Islamic Finance and Banking

Prepared By:
Dr. H. M. Mosarof Hossain
Professor
Department of Finance
University of Dhaka
mosarof@du.ac.bd

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 Elements of shariah contracts

Contract (aqd) is made of a connection between the

words of the offeror and the words of the offeree which
thereafter creates legal consequences on the subject-
matter and constitutes contractual binding upon the
contracting parties. Essential elements are:
1. From of the contract (sighah al-aqd)- it refers to an
expression made by the contracting parties to declare their
inner will to undertake a contract and thereafter be bound by
certain obligations. It includes the followings:
(a) Methods of offer and acceptance
(b) Conditions of offer and acceptance
-Clear indication of offer and acceptance
-Correspondence of acceptance to the offer
- Continuity of offer and acceptance

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 Elements of shariah contracts

2. Subject matter of the contract (mahal al-aqd)- it refers to

the contracted object upon which the legal rulings and effects
of the contracts are manifested. It requires the followings:
i. The existence of the subject matter at the time of the
conclusion of the contract
ii. Precise determination of the subject matter
iii. Certainty of delivery of the subject matter
iv. Permissibility of the subject matter

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 Elements of shariah contracts

3. Contracting parties ( al-aqidan)- a contract can only be

established in its actuality if the contracting party has a legal
capacity (ahliyyah) that renders him competent (salih) to offer
or accept an offer made in a contract. A contracting party
should posses Ahliyyah- ability to acquire rights ahliyyah al-
wujub) and exercise them as well as to accept duties and
perform them ahliyyah al-ada).

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 Classification of shariah contracts

i. Exchange-based contract- contracts which are entered

into by two parties to acquire ownership of an asset which
end up with the transfer of ownership of the exchanged
counter values.
ii. Charity-based contracts- contracts effected by someone
on the basis of benevolence (ihsan) and cooperation
(taawun), which does not require the exchange of something
for another thing. Qard, hibah, sadaqah and waqf are
examples.
iii. Waiving contracts(Uqud al-isqatat) contracts which are
entered into by someone to waive a right that has been
established in ones liability whether with or without a counter
value.

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 Classification of shariah contracts

iv. Partnership contracts- contracts which are entered into

for the purpose of having a partnership in work and profit.

Concept of Exchanged-based Contracts:

i. Bay al-murabahah (Mark-up sale)
ii. Bay al-istisna (Manufacturing sale)
iii. Bay al-salam (Forward sale)
iv. Bay al-dayn (Sale of debt)
v. Bay al-sarf (Sale of currency)
vi. Bay al-inah (Sale and buyback)
vii.Bay al-tawarruq (Monetisation/cash financing/cash
procurement)
viii. Ijara (Lease)

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 Classification of shariah contracts

Concept of Partnership Contracts:

i. Musharakah (sharing)
ii. Mudarabah

Concept of Security Contracts:

i. Kafalah (Guarantee)- kafalah bi al-mal (guarantee to return
an assetn to its owner) and kafalah bi al-nafs (guarantee to
bring someone to a specific authority i.e. judiciary).
ii. Rahn (Pawning/mortgage/collateral/charge/lien/pledge)

Charitable Contracts:
i. Hibah/Sadaqah (Gift)
ii. Wadiah/Amanah (Deposits)- wadiah yad amanah (Safe
custody based on trust) and wadiah yad damanah
(Guaranteed safe custody) 7
 Classification of shariah contracts

Concept of Agency Contracts:

Wakalah (delegation of power/authority):
(a) Based on scope of the agency- General and specific
(b) Based on payment to the agent paid and nonpaid
(c) Based on bindingness of parties binding and nonbinding
(d) Based on duration of the contract continuous and
temporary

Concept of Supporting Contracts:

i. Hiwalah (Shifting) hiwalah al-haqq (Transfer of right) and
hiwalah al-dayn (transfer of debt)
ii. Muqasah (Set-off i.e. debt settlement)- al-muqasah al-
jabariyyah (mandatory set-off) and al-muqasah al-talabiyyah
(mandatory set-off on demand)
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 Classification of shariah contracts

Concept of Supporting Contracts:

iii. Ibra (release/eliminate/purify/remove)
iv. Wad (promise)