very low. Mudarib will not able to use his
knowledge and creativity to build a successful
business and make profit.

Mudarib has no right to:

1)

Establish a new mudarabah with others or

to give the capital to another person for
mudarabah without permission of the Rabu
al-almal otherwise he is held liable.
Hanafees: if profit is made it has to be
first distributed between the sahib al-mal
and the first mudarib based on the
agreement. The first mudarib would have to
share his portion with the second mudarib
in accordance with the agreement between
them. In case of any loss, the first mudarib
is held liable and he has to guarantee the
capital.

Malikees: if the first mudharib enters into a

mudarabah with the second mudharib he is
held liable in case of loss. And in case of
profit he (first) mudharib is not entitled to
any share for he did not work for the
mudharabah.
The second mudarib then should share his
portion of the profit with the first mudarib
based on their agreement.
To Shafiees: the first mudarib cannot enter
into a mudarabah contract with a second
mudrib with or without permission of the
sahib al-mal.

2)to sell or purchase properties on deferred

basis. As this will increase the liability of the
sahib al-mal without his permission.
3) To lend or borrow money for the purposes
of mudarabah.
4) To commit the mudarabah business for any
sum greater than the capital contributed by
the sahib al-mal.
5) To mix the capital of the mudarabah with
his own or with another persons properties.

The Position of Mudharib

The mudharib is a trustee and not a

guarantor of the capital. If the property or
cash is destroyed or lost in his hand, he is
not held responsible unless negligence,
mismanagement on his part is proven.
The mudarib should take all possible steps to
mimimise the risk of loss.
However, his statement accompanied by
oath should be accepted.

Maintenance of Mudarib

Mudarib cannot claim any periodical salary or a

fee for the work done by him for the mudarabah.
The maintenance expenses of a mudarabah are
solely on Mudarib.
He cannot take from the money invested for
mudarabah. Otherwise he might use it for
himself while leaving nothing to the investor.
Hanbalis: he is allowed to draw his food
expenses from mudarabah account provided it
has been stipulated in the contract.
The majority of fiqh school restrict this right
only to a situation where the mudharib is on a
business trip. Any other expenses which are
acceptable in the custom may be accepted.

Void Mudharabah

Majority: mudarabah is not valid if, for instance, A gives a

car to B to use it as a taxi, and the fare received from the
passengers is distributed between them at an agreed
proportion. This is a contract of ijarah and not mudarabah.
B as an employee of A should receive a definite amount as
his wage. Since this is not known, the ijarah in this case
is also voidable.
Imam Awzae: it is a mudharabah contract.
- If shares of both parties are not clearly defined.
- Malikees and Shafiees : mudharabah is void if the
contract is made for a certain fixed period for instance one
year.
- If Mudharib is asked to guarantee the capital even if
the loss has not occurred due to his negligence.
- If sahib al-mal stipulates that he would jointly sell
and purchase with the mudarib; or that nothing should
be done without his permission; or if a sahib al-mal
appoints a supervisor over the mudarib...

Termination of Mudharabah

1) If it is cancelled or when a mudarib is

prevented from using the fund, or when he is
dismissed. In this case the mudarib is entitled
to his claim in the profit. If the capital is in
the form of goods cancellation of mudrabah,
prevention of mudarib, or his dismissal can
only take place after the goods are sold. The
action of the mudarib who is unaware of the
cancellation, prevention, or dismissal is
binding on the sahib al-mal.
2) When mudharabah which is for the fixed
period of time expires.

3) If either party loses its legal capacity.

4) If one of the conditions in restricted
Mudarabah is violated.
5) If Mudarib fails in his duties due to his
negligence or deliberate loss.
6) If the capital is destroyed in the hands of
the mudarib.
7) If either party dies. And if the investor dies
the mudarib has no right to continue
mudarabah. Any further use of the capital
depends on the permission of the heirs.

The Differences between Musharakah and Mudarabah:

1)

2)

3)

The investment in musharakah come from

all partners, while in mudarabah, investment
is the sole responsibility of sahib al-mal.
In musharakah in contrast to mudarabah all
partners
can
participate
in
the
management of the business.
In musharakah all the partners share the
loss to the extent of the ratio of their
investment, while in mudarabah, the loss, if
any, is suffered by sahib al-mal only.

4)

5)

Partners in musharakah have unlimited liability.

In case of loss when the asset of musharakah is
not sufficient to pay for the liabilities , they are
transferred to the partners and should be paid
by them on pro rata basis. In mudarabah the
liability of sahib al-mal is limited to his
investment unless he has permitted the
mudharib to incur debt on his behalf.
In musharakah all the partners jointly own the
assets of musharakah in proportion to their
respective shares in the investment. In
mudarabah, on the other hand, the assets
belong solely to sahib al-mal. The mudarib
cannot claim any share in the assets, in case if
its value is appreciated.

 MORTGAGE OR PAWN

Literally: detaing or holding a thing

Technically: a contract where a debtor
provides a corporeal property to a creditor as
a security that enables the creditor to reclaim
the debt or satisfy it out of the pledged
property in case where the debtor is unable or
refuses to settle the debt.
- Legality:
The Quran says:
If you are on a journey, and cannot find a scribe, a
pledge
with
possession
(may
serve
the
purpose).And if one of you deposits a thing on trust
with another, let the trustee (faithfully) discharges
his trust, and let him fear his Lord. (2:283).

The Prophet (pbuh) in a bargain made with a

Jew for grain, gave his coat of mail in pledge
for the payment.
- Pledge is convenient when:
a) Two parties cannot trust each other
b) Cannot get a written agreement
c) No witnesses are available
-

1)

2)

3)
4)

The pillars of pledge/Rahn

Two parties: pledgor (al-Rahin) who is the
debtor and owner of the pledged property
and pledgee (al-Murtahin) who is the
creditor who takes and keeps the pledged
property.
The pledged property (al-Marhun) is the
property which is kept as a security for the
debt.
The debt (al-marhun bihi).
Expression (offer and acceptance).

Conditions:
The pledged property should be known and
well-defined.
2) Existence of the pledged property at the time of
contract, and should be capable of delivery.
(ex: pledge of an unborn animal, lost animal is
not valid)
3) It should be a valuable property (mutaqawwim)
(ex: haram properties or properties that cannot
be possessed is not valid).
5) Usufruct cannot be a pledge.
Hanafees: because it is not property
Majority: who consider usufruct property argue
that it comes gradually and as such it is not in
existence when the contract is concluded.
1)

6) Conjoined property with another property

cannot be pledged separately (ex: crops and
trees without the land, cannot be pledged as
possession of crops, and trees is not possible
without the possession of the land).
7) The pledgor should have full ownership of the
pledged property except in case a guardian or
a father who may pledge the property of a
minor for the debt of a minor or for his own
debt.
8) The pledged property should be capable of
coming into the possession of the pledgee.
(jewelry (actual), land or house (constructive).
9) The value of the pledged property should be
equal or more than the amount of debt.

The Use of Pledge by the Pledgee

The pledge is considered a trust in the hands of
the pledgee.
The pledgee is responsible for its safety otherwise
he is liable for compensation.
Pledge is given to secure the debt, therefore, it is
not meant for investment and profitable use.
The pledgee is not allowed to exploit or use the
pledged property even with the permission of the
pledgor except with compensation.
Exploitation and profitable use of the pledge is
considered usury. based on the principle that all
loans that generate profit are usurious.
But if it is an animal that can be used for riding or
milk, the pledgee may make use of it in return for
its maintenance.

Rights and Responsibilities of the Pledgee

1) The pledge is kept with the pledgee until the
debt is paid.
2) The pledgee may demand payment of his debt.
3) The pledgee is not entitled to use the pledge, for
he has the right to possess it, not to use it. He
cannot let or hire the pledge to someone else.
4) The pledge must be returned upon receiving the
payment.
5) In case if the pledgor refuses to spend on the
pledge, the pledgee may do so with the
permission of the court and reclaim that from
the pledgor
6) The pledged property
cannot sold without
consent of the pledgor.

Rights and Responsibilities of the Pledgor

1) The pledgor is not allowed, to retake his
pledge before settlement of his debt.
2) The pledgor cannot reclaim the pledge on
the plea of selling it to discharge his debt.
3) The pledgor cannot reclaim the pledge on
the ground of partial settlement of the
debt.
4) The pledgor has to pay for the maintenance
of the pledge.
5) The produce and the benefit of the pledge
belong to the pledgor.

Forfeiture of the Pledged Property

If the pledgor is not able to setle his debt, the
pledgee cannot can not forfeit the pledged
property.
The Hadith states: a pledged property is not
forfeited from the owner who has pledged it, he is
entitled to its output and is responsible for its
expenses.
The pledgor has to settle the debt within the fixed
time.
If the pledgor refuses to pay and also does not
allow to sell it, the court may force him either to
settle the debt or to allow the sale of the pledge.
Balance of the sold pledge belong to the pledgor.
But if it is not enough the pledgor has to settle
the balance.

The pledged property is inherited by heirs of

the pledgee
and they have the right to keep the pledged
property until the pledgor settles the debt.
If the pledgor dies the contract is dissolved
automatically and the debt is payable
immediately from the estate of the deceased
pledgor.

The Contract of Guarantee or Kafalah /

Literally: comes from the root word kafala, which means
junction, joining, combination, responsibility.
Legally: The joining of one obligation to another
obligation with regards to the settlement of a claim.
In kafalah a person joins another person in undertaking
certain obligation. Consequently, both persons become jointly
liable to meet any claim that may arise from this obligation.
Legality: Prophet (s.a.w) said:
( The surety or a Guarantor is liable.
Hadith says:

()

- Prophet (s.a.w) would refuse to perform prayer for a Muslim
who died indebted then: Abu Qatadah said: O Messenger of
Allah pray for him and his debt is on me (I guarantee), then
He prayed for him (Bukhari).

Pillars of Kafalah
To Hanafis: it has two pillars,.offer and
acceptance only where offer may come from the
guarantor and the acceptance from the creditor.
- Majority of Schools: kafalah has five pillars:
1) The guarantor or surety (/ )who agrees
to be jointly liable with the principle debtor for
the settlement of his debt.
2) The principal debtor ( / ) .
3) The claim itself ( .( whether it relates to
a person or a debt.
4) A creditor ( / ) .
5) Expression: offer only. kafalah is concluded
only by an offer made by the guarantor. And
the acceptance by the creditor is not necessary.

Modes of Kafalah: Kafalah can be:

1) Immediate: it is a type of kafalah which
immediately takes effect. (ex: I guarantee the
loan). In this case the guarantee will follow the
loan and he might be asked by creditor to pay the
loan either immediately or later or by instalments.
The guarantor becomes liable from the beginning.
2) Conditional or restrcited : it is restricted to
certain conditions. The guarantee takes effect
when the conditions are met.
Ex: He is my guarantor if I leave the city.
3 Contingent or deferred : to a future date. The
guarantee would depend on the happening of a
certain incident.
Ex: I guarantee his loan starting from 2015.

Conditions
1) Legal capacity of both guarantor and the creditor
2) Consent of the guarantor about the contract.
3) Neither legal capacity of the principal debtor nor his
presence during the contract is necessary.
4) Consent of the principal debtor is not necessary.
5) The creditor should know the guarantor.
6) The principal debtor should be known to the guarantor
7) The creditor should be known
8) Obligation must come from the real debt and not from
a trust (amanah). (ex: a partner or a mudharib are
trustees. Accordingly, partner, or a sahib al-mal can
not ask for a guarantor).
9) Quantity, quality and type of claim should be known.
10) Claim can be a person, loan or a thing or an act or
work.

Types of Kafalah
For a person ( ) or for a claim ()
1) In Kafalah for a person a guarantor is liable
ONLY for the presence of the principal in a lawsuit.
He is not responsible to settle the debt even if the
principal dies.
2) In Kafalah for a claim or property a guarantor is
liable for the settlement of a debt (dayn) or that a
certain specific thing (ain) would be returned.
In this case a guarantor is liabile if the creditor or
the owner of the thing dies. The heirs of the
creditor or the owner of the thing can demand that
the guarantor settle the debt or return the thing.
(ex: guarantor is liable to make sure that a certain
property bought by the buyer will be returned to
him).

The Effects of Kafalah

Majority of Schools: a creditor has option
to claim the debt from either the principal or
the guarantor.
Imam Malik in one of his opinions says that
the debt should not be claimed from the
guarantor unless if the principal debtor is
unable to pay.
Kafalah is a gratuitous contract, so the
service rendered by the guarantor is done
freely without any reward or payment.
However, it is possible that a guarantor may
demand a certain fee for his service.

Termination of Kafala
When the debt is settled either by the principal
debtor or by the guarantor or when the creditor
makes the debt as a gift either to the principal
debtor or to the guarantor.
2) When a creditor releases ( )the principal
debtor the guarantor is also released (
) If a tree trunk falls the branch falls with
it. However, if a creditor releases the guarantor
from the claim and not from the debt, in this
case the principal debtor is not released.
3) When the debt is transferred (hawalah). In this
case both the principal debtor and the guarantor
are released (ex: someone owes a similar debt
to the principal debtor..)
1)

4) When the guarantor settles the claim through

arbitration with the creditor. Arbitration may lead
to the release of both the guarantor and the
principal debtor. Alternatively, a guarantor may
release himself from part of the claim through
arbitration and allow the creditor to claim the
balance from the principal debtor.
5) Death of the surety for the property does not
terminate the contract of kafalah. In this case the
debt will be discharged from the estate of the
guarantor. However, the death of the principal
debtor or the guarantor in a contract of kafalah for
the person terminates the contract.
6) The creditor can terminate the contract of kafalah
even if the principal debtor or the guarantor does
not agree.

Transfer of Debt/alHawalah/

Literally, transfer or change.

Legally: a contract through which the liability for
the settlement of debt is transferred from a
principle debtor (muheel) to a transferee
(muhalalaihi).
Hawalah abolishes the existing debt between the
creditor and the principal debtor and the principal
debtor and the transferee and it establishes a new
debt between the creditor and the transferee.
When a valid hawalah is concluded, the debt is no
longer demanded from the principal debtor. This is
because the debt is transferred from the principal
debtor to the transferee.

Pillars of Hawalah
Hanafis: two pillars only:
1) Offer from the principal debtor
2) Acceptance from the creditor and the transferee.

1)
2)
3)
4)
5)
6)

Majority of schools: six pillars:

The transferor : the Principal debtor (Al-muhil)
Creditor (Al-muhal).
Transferee (Al- muhal alihi)
Principal debt
Debt owed by the transferee to the principle debtor
Expression which include offer and acceptance. (I
have transferred your credit to so and so, and the
creditor may issue an acceptance by saying : I
agree).

The contract of Hawalah is legalized by

proof from the Legality
sunnah.
The proof is provided in the sunnah in the
Hadith
Procrastination in paying
debts by a wealthy man is injustice.
So, if your debt is transferred from
your debtor to a trustworthy rich
debtor you should agree.

The effect of the command mentioned

in this Hadith
To Hanbalis : it is a binding command and
as such it creates an obligation ().
Once the principal debtor initiates the
hawalah, and the creditor and the transferee
are informed , they are bound to accept to
the transfer of debt and should agree with it
as the hadith indicates.
Majority: it is preferred to accept the transfer
of debt, but that it is not an obligation.
recommendation ().

Consent of three parties

According to to Hanbalis :
consent of the principal debtor is required
because he has to initiate the process. Once
the principal debtor initiates the hawalah,
and the creditor and the transferee are
informed, they are bound to accept the
transfer of debt and should agree with it as
the hadith indicates. (The hadith rendered
their consent unnecessary).

Malikis and Shafiis: there must be an agreement of the

principal debtor and the creditor.
They based the first requirement on the view that the
principal debtor may repay his debt in any way he may wish,
and thus must nit not be bound to paying in any given way
without his consent.
The creditors consent is required since his credit is
established as a liability on the principal debtor, and
therefore his consent is required to transfer that liability to
another person whose creditworthiness and promptness of
payment may be different from the first.
The hadith doest not compel the creditor to accept the
transfer of debt , his acceptance is desirable (mustahab)
only.
The consent of the transferee is not a condition because he
is under obligation to settle the debt that he owes to the
principal debtor. So it does not matter whether the principal
debtor personally claims his debt from the transferee or he
empowers another to claim it.

Hanafis: there must be a consent from all

three parties.
The consent of the transferee is required
because creditors vary in their degree of
aggressiveness when collecting their debts.
Conclusion:
- Hanbalis : the consent of the principal
debtor is a condition of the contract.
Malikis and Shafiis: the consent the
principal debtor and the creditor is a
condition of the contract.
Hanafis: there must be a consent from all
three parties.

The Conditions of Hawalah

1)Legal capacity of all parties
2)Consent of parties for hawalah.
3)The subject matter of hawalah should be
debt (dayn) and not a specific thing (ain: a
book). Since this cannot be established as
liability.
4)Both debts should be known.
5)The debts or one of them should not arise
from salam contract as the parties cannot
deal with the debt unless they obtain its
possession.

7) Majority of schools: the transferee should

be indebted to the principal debtor. If no such

debt exist, then the contract is one of guaranty
rather than transfer of debt.
Hanafis, do not agree with this condition (the
transferee for instance could be a depositor) .
8)The transferor (muhil) should owe a debt to
the creditor (muhal) otherwise it is a wakalah.
9)Malikees: both debts should be identical in
quality and quantity otherwise it is a contract
selling debt for debt.
- Hawalah is not valid if the principal debt is
payable instantly and the debt on the
transferee is payable at a fixed future time.

Types of Hawalah
- Hanafis: two types of hawalah:
1) Absolute hawalah (mutlaqah): This is a
type of hawalah where the contract is
concluded without reference to the debt on
the transferee and he accepts the transfer.
The majority argues that the contract is a
kafalah and not hawalah.
2) Restricted hawalah (muqayyidah) when
a transfer is made with reference to the
debt on the transferee.
- Majority of fiqh schoola recognized only
this type of hawalah.

Transfer of Right ()
It refers to a transfer of right from one
creditor to another.
While in transfer of debt one debtor replaces
another, in transfer of right one creditor
replaces another.
(ex: a seller asks a purchaser to pay the price
of the sold item to his (the sellers) creditor;
a pledgee asks the pledgor to pay the debt
to another person).
- In hawalah al-haq the initiative is taken by
the creditor while in hawalah al-dayn the
initiative is taken by the debtor.

Termination of Hawalah
1)When the transferee pays the debt to the
creditor.
2)Death or bankruptcy of the transferee:
Hanafis: hawalah is terminated when the
transferee dies or becomes bankrupt or he
refuses the transfer and the creditor has no
evidence against him.
They say that hawalah should have secured
the right of the creditor and since it is not
possible, the contract therefore is cancelled
and the debt is retransferred to the principal
debtor.

According to Shafis : a valid hawalah contract

transfers the debt to the transferee. The debt
actually should never be retransferred to the
principal debtor even if the transferee is dead
or bankrupt. The creditor before giving his
consent
to
the
hawalah
should
have
investigated whether the transferee is bankrupt
or not. In this case his position is the same
with a person who has bought a certain
property for a price higher than the market
price.
Malikis and Hanbalis: if the creditor has
stipulated that the transferee should not be a
bankrupt, and later found to be a bankrupt,
then he can claim his debt from the principal
debtor

3) When the creditor gives the debt as a gift

or charity (sadaqah) to the transferee or
releases him from the debt (ibra) and the
latter accepts it.
4)Cancellation of hawalah (faskh) before it
becomes effective or executed.

Bill of exchange Suftajah

It is a loan contract in which a creditor stipulates

another place for the settlement of loan.
A lends an amount to B in order that he may pay it
to him or C in another place.
In hawalah the obligation of B to A is already in
existence. While in suftajah, the obligation of B to A
is created on purpose by a payment which A makes
to B.
The practical advantages of Suftajah:
Avoiding the risk of insecurity that is usually
associated with the transfer of a large sum of
money.
The creditor wants to avoid the payment of fees
that he would have to pay for the transfer of money
from one place to another.

- To Malikis and Shafiis: it is prohibited :

because any benefit that can benefit the
creditor falls under the meaning of riba.
To Hanbalis it is valid as it does not cause
any harm or inconvenience to the debtor.
To Hanafis it is strongly disliked (karaha
tahreem)

The legal ruling of suftaja

1)In

hawalah the debtor is released while in kafalah

he is not.
2)In hawalah the creditor can claim the debt only
from the transferee, but in kafalah the creditor can
claim the debt either from the principle debtor or
the guarantor.
3)Majority of schools: in Hawalah the transferee
owes to the debtor while in kafalah the guarantor
does not.
4)Kafalah can refer to debt or to a thing or to a
person while in hawalah can only refer to a debt.

The difference between Hawalah and Kafalah

The difference between Hawalah and the sale

of Debt (bay al-dayn)
1)In hawalah a debt is transferred while in bay aldayn it is sold.
2)In hawalah a debt is transferred for its par value,
while in bay al-dayn it is sold for a discount.
3)Majority of schools: in Hawalah the transferee
owes the principal debtor while in bay al-dayn the
purchaser of the debt does not owe the debtor.
4)In hawalah it is the principal debtor who transfers
the debt, while in bay al-dayn it is the creditor
who sell it.
5)Hawalah is a permissible contract while the
validity of bay al-dayn is disputed by the Fiqh
Schools.

The contract of release from liability ()

Literally: purification, release, relief or abandoning.
Technically: a contract where a person drops a right that is
established as a liability on another .
Ex: a creditor releases his debtor from the payment of debt.
Ibra is a charitable gratuitous contract, and the provider of
ibra is rewarded.

if the debtor is in hardship, then deferment

until a time of ease. But to remit it as
charity is better for you, if you only knew.

Ibra implies ownership or annulment only ?

Malikees , Shafiis : Ibra does imply the dropping of a
legal right and also implies a transfer of ownership.
Ex: when absolving a debtor, the debt is dropped , and the
ownership of its object is transferred to the debtor.
Hanafis and majority Hanbalis : argue that the
dominant aspect of ibra is the dropping or annulment
( )of a right.

The subject matter of Ibra

The proper subject matters of Ibra are:
- Debt : a creditor drops his debt and releases the debtor.
Accordingly debts of fungible properties such us: rice ,sugar or
money can be dropped as they are considered as an obligation
that could be established as a liability.
- Rights: that concern humans, ex: a creditor may release a
guarantor in contract of kafalah , a person may waive his right to
use his right to cancel a contract based on the option of defect,
his right to claim compensation for the destruction of his
property.
Ibra is not valid with regard to the rights of Allah: false
accusation (Qadhf), and theft after the matter has reached the
court and a judge convicts him.
Ibra can be made with regard to those rights where the rights of
the person are dominant, like : Qisas punishment.

- Borrowing of non fungible properties (cannot be

replaced) such us a book is not considered debt and
cannot be dropped. The book continues to belong to
its original owner unless the lender has transferred it
to the borrower through other contract such us a gift
or sale.
Claim regarding a non fungible property (ain) could
also become the subject matter of Ibra.
Ex: the right to demand the return of a certain thing
such us a book. But the ownership over those
properties remains with the owner.
Ibra is not applicable in relation to a thing it self
because it amounts to the dropping of ownership
right over that thing which is not accepted by the
law.
Conclusion: Only debts, rights and claim regarding a non
fungible property are the proper subject matter of ibra.

The Pillars of Ibra:

Hanafis: Offer only which would indicate the abondoning
of a claim.
Majority of schools:
1) The creditor :
: a person who has a right on

another
2) The debtor :
: a person who is under obligation.

3) The claim : :
: which could be in

relation to a certain right over a thing, or a right, or a
debt.
4) The Offer and acceptance - I released you from
the debt or I have no claim on you

Is acceptance necessary ?
The non Maliki jurists ruled that absulotion does not require
acceptance. (in analogy to divorce).
Malikis Ibra transfers ownership and it is similar to the gift
and needs to be accepted.
Rejection of the Ibra:
Shafiis and Hanbalis: it is valid even if rejected by the debtor.
(in annalogy to other contracts in which rights are dropped:
dropping the right to physical retribution for murder)
Hanafis and Malikis: absolution can be rejected.
The Hanafis argue that release is not dependent on acceptance
but it is invalid if rejected because they did not deny the
aspect of ownership aspect .
As for Malikis : absolution requires the absolved debtors
consent.

1)
a.
b.
c.
d.

Conditions for Ibra

Conditions for the creditor:
He should have Complete legal capacity
He should be the owner of the right or his agent.
With consent not valid if forced
Ibra during death illness in favor of some of the heirs
depends on permission of the rest even if the debt is less
than 1/3, however, it is valid if made in favor of a
stranger as long as it does not exceed 1/3 of the estate.

2) Condition for the debtor:

He should be known and specified. (absolving one of your
debtors without specifying which one is not valid)
3) The conditions for the debt:
A- According to Shafiis the debt should be known.
This ruling follows from the view that absolution is a transfer of
ownership, which thus requires consent, In this regards
consent is not applicable to unknown debt .
- However, the majority does not stipulate this.
They based this ruling on the view that absolution is primarily
dropping of the creditors right without compensation, and
thus it can be executed whether or not the object of contract is
known.
You are absolved from one of my two debts without specifying
which one is valid.

B- Should be either debt (dain) or right (haq: right of

kafalah) and not a thing as it cannot be established as
liabilities (on the Dhimmah).
Ex: If a person usurps a particular book , absolution from
this usurpation is not valid.
C- The claim should be present when Ibra is made. It is
not valid for future claims. Release of debt or right
prior to its existence is not valid.
Ex: - A person cannot release another from debit which he
will give him later.
- A woman cannot release her future husband from the
payment of alimony (mahr).

Conditions for expression (Language of Ibra)

A- It should be immediate. Should not depend on condition
or deferred to future. However, if Ibra is made
dependant on death it is valid for it becomes a wasiyyah.
- If Ibra is made on the condition of performance it is
valid: I have released you from 1/2 or 1/3 of the debt
but you have to pay the balance now :it is valid
according to non Hanbalis as this is receiving some of
the debt and forgiving the balance.
- If Ibra is deferred and dependent on the payment of the
balance it is not valid except to Malikis.
Ex: you are released from half of the debt when you
pay the other half.

B- Releasing the debtor from some the debt on the condition

that the latter should accelerate or bring forward the
payment of the balance or pay it in shorter period is not
valid for it resembles usury. However, if the debtor
voluntarily pays the debt in a shorter period and the
creditor voluntarily releases him from some of the debt
then it is valid.
C- It Should not contradict with Shariah. Ex: in a contact of
Sarf (exchange currency) a person cannot release another
from condition of
possession (
) . Or a person should release
himself from the duty of guardianship over a minor.

Types of Ibra
Specific and general
1- Specific Ibra () : it refers to specific right such
as releasing a person from the debt arising from sale or
rent.
2- General Ibra () : it refers to releasing a person
from all claims arising from different causes such as
sale, rent, dowry (mahr), Wadiah or Ariah.
(pertaining to all liabilities that are owed by one party
to another

Another classification:
Ibra can be classifeid based on the way it is expressed
( )into the following two types:
1- Baraa al-isqat ( ) : where a person releases
another by dropping some or all his rights which he
has against him.
2- Baraat al-istifa () : it is made when a
person admits that he has received his right from
another person: I have received my item from him..

The Effect (Hukum) of Ibra () :

-The debtor is released from the claim depending on the
type of Ibra that is made.
- If particular then debtor is released from a particular Dain.
-If it is general Ibra, in favour of a person the person is
released from all the claims.
- it is not allowed for the person who made Ibra to retract
it (( .
- it is not valid if a person confesses a debt after he was
released by general Ibra as Dain is abolished by Ibra and
claims that are abolished cannot return.

Al-Muqasah or the contract of set-off debt clearance

Literally: equality.
Legally: the dropping of one debt in exchange for
another that is equal in genus and characteristics.
- It is the subtraction of one debt in lieu of another.
- When a creditor owes to his debtor another debt , set off
may come into operation regarding their mutual debts.
- In this case, both debts are dropped if they are equal, and
the lesser of the to debts is dropped if they are unequal.

1)
2)

Two types of Muqasah

Automatic set off (Muqasah al-jabriyyah)
Voluntary set off (Muqasah al-ikhtiyariyyah)

1) Automatic set off

It is an automatic process which is enforced without the
necessity of the two parties giving their consent
Ex: A was indebted to B for a fungible debt, and then B bought
from him a commodity for a price equal to the debt, the two
debts are automatically cleared without either party
requesting the clearance.
According to the Majority of schools automatic set off happens
without any consent, request or demand from either party.
However, Malikis do not approve it unless it happens by
request of one and consented by the other.
Thus most of the Maliki definitions of Muqassah relate to
voluntary debt clearance.

1)
2)

3)
4)

Conditions
Both parties should be creditors and debtors to each
other at the same time.
Both debts should be identical in genus,
characteristics, amount and date and maturity.
Automatic set off is not valid if one debt is deferred
while the other should be paid instantly or when one of
the debts is created in usd and the other one in euro.
Cause of the debt is not important (ex: one is a loan
contract (Qardh) while the other is a sale contract).
Muqasah should not involve the right of a third party.
Ex: a pledgor should not sell the pledged property to
another person for the pledgee has a priority right over
the pledge.

Similarly, a bankrupt person has no right to sell his property

to one of the creditors for it will harm other creditors
who have an equal right over the same property.
However, if a person is not a bankrupt then he has right
for Muqasah with one of his creditors and other creditors
have no right to object it.
5) It should not result in violation of any Islamic law or in
forbidden action.
Ex: Dealing in object of salam prior to receipt.
A person who bought a certain commodity based on salam
contract cannot sell it to his creditors prior to obtaining
to its possession. Similarly a creditor has no right to buy
from his debtor Salam commodity by making his debt as
the price for the commodity.

All schools agree that a debt cannot become the price for
the salam commodity and that the price should be present
and given during the session of contract (Majlis al-aqd).
2) Voluntary set off (Muqasah al-ikhtiyariyyah)
It is when two debts are created in two different types of
currencies.
Jurists permit debt clearance by mutual consent, regardless
of unity of genus and currency provided that it does not
result in a forbidden transaction.
Ex: RM and Dinar or Dirham and $ US.
The parties still have right to enter Muqasah by mutual
consent.

Ex: Ahmad owes RM 100 to Bakar and Bakar owes 100$

(US) to Ahmad. The value of RM 100 could be set-off
against 100$ (US) and Bakar has to pay the balance in $
(US).
- The exchange rate should be the rate of the day in which
the set-off takes place.
- Voluntary Muqasah happens by mutual consent of the
parties irrespective of whether the debts are of the same
of different types or whether one is debt (Dain) and the
other is an item (Ain) or one is deferred and the other is
immediate.