INTRODUCTION

The concern over Shari'ah-compliant transactions is firmly entrenched in the activities and
operations of Islamic financial institutions (hereafter IFIs). As a business entity established
within the ambit of Shari'ah, an IFI is expected to be guided by values, principles, objectives and
rulings of the Shari'ah. However, ensuring effective Shari'ah compliance is not a straightforward
matter. As financial markets become increasingly sophisticated, heightened product
innovations and engineering in Islamic finance entail genuine concern over the need to
strengthen Shari'ah compliance throughout the product life cycle. This means that, while a
product may be deemed Shari'ah compliant prior to its launch (ex-ante), the IFI must also be
cognizant of the need to ensure that the entire ex-post process―including contract execution,
utilization of funds, investment activities, the audit and governance process―are all in place.
Off course, we never expect that IFIs are dealing with Shari'ah non-compliant transactions, but
many cases in the market prove that non-Shariah compliance is sometimes unavoidable.
In addition to, there is a kind of misperception in the market today that should a bank fails to
act in accordance with the Shari'ah rules, the transaction is null and void from a Shari'ah
viewpoint so that reexecution should be made from the beginning in place and that all income
derived from it is tainted and to be purified. However, the obligation resulting from Shari'ah
non-compliant transactions is not always purification. There are also instances in which the
transaction can be rectified and the proceeds can still be recognized as the IFI's income,
provided all the necessary amendments have been made. Against this backdrop, the present
study undertakes the approach on dealing with Shari'ah non-compliant transactions in Islamic
finance. In particular, the study provides critical analysis to deal with invalid contracts based on
Hanafi's approach.
Following this brief introduction, the study is organized in accordance to the following
structure: the next section discusses the established schools of thought in Islamic jurisprudence
and the theory of contract from Shari'ah perspective. The third section elaborates the Hanafi's
conceptualization on invalid contracts. The fourth section examines the approach to dealing
with invalid contracts based on Hanafi school. The next section provides sample scenarios for
how IFIs treat Shariah non-compliant transactions, while the final section concludes the study. 1

1
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Established Schools of Thought:
Islamic law is established upon two primary sources, namely divine revelation (naqli) and
personal reasoning ('aqli). The former is detailed in the Qur'an and Sunnah which assume the
central references of Shariah. Meanwhile, the letter is the basis of Islamic jurisprudence (fiqh)
which is done through the process of ijtihad (juristic reasoning) in deriving the Shari'ah ruling
from Qur'an and Sunnah particularly on the issues related to financial and commercial
transactions (muamalah). The latter approach was further developed mainly by schools of
thought (madzhab) (Kamali, 2002; Kamali, 2006).
Madzhab, as a body of doctrine taught by a leader and is followed by the member, plays
paramount role in formulating Islamic jurisprudence. It is because being principles sources of
Shariah, Quran and Sunnah only provide the general guidelines on almost every major topic of
Islamic law thus requires further examination and interpretation from Islamic jurists. There are
mainly four authoritative schools of thought recognized by majority sunni muslim, namely
Hanafi's school, Maliki School, Shafii School and Hanbali School (Nyazee, 2002).
The Hanafi school is one of the earliest school of thought found by Abu Hanifah Nu'man Ibn
Thabit (d.767). He has made a notable contribution particularly to the development of the law
on commercial transaction (mu'amalat). The Hanafi's school was favored by the ruling of
Abbasid dynasty and known for his extensive reliance on personal opinion and analogy (ra'yu
and qiyas). It is considered as the most humanitarian school of thought particularly concerning
the treatment of non-muslim and war captives (Kamali, 2006).

Theory of Contract:
In Islam, contract is the basis of financial transaction in which the income can be legally
generated. Islam put emphasis that transactions between two parties have to be established on
the notion of mutual consent (4:29) which is translated into modern practice through the law of
contract. This provides a parameter for determining the status of income derived from any
transaction conducted. According to the majority of jurists, there are only two possible rulings
on the status of a contract: valid (shahih) and invalid (ghayr shahih), and this latter category has
other names (batil and fasid) which can be used interchangeably for it (Zuhaily, 2004). Shahih is
a contract that is good in its essence (asl) and lawful in its external attributes (wasf) (al-Rumi,
2004). It is a contract in which all the essential elements ―such as the contracting parties,
subject matter, and offer and acceptance―and all the underlying conditions are fulfilled (al-
Minyawi, 2010).
From a Shariah point of view, a valid contract establishes all the legal implications that the
Shariah has assigned to a contract of that type (al-Namlah, 1999). For example, the buyer
attains the exclusive right to utilize the asset while the seller becomes entitled to the
consideration. All income generated from this class of contract is deemed legal, and the
contract becomes effective upon its execution. The majority of jurists hold the view that the
effectiveness of a valid contract may be suspended until the occurrence of a future event. In
contrast, the Shafii School and some Hanbali jurists hold that a valid contract must become
immediately effective upon its execution (Ayyub, 2007).
On the other hand, a contract that is invalid (ghayr shahih) is one that violates the pillars and
conditions of the contract (al-Shawkani, n.d). The following are examples of factors that render
a contract invalid: the sold asset is an impure or prohibited commodity such as blood, pork,
wine, a carcass; the asset is not fully possessed by the seller or is undeliverable; there is
excessive uncertainty in the delivery date or price; or the contract is performed by parties
without legal eligibility to execute contracts; i.e., one of the parties is insane, immature or not
of sensible conduct. From the Shariah point of view, an invalid contract does not produce the
legal effects of that contract. There is no exchange of financial rights and responsibilities due to
it; the buyer does not have any right to dispose of the asset, while the seller cannot possess the
income realized. Such a contract must be properly re-executed, starting from scratch.

The majority of jurists do not distinguish between batil (void) and fasid (irregular) in financial
transactions (Ibn Qudamah, 2002). Both terms are the opposite of shahih, having a single legal
implication (al-Ramli, n.d), and are often used interchangeably. On the other hand, the Hanafi
School took a different position from the majority of classical jurists. They further classified
contracts into three different categories: shahih (valid), fasid (irregular) and batil (void).

Fasid Contracts:
A fasid contract is a unique class of contract recognized in the HanafÊ School’s categorization
scheme. Unlike a batil contract, the essential elements of a fasid are present, but the contract is
tainted by a defect in an accessory attribute (Mahmud, 2000, 8:139).

Hanafi jurists identified various factors leading to a fasid contract, as highlighted below:

1. Ignorance; i.e., insufficient information that may exist with regard to four matters:

a. the asset; e.g., the seller says, “I hereby sell you some of my cloth,” and the parties disperse
without the seller specifying which cloth is being sold.

b. the price; e.g., the seller says to the buyer, “I hereby sell this asset to you for RM 100 spot
payment or RM 200 deferred payment” and the parties disperse without the buyer accepting
one of the prices in particular (alImrani, 2006).
c. the time of delivery.

d. the guarantee, surety or the pledge; e.g., a seller stipulates a guarantee or pledge without
specifying what it is (Zuhaily, 2004).

Insufficient information about any of these four matters, according to Hanafi, renders the
contract fasid because it will create a dispute between the contracting parties (Zuhaily, 2004).
However, if the lack of information entails excessive uncertainty about the delivery date―e.g.,
selling an asset for delivery if rain falls or if a certain person comes―the contract is ruled batil
according to all four schools of thought, including the Hanafis (al-Kasani, 1986).

2. The existence of an invalid condition. The Hanafi School defined an invalid condition as a
condition that is neither consistent with the nature and implication of the contract, nor
endorsed by textual authority, nor admitted by customary practice. The condition even offers a
benefit to only one of the contracting parties (or a third party) at the expense of the other
contracting party (Zuhaily, 2004). One example is tying a loan agreement to a sale contract; e.g.,
Ali agrees to give a loan to Bakar on the condition that Bakar sells his asset to Ali. In this case,
Bakar may consider discounting the price in favour of Ali due to the loan facility, resulting in a
loan that extracts profit (Arbouna, 2007).

3. The existence of an element of riba (usury). The majority of jurists consider the existence of
riba to invalidate the contract. However, the Hanafi School holds that riba does not make a
contract void; rather, it makes it irregular (fasid) and, hence, rectifiable (Wizarat al-Awqaf wa al-
Shu’un al-Islamiyyah, 1404-1427AH).

Unlike a batil contract, the income from a fasid contract is not irretrievably illegal; it is irregular
but rectifiable. Once the intolerable elements are eliminated, the contract becomes shahih;
thus, the income becomes legal.

Indeed, the Hanafi approach to invalid contracts in financial transactions is also supported by
some Maliki and Shafii jurists. Al-Qarafi of the Maliki School acknowledged that the Hanafi
approach is sound (al-Qarafi, n.d). Some Shafii scholars also differentiate between fasid and
batil in certain contracts such as agency contract (wakalah) and leasing contract (ijarah). Some
even completely follow the Hanafi view in all types of contracts (al-Ramli, n.d). Contemporary
fiqh scholars have generally adopted the Hanafi's view. Therefore, this paper has employed the
Hanafi's model approach to invalid contracts as the methodology to deal and treat Shari'ah
noncompliant transactions in IFIs. The authors view the Hanafi differentiation between batil
and fasid to be more practical and relevant to the current context and the needs of market
players, due to a number of reasons:

First, practically speaking, not every contractual defect is serious enough to warrant re-
execution. Some defects are minor and can easily be rectified by removing the objectionable
elements. Second, in the current context, re-execution of contracts creates practical complexity
as institutions tend to use boilerplate contracts to undertake the same basic type of transaction
with thousand of clients, and some contracts involve cross-border transactions. Adopting the
majority view will undoubtedly impose hardship and difficulty on the market. Thirdly, the
Hanafi categorization provides more options to the market players to apply the Islamic law of
contract in modern financial operation.

Treatment of Fasid Contract:

Unlike batil contract, an fasid contract, as promulgated in the Hanafi's approach, does not
necessarily require re-execution of the contract. In most cases, the rectification process can be
done in one of two ways. The first way is to eliminate objectionable elements that render the
contract fasid. If such elements are eliminated , the contract becomes valid. This is based on the
Hanafi legal maxim: “When the impediment disappears while the reason for the ruling is present, the
[original] ruling returns” (Wizarat al-Awqaf wa al-Shu’un al-Islamiyyah, 1404-1427AH, 12:60).

Following are examples of objectionable elements that may be rectified by eliminating such
elements (Wizaratu al-Awqaf wa Al-Syu'un al-Islamiyah, 1404-1427AH):

1. The existence of ignorance or lacking information in regard with the asset or

the price or time of delivery. In this case, according to Hanafi jurists, the contract is
deemed fasid and may be rectified by eliminating such ignorance elements. The parties should
specify the asset to be transacted and determines type of payment to be applied, either on the
spot or deferred. The party may also rectify the fasid contract due to ignorance in time delivery
by determining the precise and specific time.

2. The existence of invalid condition. The process of rectification may be done by

removing the objectionable invalid conditions, thus the contract is valid .

3. The existence of riba element. In this case, the contract may be rectified by removing
the condition of riba or returning the riba element to the original owner.

The second way of rectification process can be done by changing the fasid contract into another
suitable nominate contract that make the contract valid by looking into substance and essence.
There are many examples Aust. J. Basic & Appl. Sci., 7(6): 589-595, 2013 593 of that form
discussed by Hanafi jurists, among other are (Wizaratu al-Awqaf wa Al-Syu'un al-Islamiyah,
1404- 1427AH):
 1. Kafalah contract with the condition that debtor is free from any liability. The contract is
basically fasid as the condition does not fit the nature and legal effect of kafalah. However, it
can be rectified by shifting the contract into hawalah with all its ruling and legal consequence.
Once the contract is shifted to hawalah, the contract will eventually valid.

2. Mudharabah contract. The original ruling of mudharabah contract is that a mudharib

(manager) is a trustee and not held liable for any financial loss. Any profit is shared between
mudharib and capital provider based on profit sharing ratio agreed upfront. However, if it is
stipulated in the contract that all profit belongs to mudharib and not to be shared with rabb
maal, the condition cause the contract fasid and may be rectified by turning the contract into
qard will all ruling and condition of loan. The reason is that a person, from jurisprudence
perspective, has an exclusive right to get the entire profit if he is the owner of the capital.
Therefore, when a mudharib stipulates a condition that all profit belongs to him, he assumes
that he possess the capital. When he possess the capital, it means that he treats the capital of
rabb maal as a loan to be repaid in kind (qard).

3. Wadi'ah is basically a trust based contract. A custodian is not entitled to utilize the deposit in
anyway and not held liable to any loss or damage unless in case of negligence or misconduct.
However, in case the custodian stipulates the condition to utilize and invest the deposit, the
wadi'ah contract becomes fasid. Yet, it can be rectified by turning the wadi'ah contract into the
concept of qard (loan to be repaid in kind). As a consequence, a custodian is required to
guarantee the sum of the deposit and indemnifying it in case of losses or damages.

However, if the objectionable elements persist and the contract is not shifted to another
contract that make it valid, the contract becomes void so that all income generated or asset
received should be returned to the original owner.peration.

Gharar and its forms:

The Arabic word Gharar is a fairly broad concept that literally means deceit, risk, fraud,
uncertainty or hazard that might lead to destruction or loss

. Hanafi scholars have defined Gharar as

“something which its consequence is undetermined.” While Shafi’i scholars have described it
as “something which in its manner and its consequence is hidden.

According to Al-Sarakshi, “anything that the end result is hidden or the risk is equally
uncommon, whether it exists or not.” Therefore, Gharar in Islam refers to any transaction of
probable objects whose existence or description are not certain, due to lack of information and
knowledge of the ultimate outcome of the contract or the nature and quality of the subject
matter of it.
Gharar is divided into two types:

Gharar fahish (excess Gharar)

Gharar yasir (light Gharar).

Examples of Gharar fahish in contracts are plenty as shown by the AlHadith and normally is
associated with the reasons why Gharar sales are prohibited. On the other hand, Gharar yasir,
which means small in amount or trivial is the uncertainty that is always present in all contracts
and conducts, thus its existence is tolerated. All scholars agree that every transaction have
some amount of Gharar in it but they start to differ when referring to the amount of Gharar
contained in each.

There is no specific evidence from the Quran which connotes Gharar, however, Allah (s.w.t)
mention “Eat not your property among yourselves unjustly by falsehood and deception, except
it be a trade amongst you by mutual consent (Al-Bakarah, 2:188; AlNisa, 4:29). The Quran has
categorically prohibited gambling (Al-Bakarah, 2:219 and AlMaidah, 5:93). Many scohalrs argue
that Gharar is one of the branches of gambling (Rahman, 2010; p.71). In addition to that
tradition of our beloved Prophet (s.a.w.) on many occasions forbade many transactions which
included Gharar. For example, the Prophet (s.a.w.) has forbidden the purchase of the unborn
animal in the mother’s womb, the sale of the milk in the udder without measurement, the
purchase of spoils of war prior to distribution, the purchase of charities prior to their receipt,
and the purchase of the catch of a diver. Gharar occurs in all sorts of transactions where the
subject matter, the price or the two, are not determined and fixed in advance. Speculative
activities in capital market, derivatives instruments and short-selling contracts are bright
examples of Gharar in modern finance.

Moreover, Gharar in practice relates potentially to issues such as pricing, delivery, quantity and
quality of assets that are transactional-based and would affect the degree or quality of consent
of the parties to a contract. For example, one cannot buy an ‘option’ at a certain price to have
the right to purchase its underlying shares, as an ‘option’ is not ascertainable and is thus
uncertain. An option is just a right. It is not an asset whose specifications are clear and
attainable. In conventional insurance, the premium paid by policyholders and the indemnity
provided by the insurer upon a claim are equally uncertain, thus making conventional insurance
non-compliant from an Islamic legal perspective.

Definitions for Narcotics:

There are various definitions for narcotics, either in terms of the word or term, we notice to
the most important words and terms related to the narcotic drugs in this section: 2.1.1. Lexical
Definition Mokhader (Arabic word of the narcotic) have been derived from the word (al-Khadr),
which means weakness, disability, also means coldness, generally it includes the meaning of
fear, slowness, perplexing, indecisiveness, laziness, carelessness, and all these characters can be
found in a drug addict and in all of these narcotic drugs, whether solid or liquid drugs (Moussa
& Saidi, 1989: p 482). Also, the word addiction literally means getting used to something in the
Latin language. .

Narcotic Drugs in Jurisprudential Causes:

A) Jurisprudential causes Sunni and Shi’a religion debate about narcotics in a number of
jurisprudential causes that each one has presented independent opinions about prohibition,
ta’zir (discretionary punishment awarded by the judge)…, which are briefly stated.

1) Tazirat (discretionary punishment awarded by the judge) and Hudood (Penance that is a
punishment by a lash as ordained by the Islamic religion) causes

2) And whoever gives hashish to another person or befuddles him/her with something by
eating or drinking and then takes his property away, he is punished and the property is
returned to his/her owner according to what the Imam sees as good for ta’zir (discretionary
punishment.

3) In the statement of ta’zir, you should know the sins that lead to the discretionary
punishment of its performer are thirty-five types. Twenty-third: Someone who feeds hashish or
anesthetic to other someone.

4) Legislator distinguishes between the prohibitions that create the addiction among people
and the prohibitions that do not create addiction, such as blood and the dead body, if a
prohibition do not make an addiction, he/she will be sentenced by the religious punishment,
but if he/she makes the addiction, they be sentenced by the religious punishment along with
“Hadd” as a natural punishment (translator statement: Penance that is a punishment by a lash
as or1 Baha’addin Mohammad Ameli (Sheikh Baha’i), Jamme Abbasi, p. 538. K. M. Nejad, S. H.
Hashemi DOI: 10.4236/blr.2018.93025 404 Beijing Law Review dained by the Islamic religion)
and hashish is included for this punishment .

Blood Money Causes: “Mabnej” is someone who makes a person drink something that his/her
mind is lost by drinking, which, in this case, this action is a crime that is created by the eater of
the hashish, because it creates a defect in its wisdom and body and ta’zir is necessary for
him/her; and if he/she has secretly taken something away and the theft has been proved with
quorum, after the returning the property, his/her hand will be cut .

Forbidden Foods and Drinks Causes: The deadly poison is forbidden, whether it is at a
maximum or a minimum amount, but a minimum of it, is not forbidden to eat, if it is not lethal,
such as eating opium and scammonia, and oil of colocynth and hemlock when they combine
with other things, but a “Mesghal” (about five grams) of them are not allowed, and in general,
any amount that is likely to be harmed is not permissible .

B) Any solid thing is forbidden that is harmful to the body or the wisdom, such as rock, soil, and
poison, even it is a little (except for someone who is out of harms of it), and if it is liquid, it is
also forbidden. An example of a harmful substance for wisdom is opium in a large quantity, and
nutmeg, ambergris, saffron and hashish in a great amount .

C) Any kind of alcoholic substance is forbidden, whether it is a solid or liquid thing, such as
hashish, and what has been taken from wheat and the like; and except of the alcoholic liquid,
other alcoholic substances are not unclean .

D) Foods and drinks that can spoil the mind, are forbidden whether it is from liquids such as
wine or solid, such as hashish and opium .

Fraud from Islamic Perspective: Review of the Literature

Definitions and Concepts

In Islamic legal texts fraud (tadlis or khilaba), lesion or misrepresentation (ghabn), gross

misrepresentation (ghabn fahish), deception (shushsh), imbalance (gharar), and trickery

(taghrir) are

used interchangeably as to mean fraud. Besides there are few words that also refer to fraud
but less

commonly used such as khallab, khiyanah, ihtiyal, tahayul, tadlil, iham, nasb, and khadi’a which
all

vary in meaning from fraud, trickery, deception, lesion, misrepresentation, swindling to

imbalance.

Taghrir is defined as the act of deceiving another by deploying misleading means in the form
of

actions or words, thus, inducing the other to transact where he would not have transacted had
such

means not been deployed. In other word taghrir can either be the deceptive act or statements.
From
this definition, taghrir can be divided into two types that are taghrir fi’li such as false act
and

manoeuvres and taghrir qawli such as lying (Abdul Jabbar, 2012).

Tadlis can also be defined as fraud. It causes misrepresentation or lesion (ghabn) and leads to a

contractual imbalance (gharar) between the contracting parties. Tadlis as a legal term
means a

dishonest and deliberate action leading the contracting party to commit a mistake thereby
convincing

him to enter into a contract. Islamic scholars associate fraud with its consequence when judging
it as a

defect. The consequence should indicate ghabn or lesion on one of the parties‟ concerned
otherwise

fraud simply has no effect. In other word, the fraud must have caused ghabn or loss to the
contracting

party and the loss incurred must come from the act of the fraud (Benjelayel, 2012).

Besides that, the term gharar also refer to fraud. Gharar is uncertainty, hazard, chance or risk.

Islam prohibited gharar in terms of uncontrollable risk because it can lead to speculation.
Gharar can

be further defined as “where there is a matter that is concealed by one party, where it
(this

concealment) can raise a sense of inequality as well as tyranny to another party” (Che
Yaacob &

Abdullah, n.d). In business, gharar exist when a party undertakes a venture blindly without
sufficient

knowledge or to undertake and excessively high risky transaction. The presence of gharar
element in

the contract makes the outcome not known or hidden which may lead to a fraud (Ibid, n.d).
Legal Evidence Related To the Action of Fraud

Al-Quran

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“And do not consume one another's wealth unjustly or send it [in bribery] to the

rulers in order that [they might aid] you [to] consume a portion of the wealth of the

people in sin, while you know [it is unlawful]” (al-Baqarah 2:188)

This verse provided the general meaning of fraud where Allah s.w.t has prohibited Muslim to

consume other‟s wealth unjustly. Therefore, any activities that lead to such action are
considered as

fraud. Islam prohibits every type of fraud and deception, whether the fraud in activities of
buying and

selling or in any other matter between people. All Muslim are urged to be honest and truthful
in all

situations in everything they do.

“Woe to those who deal in fraud, those who, when they have to receive by measure

from men, exact full measure, but when they have to give by measure or weight to

men give less than due. Do they not think that they will be called to account on a

Mighty Day, a Day when (all) mankind will stand before the Lord of the Worlds?

(Al-Mutaffifin 83: 1-6)

Based on the above verse, Islam condemns those who are fraudulent with greater punishment.

Among them are the people who are insincere when gives measurement. The act of giving a
less
weight than due or giving a less amount than one should receive is considered fraud and who
engage

in it will face severe punishment.

Al-Sunnah

Prophet Muhammad (PBUH) once said in his hadith as reported by al-Hakim and al-Bayhaqi,

“It is not permissible to sell an article without making everything (about it) clear, nor is it
permissible

for anyone who knows (about its defects) to refrain from mentioning them” (Yusuf al-
Qaradhawi,

2001)

Once, when passing by a grain merchant, the Prophet's curiosity was aroused. He thrust his

hand into the heap of grain and found it wet. "What is this, O merchant?" he asked. "It is
because of

rain," the man replied. The Prophet (peace be on him) then said to him, "Why did you not put it
on top

so that the people could see it? He who deceives us is not of us." (Reported by Muslim)

In this hadith, the Prophet Muhammad (PBUH) forbade sellers to hide any defects in business

transactions. The act of hiding the defects by sellers may lead to a fraud and injustice. That is
why the

Muslims of earlier times strictly observed the practices of exposing defects of what they sold,
telling

the truth and giving good advice. Examples of that action are as followed: When Ibn Sirin sold
a

sheep, he told the buyer, "I would like to tell you about a defect it has: it kicks the fodder." And
when

al-Hassan bin Salih sold a slave girl he told the buyer, "Once she spat up blood." Although she
had
done this only once al-Hassan's Muslim conscience required that he mention the fact, even
if it

resulted in his receiving a lower price. (Al-Qaradhawi, 2001)

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Among the act of fraud is market manipulation or najash. Ibn 'Umar explained that najash

signifies someone's bidding for an item in excess of its price without having any intention of
actually

buying it, but merely in order to induce others to bid still higher. Many times this is pre-
arranged for

the purpose of deceiving others (Al-Qaradhawi, 2001). Besides prohibiting market

manipulation,

Prophet Muhammad (PBUH) also forbade people from going out of town to buy merchandise
which

was on its way to the market; instead, telling them to wait until it was brought to the
marketplace

(Reported by Muslim). This prohibition is relevant to make sure that the seller is not defrauded
by the

lack of knowledge about the current price of his merchandise. If anyone does buy some of
his

merchandise in this manner, the seller has the option of cancelling the transaction after arriving
at the

marketplace. (Reported by Muslim)

The Prophet forbade any kind of transaction which is uncertain or which involved an unspecific

quantity to be exchanged or delivered. This includes the sort of transaction in which there is
no
guarantee that the seller can deliver the goods for which he receives payment. Accordingly,
the

Prophet forbade accepting money for a stallion's or male camel's covering, for fish in the water
or

birds in the air which one has not caught, or for the offspring of a camel still in the womb, since
there

is an element of uncertainty as to the outcome in all such transactions. The reason for the
prohibition

is to avoid quarrelling over who was to bear the loss if occurred among the seller and the
buyer.

Therefore, the sales of goods and items that already exist during the transaction can avoid such
issues.

(Al-Qaradhawi, 2001)

Types of fraud

There are a few types of fraud that can be relate to the institutional malpractice such as

dishonesty, falsehood and breach of pact/promises, disloyalty (khiyanah), and bribery (al-
rishwah).

Besides that, other acts such as the sale of al-gharar items and hoarding (ihtikar) are
considered

fraud.

Dishonesty

Literally dishonesty means lack of honesty or integrity which is disposition to defraud or

deceive. A dishonest act is equivalent to fraud. Dishonesty is one of the worst forms of fraud.
A

dishonest person is always prone to defraud others whenever and wherever possible.
Among the
dishonest act or fraudulent activities are embezzlement, misappropriation, misapplication,
destruction,

removal, or concealment of property, alteration or falsification of paper or electronic

documents,

including the inappropriate destruction of paper or electronic documents, false claims

and/or

misrepresentation of facts, theft of an asset, trade secrets or intellectual property,

inappropriate use of

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computer systems including hacking and software piracy, bribery, kickbacks, or rebates,
conflict of

interest or commitment.

Falsehood and Breach of Pact/Promises

Falsehood can be defined as an untrue statement, an absence of truth or accuracy and the

practise of lying. Falsehood is strongly condemned in Islam as mentioned in Holy Quran,

“O ye who believe! There are indeed many among the priests and anchorites, who in

falsehood devour the substance of men and hinder (them) from the way of Allah. And

there are those who buy gold and silver and spend it not in the way of Allah.

Announce unto them a most grievous penalty.” (Al-Taubah 9:34)

In this verse, Allah gives a warning to those who devouring people the wrong way with a

severe punishment. Falsehood or misstatement about merchandise or services will harm the
customer
along with the producer and the trader as well (Khan, 2011). The person who falsified the truth
in

zakat collection for example, will lead to mismanagement in zakat distribution.

Khiyanah (disloyal)

Khiyanah can be derived as treachery, infidelity or disloyal. Khiyanah involves deception

breach of agreements and promises and failing a trust as well as infidelity. Khiyanah is an
immoral

characteristic. It may occur in regard to money or as a violation of trust. It may occur in regard
to

honor, power, or position. Allah said in Holy Quran,

“No prophet could (ever) be false to his trust. If any person is so false, He shall, on

the Day of Judgment, restore what he misappropriated; then shall every soul receive

its due, - whatever it earned, - and none shall be dealt with unjustly”. (Surah Ali

Imran 3:161)

“O ye that believe! Betray not the trust of Allah and the Messenger, nor

misappropriate knowingly things entrusted to you.” (Surah Al-Anfal 8:27)

“If thou fearest treachery from any group, throw back (their covenant) to them, (so

as to be) on equal terms: for Allah loveth not the treacherous.” (Surah Al-Anfal

8:58)

All the verses above show that act of khiyanah are condemned in Islam and the treacherous will

face severe punishment in hereafter. Khiyanah can be considered as fraud because it will harm
the

people who put their trust to the person or on the contract signed.
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Bribery (al-rishwah)

Bribery is an offer or promise of whatever nature given to someone in order to influence him or

persuade him to do something which is unlawful in the circumstances in favor of the giver. It
can also

be understand as an incentive that is illegally given to someone in position of authority to

influence

his sense of justice, due process and discretion (Arowosaiye, 2008). Prophet Muhammad
(PBUH) said

in his hadith as narrated by Ahmad al-Tibrani (Yusuf al-Qaradhawi, 2001),

“Allah has cursed one giving bribe and one receiving bribe as well as the go between”.

The practice of bribery is strongly condemned in Islam because it has a tendency to encourage

dishonest practices. Giving of gifts to people who occupy public office or position of authority,
by the

consensus of scholars are not to be accepted because it can be part of bribery as said by Caliph
Umar

to all his governors “Beware of gifts because they form part of bribe”. (Arowosaiye, 2008)

Sale of al-gharar (uncertainty, risks, speculation)

The sale of gharar in Islamic terminology refers to the sale of a commodity or goods which is
not present at hand, or the sale of an article or goods which the consequence is not yet known,
or a

sale involving risks or hazard where one does not know whether at all commodity will later
come into

existence. This type of sale is prohibited in Islam because it may give rise to dispute
and

disagreements between the concerned parties (Khan, 2011). The contract that involved
uncertainty

that can harm the consumers also prohibited in Islam. Examples of sale of al-gharar as stated
in

prophet Muhammad saying are the sale of birds in the air, the of fish in the sea, the sale of
fruits and

grains that still not harvest yet.

“Ibn Umar (Allah be pleased with them) reported Allah's Messenger (may peace be

upon him) as saying: Do not buy fruits (on the trees) until their good condition

becomes clear. In the hadith transmitted on the authority of Shu'ba it was stated that

Ibn Umar (Allah be pleased with them) was asked what good condition implied. He

said: When (the danger of) blight is no more”. (Reported by Muslim)

Hoarding (ihtikar)

Literally hoarding mean an accumulated store hidden away for future use. Technically hoarding

means the purchase of large quantities of a commodity with the intent of pushing up the price.
An

investor hoping to increase the price of a commodity can do so by leveraging his or her demand
for it,

and buying physical inventory as well as purchasing futures contracts for that
commodity. The
activity of hidden the commodity with intend to manipulate the price is severely condemn in
Islam. A

very important hadith concerning hoarding and manipulating prices has been narrated by
M'aqal bin

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Yassar, a companion of the Prophet (peace be on him). The Umayyed governor, 'Ubaidullah
bin

Ziyad, came to visit M'aqal when he was bedridden due to a grave illness. After inquiring about
his

condition, 'Ubaidullah asked him, "Do you know of any instance of my having wrongfully
shed

someone's blood?" M'aqal replied that he did not. "Do you know of any instance,"
'Ubaidullah

continued, "in which I interfered with the prices of the Muslims' goods?" M'aqal again replied
that he

did not know. Then M'aqal asked the people to help him to sit up, which they did. He then
said,

"Listen, O 'Ubaidullah, and I will tell you something which I heard from the Messenger of
Allah

(peace be on him). I heard the Messenger of Allah (PBUH) say, as reported by Ahmad and al-
Tibrani

in their kitab (Yusuf al-Qaradhawi, 2001),

“Whoever interferes with the prices of the Muslims' goods in order to raise them

deserves that Allah should make him sit in the Fire on the Day of Resurrection.' "Did

you hear this from Allah's Messenger (peace be on him)?" asked 'Ubaidullah, and
M'aqal replied, "More than once or twice"

“Ma'mar (Allah be pleased with him) reported Allah's Messenger (may peace be

upon him) as saying: He who hoards is a sinner. It was said to Sa'id (b. al-

Musayyib):You also hoard. Sa'id said: Ma'mar who narrated this badith also

hoarded”. (Reported by Muslim)

According to the above hadith, scholars concluded that hoarding is prohibited under two

conditions:

first, that hoarding at a given time is injurious to the people of that country.

and two, that the hoarder's aim is to force the price up in order to make more profit.