Islamic law of contract

Essentials of Islamic Banking and Finance

IQRA University North Campus. MBA Fall, 2013
Talha Saleem Kapadia

talhasaleemkapadia@gmail.com

Contents of the lecture

Definition of contract;
Types of contract;
Basics of the contract;
Conditional contract;
Application of law of contract;
Types of sale;
Q & A;

Islamic law of contract

and types of sale

Definition of contract
Legally a contract is an agreement between two or
more persons or parties for doing something;
According to Islam every action or work that takes
place between two or parties is a contract;
Therefore, exchange of goods, receiving a gift,
accepting a woman as wife through Nikah and
agreement on partnership etc. etc. come under the
umbrella of 'contract';
Contract has different types for which the rules and
law are different;

Types of contract
A contract can be of two nature:
Compensatory or financial contract;
This is a contract in which there is exchange of either
goods or services against an agreed compensation / price /
fee / charges;

Non Compensatory or social contract;

This is a contract in which there is exchange of either
goods or services against an agreed compensation / price /
fee / charges;

Basics of a contract
A Financial Contract is allowed in Islam with some
conditions:
The contract should not contain any element of Riba
(explicit or implicit);
The contract should not have element of Gharar (excessive
uncertainty);
The contract should conform to the rules laid down by
Shari'ah for execution of contracts;
The contract should not be for those activities which have
been considered impermissible (Haram) i.e. general
prohibitions;
Element of Riba can easily be recognized and
eliminated;

Basics of a contract
The conformity with laws of Shari'ah and the
element of Gharar are important points that need
elaboration;
Every contract has some basic elements which
should conform to rules of Shari'ah;
The elements of a contract are:
Parties/persons to contract (those who enter in a contract);
Wordings of contract;
Subject matter of contract (the thing/task meant by the
contract);
Compensation (remuneration/price for exchange);
Mechanics of the contracts (rights and responsibilities);

Basics of a contract
Parties to contract should be:
Eligible to enter in such a contract;
Sane;
Mature enough to understand the nature of transaction;
Legally allowed for executing of such transaction
(licence/permit requirement etc. etc.);

Basics of a contract
Wordings of a contract should:
Contain Offer from one party and Acceptance from other
( Ijab-o-Qobool) in session of contract (Majlisul A'qd);
This Offer and Acceptance can be:
Oral/verbal (Qauli), purchase through bargaining;
Implied/understanding (Ishsraa), purchase in super
market;

Be Present i.e. they must create sense of immediate effect

(words give sense of future are not allowed, I will buy it
does not make sense of immediate effect);
Unconditional and Non-contingent conditional wording do
not create immediate effects, I will accept if my father
allow it is a conditional wording;

Basics of a contract
Subject matter of a contract should be:
Lawful legally and Islamically allowed;
Subject matter and the underlying cause must be lawful;
The transacted object must be legally owned by the
parties to a contract;

Existent something that exists, contract of supply of

mangoes in January;
Deliverable can be transacted and exchanged, sale of fish
in water or bird in air;
Specified in clear manner, Toyota corolla, XLi, engine # and
chassis #;
Quantified if quantifiable, X1000 kg of wheat;

Basics of a contract
Compensation (remuneration/price for exchange):
Conditions apply to Subject matter also apply here;
In case of barter system the application becomes
important;
Lawfulness, Existence, Deliverability, Specifiability and
Quantifiability become important;
In normal trade specification of currency is enough;

Basics of a contract
Mechanics of the contracts (rights and responsibilities)
should be clear;
Both parties should bear the responsibility and have the
rights which are required by the nature of transaction;
In case of sale ownership related risks should be born by
owner during the ownership, after its transfer the owner is
not responsible, (reason behind the secured nature of
credit sale);
Any condition inserted which is against the mechanics of
the contract is invalid, (making a lessee in a lease
transaction responsible for ownership related expenses is
not allowed. Guaranteeing of principle in a partnership is

Conditional contract
Conditional contract are not permissible in Islam;
However, business norms allow conditional contracts
especially in current business scenario;
Ulema and scholars have described the method for
inserting a condition in a contract;
Three types of conditions are allowed while one type is not
allowed;

Conditional contract
A condition, which is not against the basic objective of the
contract, is a valid condition, e.g. a condition of free
delivery to buyers premises;
A condition, which is against the basic objective of the
contract, but is in the market practice, is also a valid
condition, e.g. condition of five-year warranty and one
year free service;
A condition, which is against the basic objective of the
contract, not in the market practice and not in favour of
any contractor, is a valid condition, e.g. a charity imposed
on a transaction;
A condition that is against the basic objective of the

Summary
A contract, whether it is a sale contract or Ijarah contract
or partnership contract, should conform to these basic
rules;
Violation of these rules make the contract unacceptable to
Shari'ah;
As a matter of principle a contract in one sector may differ
in application of these rules from other contract in other
sector;
Oil sector has different meaning for specification and
quantification from what sugar industry has;

Application
Islamic law of contract applies on all types of
contracts;
Here we will see its application to sale (being the
vast mode of financing in Islamic banking industry);
According to Islamic laws of sale these are key
elements of a sale transaction:
Contract of sale:
Wordings i.e. Offer & Acceptance ( Ijab-o-Qobool)
Oral/verbal (Qauli) or Implied (Ishsraa);
Parties to contract (buyer and seller) [Mutaaquadain]
must be Sane and Mature;
Does not contain any unacceptable element i.e. sale must
be non-contingent, immediate and unconditional;

Application
Subject Matter (sold good) [Mabee']:
Should be Existing, Valuable and Usable, Capable of
ownership/title;
Deliverable, Specified and Quantified;
Seller should have title and risk.

Price:
Quantified [Maloom]
Specified and certain [Mutaayyan];
Time and mode of payment should be well known;

Delivery and Possession of the sold goods:

Delivery and possession either Physical/Actual or
Constructive;
Place and method of delivery should also be known;

Types of sale - Validity & Invalidity

The application of the law of contract into Sale and
Purchase elaborates to us the way an Islamically
acceptable sale should be;
A sale sometimes does not comply with these laws and
misses some or one of the important elements;
In such case the sale is considered unacceptable to Islam;
There different levels in unacceptability to Shari'ah;
Coming slide elaborate these levels and types;

Types of sale
According to the nature of contract the sale has
four types:
Valid sale ( Bai Sahih):
A sale that meets all requirements laid down by Shari'ah
for its contractual nature;

Void/Non existing Sale [Bai'-e-Baatil];

A sale that does not meet basic requirements of its
contractual nature;

Existing sale but void due to defect (hung sale) [Bai'-eFasid];

A sale that meets basic requirements of its contractual
nature but contains an impermissible element;

Valid but disliked sale (Bai Makrooh):

A sale that meets basic requirements of its contractual
nature but executed in bad/unethical manners.

Types of sale
Valid sale ( Bai'-e-Sahih):
A sale that meets all requirements laid down by Shari'ah for
its contractual nature;
A sale that executed by:
Eligible parties;
With proper wordings;
For exchange of a permissible thing which is identified,
quantified and well known to both parties;
With specific price; and
Delivery of the sold goods

Exchange of a 'Citizen cx200 golden chain with black dial'

watch against cash payment of PKR 10,000/= with
immediate delivery is a Valid Sale transaction;

Types of sale
Void/Non existing Sale [Bai'-e-Baatil];
A sale that does not meets some or all basic requirements
laid down by Shari'ah for its contractual nature;
A sale that executed:
By ineligible parties; or
For exchange of a impermissible thing; or
For a thing which is not owned by seller; or
For a thing which is not deliverable;

Sale of stolen watch is an invalid (Baatil) sale which does

not benefit in creation of ownership for buyer nor the price
received by seller is Halal for him;

Types of sale
Existing sale but void due to defect (hung sale)
[Bai'-e-Fasid];
A sale that meets basic requirements of its contractual
nature but contains an impermissible element;
A sale that executed:
With element of Gharar;
For an unspecified thing; or
With unknown price;
Conditionally or contingently;
Sale of one Toyota corolla from a lot of cars with
explaining the specifications;

Such sale is a hung sale meaning the ownership transferred

if the buyer takes delivery but the status will be hung
unless the element is removed;

Types of sale
Valid but disliked sale (Bai'-e-Makrooh):
A sale that meets basic requirements of its contractual
nature but executed in bad/unethical manners.
A sale that executed at the time of Azaan for Jum'ah;
Sale of grapes to wine maker;
Sale of tranquilizer to addictive person;
Interruption in an ongoing deal between two;

Such sale is allowed but disliked by Shari'ah and

sometimes highly discouraged;

Types of sale Deferment of Payment & Delivery

Spot Sale:
money;

Simultaneous exchange of goods for

Deferred Sale: Deferred payment sale, commonly known

as a credit
sale;
Advanced Sale: Sale with immediate payment and
deferred delivery;
Future Sale:
Deferred payment sale with deferred
delivery of subject
matter. This transaction is
not acceptable according
to Islamic Sales
Contract.

Questions?