ISLAMIC BANKING

PRODUCT AND SERVICES

Contracts
 Learning Outcomes

At the end of the lesson, students should be

able to:
1. Identify the essential elements of a valid Shariah contracts.
2. Understand the meanings of contracts in Islamic financial
system.
3. Explain on the pillars and conditions of Shariah contracts.
4. Distinguish between the type of contracts in Islamic
financial system.
Topic & Structure of the lesson

The aim of this module is to equip students

with the knowledge of Shariah contracts and
type of contracts in relation to Islamic
financial system.
 Key Terms you must be able to use

1. Contracting parties
2. Subject matter
3. Statement of contract
4. Buyer and seller
5. Offer and acceptance
6. Price and goods
7. Transactional contracts
8. Financing contracts
 Contracts

Allah says about the contracts:O you, who believe,

fulfill your contracts. (Al-Maidah: 1)
The Arabic equivalent of the word contracts is
uqud, plural of aqd.
The literal meaning of this word are to tie, to
knot, to join, to lock, to hold, to contract,
etc.
Among these meanings, the last one is closely
related to technical meaning.
 Contracts

Technical term in Islamic law of aqd (contract) is

Conjunction of a proposal or ijab and an
acceptance or qabul.

OR

Conjunction of the elements of disposition,

namely, proposal (ijab) and acceptance (qabul).
 Contracts
According to Majallat al-Ahkam al-Adliyyah,
contracting is the connection of an offer with an
acceptance in a lawful manner, which marks its
effect on the subject of that connection.
An offer (ijab) in this definition means what is
proposed first by one of two parties indicating his
intention to go into a contract.
An acceptance (qabul) means what is stated
secondly by the other party following an offer,
expressing his/her consent to the offer.
 Contracts
According to this definition, only a bilateral
financial transaction is considered a contract, while
an act of a single party or unilateral financial
transaction is not considered a contract.

If both offer and acceptance occur, they will have

an effect on the subject matter involved.
 Contracts
For instance, if someone offers and says to another:
I have sold my house to you with such and such an
amount, and the other person accepts it and states:
I have accepted your offer and bought it from you
with the said amount, this is considered to be a
contract.
The effect of this contract will be that the
ownership of this house will be transferred from the
first person to the second.
Classical jurists consider both bilateral and
unilateral financial transactions as contracts.
 Elements of Contracts

The prerequisites of Shariah contracts are:

1. Two contracting parties (Al aqidan)

2. The subject matter (Mawdu Al Aqd)
3. Statement of contract (Sighah)
 Elements of Contracts

Majority school of laws said contract consists

from statement, two contracting parties and
the subject matter.

Hanafi school of law: Statement is the only

pillar of the contract. All aspects will
automatically follow the statement.
Pillar and Conditions of Shariah Contracts

1. The Two Contracting Parties

The two contracting parties (Al Aqidan) include

seller and buyer.
Conditions of both parties are:
1. Puberty
2. Sanity (Akil)
3. Maturity
If a person possesses all these 3 qualities: puberty,
sanity and maturity, he is considered to be fully
capable of negotiating and concluding different
types of contracts independently.
 Conditions:
The Two Contracting Parties

1. Puberty
a) Both contracting parties must attain puberty
b) Male: when he starts ejaculate sperms in his
night dreams
c) Female: at the onset of menstruation
d) Signs do not appear:
- Abu Hanifah: Male age 18, female age 17
- Malik: age 17 for both
- Al Shaiban: age 15 for both
 Conditions:
The Two Contracting Parties
2. Sanity (Akil)
a) Both contracting parties must be sane
b) If both or one of them is insane, no contract is to be
made

3. Maturity
a) A person is not allowed to deal with his wealth
independently without attaining maturity.
b) Good and proper dealings with wealth from a worldly
viewpoint. If not, request consent from his guardian.
Pillar and Conditions of Shariah Contracts

2. The Subject Matter

The subject matter of contract (Mawdu Al

Aqd) must include price and goods.
Conditions of both price and goods are:
1. Be legal
2. Known to both parties specification
3. Capability of a subject matter to be handed
over/delivery
4. Must be in existence
 Conditions:
The Subject Matter
1. Be legal
a. Suitability of the subject matter
b. Considered property of value
c. Not forbidden by the Shariah

2. Known to both parties specification

a. Viewing a similar object
b. Identified by the description
c. Exception for donation/charity
 Conditions:
The Subject Matter
3. Capability of a subject matter to be handed over

a) Subjects must be capable of being handed over at

the conclusion of the contract.
b) Delivery stray animal and prey animal cannot be
sold.
c) It is not legal to conclude a contract for
performing a job, which is not possible to be
accomplished.
 Conditions:
The Subject Matter
4. Must be in existence

a) If the subject of a contract is a tangible thing, it should

normally be present at the time of the contract.
b) The Prophet (pbuh) forbade the selling of a good, which
does not exist. For example: sale of an animal embryo
which is still in the womb of its mother.
c) Selling grains or fruits before their perfect appearance is
not allowed. Exception for sale of salam.
d) If the subject of a contract is a utility or work, its presence
at the time of contract is not required. The requirement is
on the strong possibility of its occurrence in the future.
Pillar and Conditions of Shariah Contracts

3. The Statement of Contract

The statement of contract (sighah) must

have an offer and an acceptance.
Conditions of both the offer and acceptance
are:
1. Use past tense
2. Conformation of offer and acceptance
3. Clarity of offer and acceptance
4. Connection of offer and acceptance
 Offer and Acceptance

According to Hanafi school of law:

1. Offer (Ijab): means what is proposed first by one

of two parties indicating his intention to go into a
contract.
2. Acceptance (Qabul): means what is stated
secondly by the other party following an offer,
expressing his/her consent to the offer.
3. Offer is primary action while acceptance is
secondary action.
 Offer and Acceptance

According to majority of scholars:

1. Offer (Ijab): means what is proposed by the one

who transfers the ownership (seller).
2. Acceptance (Qabul): means what is stated by the
one to whom the ownership is to be transferred
(buyer).
3. Offer originates with seller. Acceptance originates
with the buyer.
 Conditions:
The Statement of Contract
1. Use past tense in forming the contract (recommended)

a) Present, future, or the command could be utilized

depending on the intention and these tenses can prove an
intention to form a contract.
b) Verbal expression for forming an offer and an acceptance.
c) Writing, fax, phone are new modern tools.
d) Jurists have disputed whether an offer and acceptance are
allowed to be formed through silent consent by means of
giving a price and handing over the sold good. Shafii: not
valid; Majority: valid.
 Conditions:
The Statement of Contract
2. Conformation of offer and acceptance
a)Explicit
For instance, if someone offers and says to another: I sold my house
to you for one hundred thousand dollars, and the second party says:
I bought it for that price,. This is considered as explicit and real
conformity of an acceptance to an offer because both conform to
each other completely.

b)Implicit
On the other hand, in the above example, if the second party says: I
bought it with one hundred thousand and two hundred dollars,. This
is considered as an implicit conformity.
 Conditions:
The Statement of Contract

3. Clarity of offer and acceptance

a) Both offer and acceptance must be clear and void of

ambiguity.
b) They should be in conformance with the words and
terms that are normally used in the customs of the
parties to indicate a particular type of contract.
 Conditions:
The Statement of Contract
4. Connection of offer and acceptance
a) The doctrine of session of contract (majlis al-aqd).
b) According to the Islamic system, an acceptance must be connected with
an offer. In other words, both should be in the same session (majlis), if
both parties are present.
c) Jurists differ on whether the connection of an acceptance with an offer
means their occurrence happen in the same session or not. Some jurists
agree while others opine that it means both should be at the same time.
d) The second view in this regard is preferable because in many
contemporary circumstances, such as making an offer by phone, fax,
telex, writing through regular mail, etc., it is not possible to connect the
acceptance with the offer in the same session. The underlying principle is
the unity of time instead of place, venue or session of the contract.
 Conditions:
The Statement of Contract
4. Connection of offer and acceptance (continue)

e) Jurists dispute on whether a contract is binding immediately

following an offer and acceptance, or parties are allowed to delay
for further thinking about it until the end of the session (khiyar al-
majlis).
f) Hanafi and Maliki: a contract is binding immediately following
an offer and acceptance, and parties are not allowed to delay until
the end of the session.
g)Other jurists: both parties are allowed to rethink and delay until
the end of the session.
 Prohibited Elements in
Shariah Contract

1. Duress (Ikrah)
2. Mistake (Ghalat)
3. Inequality (Ghubn)
4. Deception (Taghrir)
5. Contracts for Forbidden Things
 Types of Contracts in
Islamic Financial Transaction

The contracts dealing with Islamic commercial

and business transactions can be classified into 4
broad categories:

1. Transactional contracts
2. Financing contracts
3. Intermediation contracts
4. Social Welfare contracts
 1. Transactional Contracts

Deal with the real-sector economic transactions

Facilitates the exchange, sale and trade of goods and
services.
The core transactional contracts are based on trade or
exchange-based activities.
Exchange could be on the spot or on a deferred basis.
Exchange could be of goods for goods, or of goods for
price, or goods for promise to pay.
These contracts create assets which further become the
basis of financing and investment opportunities.
1. Transactional Contracts
 1. Transactional Contracts

When sale contracts are viewed considering the subject

of sale or the underlying asset, sale can be of 5 types:

1) Bay- sale of property or commodity (moveable or

immoveable) to another person for a price
2) Sarf sale by exchange of money for money on the spot
3) Sale by barter exchange of goods for goods, in which
neither is a money payment
4) Bay al-dayn sale of debt or liability
5) Bay al-salam (sale by immediate payment against future
delivery) & Bay al-istisna (sale on order) item for sale
is yet to come into existence at the time of the contract
 1. Transactional Contracts

When sale contracts are viewed from the point of

payment mode, they fall into the following categories:
1) Spot cash sale: the purchaser oblige to pay the agreed purchase price at
the time of concluding the contract
2) Installment sale: Payment is to be deferred & to be made in installment
3) Lump sum payment payable in the future: it is valid if the date of
payment is pre-determined and is applicable to all types except bay al-
salam.
4) Bay al-arabun: a portion of sale price is paid in good faith as earnest
money.
5) Deferred payment contracts (Bay al-muajjil): allow payment of product
in installment or in a lump sum. The product price is agreed between
buyer and seller at the time of sale and cannot include any charges for
deferring payments.
 2. Financing Contracts

Offer ways to create and extend credit.

Facilitate financing of transactional contracts.
Provide channels for capital formation and resource
mobilization between investors and entrepreneurs.
The distinguishing feature of such financing contracts
is the absence of a debt contract.
These contracts are meant for:
a) Financing of transactional contracts in the form of trade
finance or asset-backed securities, or
b) Providing capital through equity partnerships
 3. Intermediation Contracts

To facilitate an efficient and transparent execution of

transactional and financial contracts.
Provide the economic agents with set of tools to
perform financial intermediation and to offer fee-
based services for economic activities.
These contracts include:
a) Partnership
b) Fee-based services
c) Takaful
 4. Social Welfare Contracts

Contracts between individuals and the society

To promote the well-being and welfare of the less
privileged.
Although facilitation of these contracts is beyond the
scope of intermediation, an intermediary can certainly
offer community services by institutionalizing social-
welfare contracts.
These contracts include:
a) Qard-ul-Hassan
b) Waqf
Contracts/Instruments
Q&A
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Islamic Deposit in Practice

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