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Al‑‘aqd Al‑sahih: The Legal Basis for Determining the Validity of Islamic
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 International Journal of Economics and Financial
Issues
ISSN: 2146-4138

available at http: www.econjournals.com

International Journal of Economics and Financial Issues, 2016, 6(S2) 140-143.

Special Issue for “Asia International Conference (AIC 2015), 5-6 December 2015, Universiti Teknologi Malaysia, Kuala Lumpur, Malaysia”

Al‑‘aqd Al‑sahih: The Legal Basis for Determining the Validity of

Islamic Financial Transactions

Abdullahi Saliu Ishola1*, Yusuf Abdul Azeez2, Norfadhilah Mohamad Ali3

1
Department of Law, College of Humanities, Management and Social Sciences, Kwara State University, Malete, Nigeria, 2Fakulti
Syariah dan Undang‑Undang, Universiti Sains Islam Malaysia, 3Fakulti Syariah dan Undang‑Undang, Universiti Sains Islam
Malaysia. *Email: abdullahi.ishola@kwasu.edu.ng

ABSTRACT
There is no modern activity premised on Islamic law that does not have a link with one of the traditional practices in the classical Islamic law society.
Failure to find its root in the past may even be a justification for such activity to be rejected as alien to Islamic law. The contemporary Islamic financial
transactions (IFT) otherwise referred to as Islamic banking system, cannot equally be free from that inevitable litmus test. Consequently, through the
principles of al‑‘aqd al‑sahih (a valid contract) in Islamic law, the inexplicable requirements for the activities of the Islamic banking and finance (IBF)
to be Shari‘ah compliant could be more easily and reasonably spelt out while the extent of such a compliance could be clearly assessed. This paper,
therefore, examines the role of al‑‘aqd al‑sahih as the pivotal instrument for validating any IFT and its obligations. Thus, what will make any contract
to be invalid in Islamic law is primarily applicable to any IBF transactions in the modern world. The study emphasises the danger in losing the sight
of the contractual nature/basis of IBF Transactions and hypothesis that al‑‘aqd al‑sahih is the pivotal legal basis for the validity of IFT.
Keywords: Islamic Financial Transactions, Islamic Banking and Finance, Al‑‘aqd Al‑sahih, Shari‘ah Compliant, Islamic Law
JEL Classification: G2

1. INTRODUCTION to the vast majority of mankind… The commercial laws that

are in use today also derive in large measure from these very
A deep look at the general nature of the modern financial business laws.
transactions and the usage of technology to effect its transactions
reveals that except for a change in terminology and nomenclature It therefore follows that, for a proper appreciation of the position
and perhaps, to some extent, in the packaging, it can hardly be of Islamic law on any activity, such a kind of activity must be
said that there is anything new about them. At least, with respect put in the perspective in which a similar traditional activity is
to Islamic law, they cannot be said to have come with principles placed. This cannot be proved otherwise, as the recent decades
that were never articulated at all, however scanty it may be. have witnessed strong assertion and corroboration of the classical
A  deep study of the Islamic Financial system reveals this as a Islamic identities (Alamer et al., 2015), and it is only by adopting
truthful juxtaposition. The observation of Nadwi (n.d., p. 15) in this kind of approach that the Islamic issues will not be addressed
this direction instructs this assertion when he posits that: through the terms that are dictated by other legal systems (Oba,
Most of the trade transactions that go on today are the same thing 2004). Thus, a well‑grounded approach to any study in Islamic
as that went on thousands years ago. The trade of the Muslim Law must be holistic in nature.
world was conducted under these laws for fourteen centuries,
and the abandonment of these laws by the (contemporary) Notably, diverse views have been expressed on the legality of the
world and by the people who call themselves Muslims today contemporary Islamic financial transactions  (IFT), commonly
has not brought anything except scandalous luxury and referred to as the Islamic banking system  (IBS). The polemics
corruption for a few and the most utter misery and oppression have so much been heated in arguments that some Muslim writers

140 International Journal of Economics and Financial Issues | Vol 6 • Special Issue (S3) • 2016
 Ishola, et al.: Al‑‘aqd Al‑sahih: The Legal Basis for Determining the Validity of Islamic Financial Transactions

have come to the conclusion that what is referred to as IFT or IBS long as the IFT is clothed with any of the means of mu‛āmalāt
is most un‑Islamic, i.e., haram (Vadilo, 2006). This has not just described above, it will, therefore, be sanctioned as being legal
been stirred up; it has been informed by inability or ignorance of and being valid. In explaining the notions of legality and validity,
those who have made that position to appreciate the basis for IFT Doi (2008) clarifies that ‘the Arabic word for contract is “aqd,
in Islamic law. This however is not to suggest that, if IFT cannot which literally means an obligation or a tie. It is an act of ‘putting
find any basis in Islamic law, their view will still not be corrects; a tie to a bargain.” When two parties enter into contract, it is
definitely it will be. However, this paper stands to demonstrate that called in‘iqad, that is joining or tying the offer and the acceptance
their view is highly misconceived and most unfounded. together. The obligations thus arising out of contracts are called
‘uqud.
2. THE PRINCIPLES OF AL‑‘AQD AL‑SAHIH
2.2. Al‑mal as the Subject of Al‑‘aqd Al‑sahih
UNDER THE ISLAMIC LAW One of the conditions applicable to al‑‘aqd al‑sahih, is that it has
to centre on the property (Zubair, 1991). Therefore, anything that
A treatment of al‑‘aqd al‑sahih as the pivotal legal basis for could not be validly regarded as property in the Islamic points of
determining the validity of the contemporary IFT demands a view cannot constitute the object of al‑‘aqd al‑sahih. It should be
background information on the concept of al‑‘aqd itself. In a yardstick that in order to develop a product for IFT, such a kind
business dealings, up to the point of mutual agreement, the of product must qualified as a property (al‑mal). Accordingly, one
principles of Islamic law and those of other legal systems like could easily distil the legality or otherwise of the modern Islamic
the English common law, for example, are in tandem, and the banking and finance (IBF) products like sukuk and takaful etc.,
understanding of one could still be utilized to appreciate the if it is assessed from the perspective of whether their object, as
other. Although, it has to be asserted, from the onset, that the being packaged, qualifies each of them as al‑mal in the context
concept of al‑‘aqd in Islamic law is connotatively wider when of Islamic law (Doi, 2008).
it is compared with the term ‘contract’ in the common law (Doi,
2008). In the ordinary English language, the term “contract” is 2.3. Observation of the Guiding Principles of Al‑‘aqd
defined as “an official legal agreement”  (Hornby, 1995). In a Al‑sahih
legal parlance, the Osborn’s Concise Law Dictionary explains The guiding principles of al‑‘aqd al‑sahih in Islamic law are of
that “contract” connotes “an agreement enforceable at law.” An two kinds; positive and negative. The positive principle is that
essential feature of contract is a promise by one party to another all transactions must be based on mutual agreement, while the
to do or forbear from doing certain specified acts. The offer of a negative principle is that the transaction must not be batil (useless
promise becomes a promise by acceptance. Contract is that species or wrongful). For example, in buying and selling, it is necessary
of agreement whereby a legal obligation is constituted and defined that the buyer and the seller should both agree. In the same way
between the parties to it  (Rutherford et  al., 1993). In a similar when any arrangement is made between an employer and an
vein, a legal writer on commercial law from the common law employee, it is necessary that it be done by mutual consent. If
perspective, while giving a vivid explanation of what “contract” either one of the parties does not consent to the arrangement,
connotes states that a contract is an agreement which legally binds then such a kind of transaction in Islamic law, will be declared
the parties. Sometimes contracts are referred to as “enforceable as impermissible. With respect to the negative condition which
agreements.” The underlying theory is that a contract is the is set together with that of mutual agreement, the Islamic law is
outcome of “consenting minds,” each party being free to accept quite different to other systems in the sense that, it is a stipulated
or reject the terms of the other (Abbott and Pendlebury, 1996). condition that this mutual agreement must not involve any
By the provisions of the Islamic Law, however, there are certain wrongful transaction or anything that is prohibited (Nadwi, n.d.,
salient requirements needed to be fulfilled before al‑‘aqd on IFT p. 21). It is not enough, as it appears to be the general trends, to pay
could be considered as valid, and these are as highlighted below. attention only to the satisfaction of the negative guiding principle
by ensuring that any IFT product does not contravene such rules
2.1. Al‑‘aqd Al‑sahih as the Cornerstone of Every on riba (usury), gharar (deception) and maysir (gambling). Rather,
Mu‛āmalah a significant focus should also be placed on the satisfaction of
Within the scope of Islamic law, al‑‘aqd al‑sahih is the cornerstone the positive guiding principle by ensuring that there is sincere,
of the various subjects of transactions known as mu‛āmalāt, and it voluntary and clear mutual consent into the transactions by the
is under this category that the modern IFT fall. In other words, all consumers at the receiving end.
forms of transactions in the modern world are regulated through
the mu‛āmalāt (Islamic law of transactions). It therefore follows
that in order for any developed Islamic Finance products to meet 3. THE TENETS OF AL‑‘AQD AL‑SAHIH
the Islamic standard, the Islamic principles of mu‛āmalāt must be UNDER THE ISLAMIC LAW
the yardstick. Mu‛āmalāt have been described as “the ways and
means by which a man earns his living and makes the necessities From the foregoing analyses, the following points could be referred
of life available to the people.” Undoubtedly, as observed by to as the tenets of al‑‘aqd Al‑sahih under the Islamic law:
Nadwi  (n.d.), there are countless ways of earning a living, but i. Al‑‘aqd al‑sahih, under the Islamic law, involves an
in general outline, people basically obtain their livelihood by agreement (mutual when two or more parties are involved),
means of trade, agriculture, manufacture, labour, investment and and or a sole decision  (when the choice is unilateral,
partnerships, loans and securities, and by their mental skills. As e.g., divorce).

International Journal of Economics and Financial Issues | Vol 6 • Special Issue (S3) • 2016 141
 Ishola, et al.: Al‑‘aqd Al‑sahih: The Legal Basis for Determining the Validity of Islamic Financial Transactions

ii. The subject‑matter of al‑‘aqd al‑sahih must be permissible One of the conditions governing mudarabah is that the rabb al‑mal
under the Islamic law. or the provider of the finance should voluntarily release the
iii. Al‑‘aqd al‑sahih must be for lawful purpose (s). needed capital to the mudarib. This means that the decision
iv. The scope and limitation of the agreement in al‑‘aqd al‑sahih to release money to the amil (agent) must not be coercive,
must be observed; e.g., the transaction must not involve riba and there should be no concoction or deception either. Where
or gharar or any other act that is prohibited under the Islamic the rabb al‑mal is forced to provide money, such a contract
law. is vitiated.

It must be quickly added here that for every contract to be valid in Similarly, under this contract, the business to be entered into
Islamic law, except for some special contracts that can be unilateral, must be legalized in Islamic law.” It must also be stated that, in
the conditions of offer and acceptance  (al‑ijab wa al‑qabul); compliance with the tenets of al‑‘aqd al‑sahih under the Islamic
consent of parties or valid legal capacities of parties or furnishing law, the Islamic financial institution utilizing the product of
of consideration, among others, must be satisfied (Nawawi, 1999). mudarabah must ensure that the object or material involved in
Any transactions where all these factors or elements are found are, such a kind of transaction should not be prohibited in Islam. It
therefore, qualified to be regarded as al‑‘aqd al‑sahih. is, therefore, evident that al‑‘aqd al‑sahih is the legal basis for
determining the validity of this kind of a product.
4. RELATIVITY OF THE CONTEMPORARY
4.2. Musharakah (Partnership)
IFT WITH AL‑‘AQD AL‑SAHIH Generally, the word sharikah is the legal term for partnership. But
in the modern world, the term is used to refer to both “partnership”
While it is not disputable to say that it was not too long that Muslims
and “corporation.” Although in differentiating partnership from
were able to fine‑tune what they now regard as the contemporary
corporation, a company is called sharikah musahamah in some
IFT, it can, however, not be validly said that it is solely a product
Arab countries. However it may be, the essence of this product is
of the present era because any issue that has affiliation with
explained by Ruxton (2004) when he says that a partnership, in the
Islam must be traceable, in one way or the other, to the time of
widest sense of the term, exists where property is held in common
the Prophet or the eras of the rightly guided caliphs. IFT, in this
between two or more co‑proprietors. It is a contract by which a
case, is not an exception (Abikan and Jaffar, 2006). Ismail (2015)
provides a relatively detailed background information on this when person alienates an undivided share of his property, in return for an
he observes that the origin of Islamic Finance, as with all things undivided share of the property of another, each having a right to
Islamic, is dated back to the time of Prophet Muhammad, Peace administer the whole. Thus, a partnership, therefore, is a contract by
Be Upon Him (P.B.U.H). Islamic history is replete with the fact which each partner is authorized and is enabled to empower another
that the Prophet (P.B.U.H) himself happened to be an epitome of to administer the common property. On the other hand, the Hanafis
honesty with regards to his trading activities under Khadija (May define sharikah as a contract between a group of individuals who
Allah be pleased with her), refraining from usury and ensuring share the capital and profits. Al‑Zuhayli (2003) is of the opinion
transparency. These specific qualities, among others, earned him that the definition given by the Hanafis is the best for the term
the title al‑amin (the trustworthy) in the pre‑Islamic Arabia. Many “musharakah” since it explicitly states the nature of partnerships
other principles and qualities exhibited by the Prophet (P.B.U.H) as a contract, whereas the other definitions only mention the
came as a result of the direct orders he received from the Qur’an, goals and outcomes of having a partnership. What Al‑Zuhayli is
such as the prohibition of interest which now forms the cornerstone emphasising is no other than a demonstration that musharakah has
of IFT. What will then follow, at this juncture, is to identify the no other basis for its validity rather than being al‑‘aqd al‑sahih.
basic products of the contemporary IFT and see what constitute This cannot be proven otherwise because if not for al‑‘aqd al‑sahih
their basis. The most commonly practiced policy and products in which it has as its basis, how would it have derived its authority
IFT are three, and they are as follows: from the Qur’an, the Sunnah, and the consensus of the Muslim
i. Mudarabah (profit‑sharing) scholars? (Mustapha, 2010). The point which must, therefore, be
ii. Musharakah (partnership); and made is that it is because this product of IFTs has its basis as a valid
iii. Murabahah (cost‑plus sales). contract that it is been specifically referred by the jurists as sharikat
al‑‘aqd  (Nyazee, 1997). The recent illustration of this product
4.1. Mudarabah (Profit‑sharing) which Nyazee has come up with, further draw home the point that
This has been defined as a contract in which one party; the al‑‘aqd al‑sahih is the legal basis through which the validity of
owner (rabb al‑mal) provides capital, while the other party (darib), this product is determined. To draw curtain on this analysis, it is
brings labor and effort with the intent to share the profit in some because of its nature as al‑‘aqd al‑sahih that it is stipulated that it
predetermined proportions  (Moshood, 2003). A  critical look at can only exist between the persons under no legal disabilities, and
the above definition of mudarabah, like any definition for other it becomes binding by the mere consent of the parties either tacitly
products that are similar, states categorically that it is a contract. in accordance with local custom or expressly by statements which
This presupposes that, it does observe the tenets of al‑‘aqd al‑sahih is followed with a conformable answer (Ruxton, 2004). Equally,
earlier outlined in this paper. To demonstrate this further, it must be this kind of a product cannot be inherited by the heir who is not
noted that the parties to the mudarabah financial transaction must a party to it (Rushd, 1996). All in all, it is clearly demonstrated
enter into the contract mutually and freely without any compulsion. that being an‘aqd‑sahih is the legal basis for which the contract of
Omipidan (2006) aptly explains this point when he says: musharakah is validated.

142 International Journal of Economics and Financial Issues | Vol 6 • Special Issue (S3) • 2016
 Ishola, et al.: Al‑‘aqd Al‑sahih: The Legal Basis for Determining the Validity of Islamic Financial Transactions

4.3. Murabahah (Cost‑plus Sales) Al‑Mustapha, S.I. (2010), An Overview of the High Risk Associated with
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Dar al‑Fikr.
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Alamer, A.R.A., Salamon, H.B., Qureshi, M.I., Rasli, A.M. (2015), CSR’s
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measuring corporate social responsibility practice in Islamic banking:
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