Introduction to Various Major

Transactions in Islamic Law

(Importance of RISK)

Basic Operation of Interest

Banking System
 Bank as institution of money lender
 Bank borrows money from depositor, and
agrees to give interest
 Bank lends money to customer, and charges
interest
 Bank’s gain: the difference between interest
paid to the borrower and interest charged on
the customer
 Mode of transaction: Loan (Qard) with riba

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 Basis of Interest Free Banking
System (IFBS)
 Avoidance of riba
 Al-Qur’an (Al-Baqarah: 179): “IF YOU
REPENT, THEN FOR YOU IS YOUR
CAPITAL”
 Athar: “Every loan accruing a benefit is riba.”
 Mode of transaction is not loan (i.e. paradigm
shift)
 The only possible loan is loan without interest
(qard hasan), which is not profitable.
 Al-bay’ (sale) and other mu’amala transactions
are the alternatives.

Salient features of IFBS

1. Money alone is barren
2. Gain is justified with risk (al-ghunm bi
al-ghurm)
3. No creditor-debtor relationship
4. Role of commodity / usufruct
5. Price factor
6. Trading and equity based financing

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 Riba and Related Matters
 Literally riba means increase, excess, addition,
surplus, etc.
 Technically it means a stipulated excess over
the loan received by the creditor in relation to a
specific period.
 Three elements: loan, excess due to time, and
stipulation.
 Excess without loan is allowed
 Loan without excess is allowed
 Loan with excess without stipulation is allowed -
Hadith: “Indeed the best person among you is
he who pays the loan with something better”

Alternative of Riba in Modern

Islamic Commercial Law
 Equity Financing [No creditor-debtor
relationship, but partnership]
 Trade Financing [Bank as a trader of
commodity, not as a lender of money]
 Interest-Free Financing [Qard al-Hasan]
 All the above types of financing are based
on the contracts permitted in Islamic
commercial law.

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 Lawful Contracts in Islamic
Commercial Law
 Contract of Exchange
 Contract of Partnership
 Contract of Security
 Contract of Safe-Custody
 Contract of Utilizing Usufruct
 Contract of Doing Certain Work
 Contract of Gratuity
 Consolidation of various contracts

Contract of Exchange
 Principal contract with the aim to
transfer either the property ownership
or the usufruct.
 Al-Bay’ (Sale) [Mutlaq, Muqayada,
Sarf, Salam]
 Ijarah (Leasing, Employment]

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 Contract of Exchange

Definition
 Contract which aim and ultimate result are the
transfer of ownership or usufruct from one party to
another for a consideration. It covers mainly the
contract of sale (bay’ ) and lease (ijara).
 Transfer of ownership = sale
 Transfer of usufruct = leasing
 Ijara = bay’ al-manfa’a (sale of usufruct)

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 Sale
 Definition: Exchange of property for another
or transfer of ownership of property for
another.
 If the exchange is between good and
money, it is called bay’ al-mutlaq.
 If the exchange is between good and good,
it is called barter (muqayada)
 If the exchange is between money and
money, it is called foreign exchange (sarf)

Type of Sale
Based on the manner of setting price
 Two types:
1. Bay’ al-Musawama where the cost price is not informed to the
buyer, only the selling price is mentioned.
 This is the normal and the current practice

2. Bay’ al-Amana where the cost price is informed to the buyer.

 It is called ‘amana’ (trust), because the buyer is let to know
the cost price, and he trusts the seller to correctly reveal the
cost price.

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 Type of Sale
Based on the time of delivery of the commodity
 Two types:
1. Spot Sale (the commodity is delivered at the
session of the contract)
 This sale may include musawama, murabaha, etc.
2. Deferred Sale (the commodity is delivered later)
 This sale may include salam and istisna’

Deferred Sale
 Salam: The seller supplies some specific
goods to the buyer at a future date, for an
advanced price fully paid on the spot.
 Beneficial to the seller, because he
receives the price in advance.
 A kind of financing
 Beneficial to the buyer, because normally
the price in salam is lower than the price in
spot sale.

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 Deferred Sale
 Istisna’ : The buyer orders the seller
to manufacture a specific commodity
to be delivered at a future date.
 The commodity of istisna’ is a good
which needs manufacturing.
 The payment can be fully in
advanced, deferred, or by installment.

Type of Sale
Based on the time of payment
 Two types:
1. Cash Payment (musawama,
murabaha, and salam)

2. Deferred Payment (bay’ bi thaman

ajil, bay’ al-arbun, bay’ al-istisna’)

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 Deferred Payment
 Bay’ Bi Thaman Ajil (BBA): Credit sale by lump
sum payment or by installment.

 In Malaysia BBA is commonly used for credit sale

by installment. If the payment is lump sum, it is
called murabaha.

 Bay’ al-Arbun: Credit sale with a down payment

followed by the remainder to complete the full
payment.

Murabaha as Bay’ al-Amanah

(Trust Sale)
 This is the traditional murabaha sale as discussed
in the book of fiqh.

 It is defined as: selling at the principal plus a profit

margin, provided that both parties know the
principal.

 ‫ﺍﻝﻡﺭﺍﺏﺡﺓ ﺏﻱﻉ‬: ‫ﺭﺏﺡﺯﻱﺍﺩﺓ ﻡﻉ ﺍﻝﺃﻭﻝ ﺍﻝﺙﻡﻥ ﺏﻡﺙﻝ ﺍﻝﺏﻱﻉ ﻩﻭ‬

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 Conditions of al-Murabaha
Knowing the initial price (money or
commodity)
Knowing the profit margin (% or lump
sum)
Principal must be fungible (mithliyyat)
Not involving riba al-fadl
The first contract must be valid

Issues on principal and profit

The difference between principal and
what is actually paid.
If profit is in percentage, then it must
refer to the principal.
All normal costs associated with the
object of sale can be added to the
total cost.

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 Some Issues on disclosing
information
• If the object of sale was initially
purchased with a deferred price, this
must be informed to the buyer in
murabaha.

• If the object of sale undergoes

increase, the increase must be
disclosed to the buyer.

Murabahah in Islamic Banking

 Technically it is called: al-Murabaha Lil Amir bi al-
Shira’ (‫ )ﺑﺎﻟﺸﺮﺍﺀ ﻟﻸﻣﺮ ﺍﳌﺮﺍﺑﺤﺔ‬or Murabaha with an Order
to Purchase
 The client orders the bank to purchase for him with
an agreed cost plus profit price.
 It can be decomposed into two promises: (1)
promise by the client to purchase the object, and
(2) promise by the bank to sell it in murabaha.
 The selling price can be cash or deferred.

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 Validity of This Murabahah
 Imam al-Shafi’i: “If an individual
shows another a good and says; buy
this, and I will give you this much
profit in it; and then the second man
buys it, then the purchase is valid. If
the first party said: ‘I will give you this
much profit in it, but I retain an option’,
then he may conclude the sale or
leave it.” (al-Umm, vol.3, p. 33).

Issues on Binding Promise

 All jurists agree that promise is religiously
(ethically) binding, but they differ whether it is
legally binding.
 A scholar from the Maliki school viewed that any
promise that does not result in permitting what is
forbidden or forbidding what is permitted is legally
binding.
 ‫ﺵﺏﺭﻡﺓ ﺍﺏﻥ ﻕﺍﻝ‬: ‫ﻝﺍﺯﻡ ﻙﻝﻩ ﺍﻝﻭﻉﺩ‬, ‫ﺍﻝﻭ ﺍﻉﺩﻉﻝﻯ ﺏﻩ ﻭﻱﻕﺽﻯ‬
‫ﻭﻱﺝﺏﺭ‬
 Ref: al-Muhalla, vol. 8, issue no. 1125 [Qaradawi,
p. 64]

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 Issues on Binding Promise
 The Malikis use this principle to make promises
binding, especially if the promise leads another
entity to undertake financial obligation.
 Islamic Banking Conference in Dubai (1979): “This
type of promise is legally binding on both parties
based on the Maliki ruling, and religiously binding
on both parties for all other schools. In this regard,
what is religiously binding can be made legally
binding if this is beneficial and can be regulated
legally.”

Issues on Binding Promise

 Islamic Banking Conference in Kuwait
(1983): “As for the making the
promises binding on either party or
both, such ruling is conducive to
stability of the contractual obligations
and protection of the parties’
economies interests. Moreover, such
a ruling that renders the promises
binding is legally acceptable.”

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 Contract of Partnership
 Contracts which render two parties or
more as partners to share profit and
loss as agreed upon
 Musharaka: Both parties provide
capital and effort to form a business
 Mudaraba: One party provides capital,
and the other provides effort to do
business.

Contract of Security
 Contracts which aim at securing the interest
of both parties or the party in whose favour
the contract is affected.
 Rahn (Pledge): Possession taken as
security for a debt in case the debtor fails to
pay back the due debt.
 Kafalah (Suretyship): An assurance given
by the guarantor to a creditor, on behalf of
the debtor, to pay his debt.

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 Contract of Safe-Custody
 A contract which aims at putting
something under the care of another.
 Wadi’a (Deposit): To put a valuable
property under the custody of
someone.
 Wadi’a Yad Amana (No Guarantee)
 Wadi’a Yad Damana (With Guarantee)

Contract of Utilizing Usufruct

 Contract which allows certain party to
enjoy the usage or the usufruct of the
property.
 ‘Ariya (Borrowing/Loan): A loan for the
goods that are not consumed by the
use (isti’mali), which is different from
qard. The return is the good itself.

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Contract of Doing Certain Work
 Ju’ala (Commission): A reward of
certain labour.

 Wakala (Agency): To authorise an

agent to act on the behalf of the
principal.

Contract of Gratuity
 The aim is to give a kind of favour to
another party without any corresponding
consideration or any advantage.
 Unilateral in character.
 Hiba (Gift): Gift granted by the donator in
favour of the recipient in cash or in kind.
 Waqf (Pious Endowment): Dedicating one’s
property for a religious and a charitable
purpose. Its ownership vests in God alone.

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Wallahu A’lam

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