Ruzian Markom

Faculty of Law
UKM

Understand the underlying philosophy of

business transactions in Islam
Explain the meaning of contracts , and the
legal concepts and theories of the various
types of contracts in Islamic law;
Describe the classification of contract, what
constitute a contract of sale, and the legal
capacity to enter into such contract in
islamic law
Analyse the main forbidden contracts in
Islamic commercial transaction

Ruzian Islamic Contract law

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Ruzian Islamic Contract law

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Quran 2: 275 : Allah has permitted trading

and forbidden usury.

Quran 2: 188 : And do not eat up one

anothers property unjustly, nor give bribery
to the rules (judges before presenting your
cases) that you may knowingly eat up a
part of the property of others sinfully

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Fundamental objectives of the Shariah:

The right to lawful acquisition of legitimate property.
The Right to earn a livelihood:
Quran 4: 32 For men is the benefit of what they earn. And for
women is the benefit of what they earn. And ask Allah of His
grace..
Rafi ibn Khadij narrated:It was said : O Messenger of Allah,
what kind of earning is best? He said: For a man to work with
his hands and every honest transaction.
Al Miqdam wrote that the Prophet once said: No one ever eats
anything better than that which he earned with his own hands.
Different types of work: Imam Mawardi : best work agriculture,
trading and manufacturing
Al Nawawi prefers a particular means of livelihood whereby
people earn their living with their own hands regardless of the
type of work .
Involved men and women- Saidatina Khadijah RA

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Leading companion of the Prophet :

Saidina Abu bakr, Uthman ibn affan, Abdul Rahman
ibn Auf engaged to lawful trade and the proceeds
were spent on the development of the Muslim
community
Some migrants and helpers in Media engaged in
agricultural
Professional jobs connected to the state teaching,
the giving of compulsory alms and adjudicated of
disputes.
Lawful business and trade best mode of earnings
legitimate money through hardwork is rewarding
from both the financial and spiritual perspectives.
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The Quran and Sunnah prohibit unlawful gains in strong terms.

Quran 2; 188 : And do not eat up one anothers property unjustly, nor give
bribery to the rulers (judges before presenting your case) that you may
knowingly eat up a part of the property of others sinfully.
Gains derived from the following sources are prohibited in Islam;
Earning a living through money lending that involves usury;
Trading in prohibited items such as intoxicating wine, pork and dead animals
Gambling and lotteries
Offering short measures in trade
Hoarding to inflate prices at a later time
Adulterating commodities and trading in defective in items
Earning through prostitution
Misappropriating public funds
-exploitation of others people financial resources through unhealthy business
dealings
Business dealings required to be conducted in fair and just manner
Earnings from clean and just business.

Ruzian Islamic Contract law

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Aqad- literally to tie between two ends, to fasten

to link
Islamic law- an agreement, commercial
arrangement, legal transaction, document or deed
2 major interpretation general- any thing or
disposition that is intended to be performed by a
person of their own will or through mutual
agreement nikah, wasiyyah
Specific agreement among contracting parties
that is concluded through an offer and acceptance
with the consequence of binding legal obligation

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Article 103-104 of the Majallah Al Ahkam Al

adliyah :
Aqd is the two parties taking upon
themselves an undertaking to do something.
It is composed of the combination of offer
(ijab) and acceptance (Qabul).
The making of aqad is connecting in legal
manner, ones offer (ijab ) and acceptance
(qabul) with the other, in a wat will be clear
evidence of being mutually connected.

Ruzian Islamic Contract law

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Al Sanhuri :
The conjunction of the offer emanating from one of the two
contracting parties with the acceptance of the other in a
manner that it may affect the subject matter of the
contract. As a result of the conjunction, both are under
obligation to each other.
The obligation to undertake certain actions in exchange for
some sort of consideration represents the underlying spirit
behind the valid contract
Consideration something that has value given by one
party to a ctt in return for a benefit or promise from the
other party

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Waad binding unilateral promise

Muwaadah- bilateral promise in comercial transactions
In simple terms , waad is a promise or undertaking by a
party to carry out a unilateral contract that signifies their
commitment to perform an obligation
- murabahah cost plus financing contract where a sale is
made at a specified profit margin
Al ijarah thumma al bai a lease agreement where the
lessee gives a binding commitment /promise to purchase
the underlying asset upon expiry of the lease period

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Quran 5: 1 : O you who believe! Fulfill your obligations.

Quran 17: 34 :And fulfill (every ) covenant. Verily, the
covenant will be questioned about.
Quran 16: 91: And fulfill the covenant of Allah when you
have covenanted, and break not the oaths after you have
confirmed them-indeed you have appointed Allah , your
surety. Verily! Allah knows what to do.
Quran 9: 4: Except for the idolaters with whom you have a
treaty, and who have not subsequently failed you in aught,
nor have supported anyone against you. So, fulfill their
treaty to them for the end of their term. Surely Allah loves
the piuos.

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Basic shariah principles of contract are

based on the general wellbeing of the
community, economic justice and equitable
distribution of resources
No form of unjust enrichment is allowed in
commercial transaction under the Shariah
Classification of contract according to
:nature,
its circumstances ;
and legal consequences

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Unilateral contracts (aqd infiradi)

Bilateral contracts (aqd thunai)
Quasi contracts (shibh alaqd)
Example of common contract
Contract of sale aqd al bay- bilateral
Contract of bequest al wasiyyah unilateral
Some bilateral contract can transform into quasi
contract depending on the manner in which they
were created, if any contract was created by the
mere operation of law without a formal agreement
between the parties, it becomes a quasi contract.
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A contract initiated and concluded by a single

party which involves some form of benefit being
transformed to another party , usually without
consideration
Quran 12: 72 : They said: We have lost the
(golden) bowl of the king and for him who
produces it is (the reward) of a camel of load and I
will be bound by it.
An open promise that is meant for the whole world.
Anybody who comes forward with the golden bowl
of the king automatically accepts its offer. The
contract then becomes binding to both parties
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A contract between two parties with the

necessary legal effect that makes their
terms and conditions binding on them
Contract of exchange (muawadat)
Contract of security (thawthiqat)
Contract of partnership (shirkah)
Contract of safe custody (wadiah)
Contract relating to use of an asset (ijarah)
Contract relating to performave of work
/rendering services eg wakalah and jualah

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An arrangement or obligations created by

the law despite the absence of contract.
Eg when a buyer wrongly pays the price of
acommodity to the wrong person due to a
mistaken identity, such a realtionship is a
quasi contract, as it is not originally based
on mutual consent. As a result, the person
receiving the money in error must return
the sum paid to the buyer for onward
payment to the rightful seller.

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Mudharabah
A trust partnership between a capital provider and an
entreprenuer where the parties shared the profit but in the
event of any loss, the capital provider bears the loss
Musharakah
A joint business partnership enterprise in which the parties
share the profits based on the contractual ratio and losses
are borne based on the equity participation ratio
Mulilateral contracts
Contracts involving more than two parties such as bank,
client and agent.

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Valid contract (sahih)

-- a contract where a party has the legal remedy to execute the contract.
Invalid contract (fasid )
A transaction where the basis of the contract itself is valid but there are
defects in its attribute that makes it invalid and thus unenforceable under
the shariah
Void contract (batil)- an unenforceable contract that is invalid from the very
beginning, which cannot be remedied by addressing any missing element in
such transaction
Binding contract (lazim )
enforceable contract ( nafidh)
Withheld contract (Mawquf)- when the ctt is concluded by someone who
does not own a property, the ctt may be dependent on the final approval of
the real owner of the subject matter. E.g power of attorney is given to a
person to sell a propert y subject to the final ratification of the negotiated
price, the contract is kept hanging until such ratification is given by the
actual owner.

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There are three main fundamentals:

Contractual expression or sighah, i.e offer and
acceptance (ijab wa qabul)
Parties to the contract (aqidan) i.e. offeror and
offeree
Subject matter of the contract (mahall al aqd) i.e.
the goods and the price /consideration

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The offer and acceptance must be clear

and unambiguous- choice or words
/phrase
There must be conformity between the
offer and acceptance- actual or implied
The offer and acceptance must be made in
one contractual session (ittihad al majlis)
The unity of the contractual session may
be actual or constructive

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The Theory of Contract

Law in Islam Ruzian

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The parties to the contract must have full

competency to enter into and execute the
contract (ahliyyah al ada al kamilah)
The impediments to legal competency (awarid
al ahliyyah) include minority, lunancy and other
interdiction orders due to bankruptcy etc
The parties must have the legal power/authority
to conclude the contract: either by actual
ownership; or representation through
guardianship, administration or agency contract

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The Theory of Contract

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The subject matter of the contract must

exists at the time of contract (jumhur) and
/or is capable of being delivered (hanbali
school)
The subject matter must be known and
ascertained by the parties at the time of
the contract-no uncertainty or gharar
The subject matter must be legally
recognized
The subject matter must be something of
value (mal mutaqawwam)

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The Theory of Contract Law in

Islam Ruzian Markom

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Definition of sale (bay)

Condition for sale contract
Types of sale contract:
Normal sale (musawamah)
Trust Sale

Murabahah (mark up)

Wadiah (discount)
Tawliyah (at cost)

BBA (deferred payment sale)

Salam (advanced payment sale)
Istisna (manufacture sale/purchase order)

Some Controversial Sales:

Bay al dayn (sale of debt)

Bay al inah (sell and buy back)

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The Theory of Contract

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Literal Meaning: Exchanging one item for

another
Technical Meaning :

Hanafi: the exchange of a property (mal) with

another property in a specified manner
(offer/acceptance)
Shafii: the exchange of a property for another
property as a transfer of ownership (tamlik)
Hanbali: the exchange of a property for another
property as a transfer of ownership(tamlik) and
acquisition of ownership (tamalluk)

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The Theory of Contract

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Conditions for the parties

Full contractual capacity,i.e sound mind and of
age (tamyiz for the Hanafis and bulugh for the
shafiis)
There should be more than one party, even if in
the capacity of agents. Thus, one agent cannot
act for both parties i.e buyer and seller(except for
guardian, administrator, judge and messenger of
both parties)

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The Theory of Contract

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Conditions for the contractual expression(sighah):

The acceptance must conform with the offer
Unity of place of offer and acceptance (ittihad majlis
alaqd)

Conditions for the subject matter of contract:

The goods should exist at the time of contract(with the

exception of salam and istisna sales)
The goods should be a valuable property (mal
mutaqawwam)
The goods should be capable of ownership and
possession (tamalluk)
The goods should be capable of delivery at the time of
contract(qabadh)

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The Theory of Contract

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Sale is a contract of exchange (aqd al muawadah)

The exchange is between the two conuter values i.e. goods
and prices
Once validly concluded with all the necessary conditions,
sales contract is considered as binding (lazim)
The sale contract presupposes the real transfer of
ownership between the parties (regardless of any formal
registration transfer)
Any term and condition attached to the contract of sale ,
limiting or defeating the purpose of transfer of ownesrhip,
may render the contract to be either not good (fasid)-shart
fasid or the term itself may be nullified-shart batil

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The Theory of Contract

Law in Islam Ruzian

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Normal sale (musawwamah)

Trust Sale

Murabahah (mark-up)
Wadiah(discount)
Tawliyah (at cost)

BBA (deferred payment sale)

Salam (advanced payment sale)
Istisna(manufacture sale)

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The Theory of Contract

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Known as musawammah sale

Based on bargaining no need to disclose
cost price /mark up
Price is paid in cash/spot
Goods is delivered immediately

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Thank you.

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