Islamic Law of Contract (Mu’amalat)

Course Contents:

 Introduction to the Law of Mu’amalat

 Essential requisites of valid contracts and mode of making Sigha
 Doctrines of Majalis al-Aqd (meeting place for the formulation of contracts,
contracting parties and subject matter of contract
 Consideration and scope of Islamic Law of Contracts
 Specific contracts and dispositions: Aqd al-Bay’, Ijarah/Al-Kira, Al-Salam, Qard,
Hibah, Ja’lah, Muzara’ah, Musaqah, Ariyah, Muzabanah, Wadi’ah, Rahn,
Kafalah, Hawalah, Sharikah
The Aim of the Course:
The general aim of this course is to present to you the social transaction provisions in
the Shari’ah with the Glorious Qur’an and the Prophetic Traditions as their undisputable
original, basic, primary and final sources. The Course discusses the background, scope
and requisites of the transactions. The overall aims of this course include:
(i) Providing you with past and present historical background information on
provisions relating to al-Mu‘amalat (social contracts) in the Shari‘ah.
(ii) To acquaint you with the concept, doctrine, nature and scope of Islamic Social
Transactions.
(iii) To point out the various prohibitions and permissible matters in the Islamic
law of social transactions.
(iv) To impart to you the concept of Islamic banking as an emerging modern way
of fiscal transactions alternative to interest infested conventional banking
system.
The Objectives of the Course:
Based on the general aims of this course, some objectives of the course are to:
(i) Define various terms used in connection with Mu’amalat (social transaction
provisions) in the Shari‘ah.
(ii) Analyze the primary and secondary sources, as well as the background of the
Mu’amalat (social transaction provisions) in the Shari‘ah.
(iii) Discuss the subject matter, guidelines, scope and impact of the Mu’amalat
(social transaction provisions) in the Shari‘ah.
(iv) Evaluate the operation, problems and prospects of Social Transactions.
(v) Underscore and discuss the role played by certain Muslim countries,
institutions, societies and individuals in the implementation of Social
Transactions.
Introduction
Islamic prescriptions for social transactions and business contracts are made in
order to guide the Muslims to the right path in their social relations. It draws the attention
of those who want to collaborate in a joint venture or business transactions to take
precautionary measures that would enhance the success of their venture. The
precautionary measures are also:

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 1. To safeguard the interests of all the contractual parties.
2. To provide the mechanisms for checking fraudulent practices, conflicts of
interests, forgetfulness, laziness, cheating, or loss of mutual understanding and
co-operation.
3. To build healthy relationship in the minds of all parties whose collective goals
are harmonized in such a way that teamwork and sense of belonging are
present in the operation of social transactions
4. To make sure that is to be implemented in obedience to Allah and His Prophet
for the overall benefit of all business partners and the society.
5. To have proper understanding of all terms of the contract before finalization
of agreements and their documentation provide a kind of insurance to the
capital and shares of the profit.
Unlike contract of usury, it shares either profit or loss par capital or labour
imputes of the contracting parties. In case of loss, every party will share the loss, and this
reduces the burden. If only one party suffers the entire burden of loss, it will be more
severe and that could lead to many social, economic and psychological problems. The
parties will nurse the hope of gaining the favours of Allah both in this life and in the
Hereafter because of the obedience to Him. It presents an excellent example to the west
and international community that Islam is capable of operating the most transparent, just,
egalitarian and successful poverty alleviation businesses.

Brief History of Social Transactions in Islam

The history of Social Transactions in Islam can be traced back to the period of the
revelation of the Glorious Qur’an in Makkah and Madinah (610-632 AD). There is
nothing left out in the mundane affairs of man and his life in the Hereafter without
necessary divine guidance. The Qur’an emphasizes that it has addressed all issues.
There is not a moving (living) creature on earth nor a
bird that flies with its two wings, but are communities
like you. We have neglected nothing in the Book then
unto their Lord they (all) shall be gathered. (Qur’an 6:
38).
Islam pays unsurpassable attention to the Social Transactions where the interests
of the contracting parties and the society are taken into consideration. It also gives
magnificent encouragement to lawful social transactions. Allah (S.W.T) emphasizes in
the Qur’an that:
Woe to those who deal in fraud. Those, when they take
measure from people, take exact full measure. However,
when they give by measure or by weight to them, they
give less than due. Do they not think that they will be
called to account? On a Mighty Day (Qur’an 83: 1-5)
The Prophet (S.A.W.) extols and encourages honesty and fair play in all Social
Transactions, including buying and selling. He likens the status of honest traders to that
of the Prophets, the righteous and the martyrs (Shuhada’). Throughout his Prophethood,
he guided the Muslims towards Islamic-Compliant transactions. Generally, Islamic Law
includes matters that are not of practical nature, such as beliefs and charity. Public affairs
are also covered by the provisions of the Shari‘ah. Some matters of politics and

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administration fall within the purview of its law. The virtues of the days of ignorance,
approved by the Prophet, can be acted upon in Islam. The revelations to the previous
Messengers of Allah as well as the rules promulgated by Muslim governments (Ahkam
al-Sultaniyyah) also are part of the materials for the formulation of Islamic laws in the
early days of Islam. International laws that did not negate the principles of Islam were put
into use. For an example, ‘Umar Ibn Al-Khattab (R.A.) ordered that the Muslims should
levy the same tarrif on traders from other territories as much as they were levied on the
Muslims. He also introduced insurance units to attend to incidence of disasters. During
the Caliphate, a vigorous monetary economy was created in the Muslim States. The
levels of their economy grew, their wealth expanded, circulation of stable economy was
pursued vigorously, and high-value currency and integration of monetary matters were
witnessed.
In modern days, a number of economic concepts and techniques were applied in
the Islamic banking system. These included Joint Partnerships (Mudarabah), Relief Trust
Fund (Waqf), Transaction Accounts and Loaning etc. Moreover, a higher system of
Islamic social transactions (Mu‘amalat) and Islamic economy were introduced.
Some Muslim scholars in the last century have produced useful theories on
interest-free socio-financial transactions. Prominent among the scholars were Anwar
Qurayshi, Na‘im Siddiqi, Mahmud Ahmad, al-Mawdudi and Hamidullahi Abdu`l-Ati.
Their major focus was the Islamic social transaction that could yield profits, lead to
setting up of interest-free banking in Islam, based on profit and loss sharing agreement. In
the 1950s, the Islamic scholars and economists made a landmark attempt to outline
Islamic-compliant banking transactions alternative to Riba-involved partnership. They
took practical steps by offering theoretical models of finance and banking with the noble
objective of raising interest-free banking and in all forms of partnership. During the last
three decades, more scholars that are Muslim have started to give more attention to the
issue of interest-free banking system. They do not only expound theories and formulate
Islamic principles that should be followed; they also encourage governments and Islamic
institutions to be more pro-active in establishing and promoting interest-free banking
system.
In response to the clarion calls, the Conference of the Ministers of Islamic
countries held in Karachi-Pakistan, in 1970; the First international Conference on Islamic
Economics was held in Makkah in 1976; the International Economic Conference was
held in London in 1977. Hitherto, the involvement of Islamic Institutions resulted in the
establishment of interest-free banks such as the Islamic Development Bank, which was
established in 1975. Egypt took commendable step by its establishment of savings banks
based on profit sharing in 1963. By 1981, there were nine of such banks in Egypt. In
1975 the first modern commercial Islamic bank, known as Dubai Islamic Bank was
established in Dubai. In 1981, the Organization of Islamic Conference (OIC) and the
Development of Africa set up three Standing Committees during its Third Islamic
Conference held in Makkah. They are Economy and Commerce, Information and
Culture, and Science and Technology. The heads of States and government of the OIC
made certain bold resolutions. These included
1. Declaration of its determination to eliminate poverty from which some of our
people continue to suffer, by consolidating its economic cooperation on the

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 basis of complimenting and pooling of resources to achieve coordinated
development of our countries.
2. Declaration of resolve in a spirit of Islamic solidarity to promote economic
development of the countries, which are least developed amongst member
countries.
3. Pronouncement of resolve to rationalize development policies that would
ensure balanced progress in both the material and spiritual domains.
4. Calling for efforts to be made to establish economic relations in the world on
bases of justice, interdependence and mutual interest.
5. To ensure the disappearance of the wide gap that separates the industrialized
countries and the developing poor countries.
6. Institution of a new economic order based on equality and solidarity, under
which development policies are rationalized and integrated to eliminate
famine and its dangers.
7. To put an end to all kinds of deprivation and exploitation of peoples that are
suffering under the effects of colonialism and backwardness.
8. To ensure these countries developed and make proper utilization of their
resources.
9. To re-affirm the right of every state to exercise sovereignty over her
respective natural resources and control of her exploitation.
Another International Conference on Islamic Business and Finance took place
from 7th to 9th February 2011 at National Institute of Banking and Finance (NIBAF),
Islamabad Pakistan. This event will provide a podium for coming together of the Islamic
scholars and experts in many fields of human endeavor. These include practitioners of
Islamic finance industry, economics, business and finance intellectuals as well as Ph.
D/research scholars of the Universities and other stakeholders.
The major reason for this intellectual gathering is to discuss the achievements, the
challenges and latent issues in the fields of Islamic business, banking and finance.
World's top scholars of Islamic Banking and Finance are expected to deliver thought
provoking lectures on areas of interests to the Muslim world. It is on record that in 2005,
Islamic banking was growing at a rate of 10-15%, per year, signaling consistent future
growth. The success of this bold step of setting up Islamic banks is manifested in the
establishment of well over 300 of its institutions spread over 51 countries, including
United States of America. In 2005, Shari‘ah-Compliant assets in those Islamic banking
institutions have risen to 822 billion US dollars. Moreover, CIMB Group Holdings has
announced, “the Islamic finance is the fastest growing segment of the global financial
system and sales of Islamic bonds may rise by 24 percent to 25 billion US dollars in
2010”. The Vatican is not left out in applauding the brilliant idea that “the principles of
Islamic finance may represent a possible cure for ailing markets”. According to the
Standard and Poor Ratings Services in 2009, “the Shari‘ah -Compliant assets reached
about 40 billion US, dollars throughout the world, and its potential market is 4 trillion”,
while Iran, Saudi Arabia, and Malaysia have the biggest Shari‘ah-Compliant assets”. The
Iranian banks accounted for about 40 percent of total assets of the world’s top 100
Islamic banks. Iran also toppled the 500 Islamic Financial Institutions. The Muslims are
expected to cooperate with the Islamic-Compliant banks to achieve their noble objectives.

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The Islamic Development Bank, an arm of the OIC, has three main types of financing
operations. These are Ordinary Operations, Foreign Trade Operations and operations
financed under Special Assistance Account. The ordinary operations include loan
financing of projects such as agriculture, basic infrastructure projects, education and rural
development projects. Its equity development projects are financed for revenue
generation and encouragement of transfer of technology and expertise. Its leasing
financing of medium-term operation is aimed at providing financial assistance to
development projects that are capable of yielding revenue in industrial, transport, agro-
industrial and other sectors of the economy among the member countries. Others include
profit-sharing projects, installment sale, technical assistance to member countries to
establish Islamic banks, technical co-operating programmes, scholarship programmes,
etc.

Definition of Terms and Concepts:

Mu’amalat is an Arabic word which means dealings. Literally, it means
transaction, while technically it means any form of mutual dealings held between people
to do a transaction for their needs, such as in trading and commerce. Basically,
Mu’amalat is seen as economic activities. However, Mu’amalat is a social relationship
which consists of various economic and non-economic activities. In addition, an element
of Mu’amalat or the factor that bind the activities called as Mu’amalat are when the
activity creates a responsibility among people, the activity comes from mutual agreement,
and last but not least, the activity has formality which bind the activity such as by offer
and acceptance by two parties. Islamic economy is driven by Fiqh Mu’amalat.
Fiqh Mu’amalat is an Islamic regulation that relate to trading and commercial
rules. Fiqh Mu’amalat is defined as a branch of Islamic jurisprudence that covers the area
of commercial and business activities in economy. It deals with the rulings which define
and govern the relationship between humans, for example in term of financial right and
obligation among them. All economic activities are therefore legally permissible as long
as these activities do not transgress any of the tenets of Shari’ah. In line with this maxim,
it is the unanimous opinion of all four major Islamic School of Thought (Hanafi, Maliki,
Shafi’i and Hanbali) that all forms of business transactions that transgress any of the
tenets of Shari’ah are considered invalid. On the basis of this, the Prophet Muhammad
(S.A.W.) said:

Surely, Allah and His Messenger have prohibited the

sale of wine, the flesh of dead animals, swine and
idols.
Deduced from this Prophetic statement is the fact that all transactions must be in
line with Shari’ah. It is because Islam regulates certain criteria that will either make the
transaction Haram or Halal.
- First, the transaction or contract bound should not be made for selling or
buying forbidden products such as alcohol and pork.
- Second, the contract must not include any interest (Riba’). Thus, no contract
should be made for any financial deal on the basis of usury (Riba). Almighty
Allah states in the Qur’an that:

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 Allah has permitted trade and forbidden usury (Q2: 275)

- Third, the contract must not include uncertainty. That is any transaction
whose existence or description is not certain.
- Fourth, the transaction that involves gambling (Maysir) is strictly prohibited
in Islam. Contract involves in gambling (Maysir) is forbidden in Islam. Allah
(S.W.T) explains:
They will ask you concerning wine and gambling. Say:
“in them is great sin, and some benefit, for men; but
the sin is greater than the benefit. (Q2: 219)
Prohibition of Riba, Gharar and Maysir in financial transactions is the
fundamental of Islamic finance which distinguishes it from conventional finance.
Therefore, it is a must for Muslims to avoid these elements in their daily transaction.
However, contract that involves major uncertainty (Gharar Fahish) is also forbidden and
may make the contract voidable. Almighty Allah enunciates in the following verse:
O ye who believe! Eat not up your property among
yourselves in vanities, but let there be amongst you
traffic and trade by mutual good-will, nor kill (or
destroy) yourselves, for verily Allah hath been to you
Most Merciful. (Q4: 29)
Riba (Usury) is defined as a loan given for a stipulated period with stipulated
increase on the principal payable by the loan-taker. It is also defined as “an increase that
has no corresponding consideration in an exchange of property for property. Riba is an
addition from the principal amount which the lender asks for extra amount from the
principal for borrower to pay. The prohibition of Riba is deduced from the following
verse:
Those who devour usury will not stand except as stand
one whom the evil one by his touch hath driven to
madness. That is because they say: "Trade is like
usury," but Allah hath permitted trade and forbidden
usury. Those who after receiving direction from their
Lord, desist, shall be pardoned for the past; their case
is for Allah (to judge); but those who repeat (the
offence) are companions of the fire: They will abide
therein (forever). (Q2: 275)
It would appear that the prohibition regarding Riba has two dimensions. The first
one prohibits increases arising from debts/loans (Duyun), known as Riba Duyun, while in
barter trades (Buyu‟), unequal exchange of Ribawi item of same kind and same basis is
known as Riba Buyu’‟. This can be summarized as follows: Riba Duyun is an unjustified
increment in money lent whether in kind or cash over and above the principal amount.
Riba Buyu‟ occurs in trading and exchange transactions, in unequal exchange of Ribawi
commodities of same kind and same basis. Prophet Muhammad (S.A.W.) said:
Gold is to be paid for by gold, silver by silver, wheat
by wheat, barley by barley, dates by dates, and salt by
salt -like for like, equal for equal, payment being made

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 on the spot. If the species differ, sell as you wish
provided that payment is made on the spot'. (Muslim)
From the above Hadith, gold and silver represent money while wheat, barley,
dates and salts represent staple food. These items are known as Ribawi item. Exchange
between Ribawi materials of the same kind (and of the same basis) must be with equal
weight, measurement or number and payment delivery must be made at the same time.
√If payment and delivery are made at the same time but the weights,
measurements or numbers of the materials exchanged are not equal, then Ribal Fadl
occurs.
√If payment and delivery are not made at the same time but the weights,
measurements or numbers of the materials exchanged are equal, then Riba Al-Nasi’ah
occurs.
Evils of Usury (Riba):
Islam frowns at, forbids and condemns usury or interest in the strongest language
because of its attendant evils to the partners and the society in general. According to
Zeno, the wisdom behind the prohibition of Riba is that:
1. It sows the seed of enmity between individuals, and destroys the spirit of
mutual help and aid between them.
2. It leads to the formation of a leisure class, which does no work at all, yet
money piles up and concentrates in their hands with no effort on their part,
so that they become the economic equivalent of parasites, which grows,
and relishes at the expense of others.
3. Riba has been and remains a major instrument of colonialism and
imperialism (in fact of neo-colonialism), it is said that imperialism follows
in the wake of traders and priests. We have known the damage of usury in
some countries’ colonialism.
4. Riba is the appropriation of people’s wealth without compensation, which
is prohibited, by the Prophet (Muslim). ‘Urwa narrated that the Prophet
gave him a Dinar to buy a ram or a goat. He bought two goats with it, sold
one of them for a Dinar. So, he invoked a blessing on him in his business
dealings, and he was such that if he had bought the dust he would have
made a profit from it (Bukhari).

Prohibition of Bay‘u `l-Gharar:

The major concerns of Islam on Social Transactions are justice and fair play,
whereby, no seller or buyer, offerer or offeree will suffer unwarrantedly because of any
dealing with one another. In an unequivocal and stern manner the Glorious Qur’an
prohibits gambling (games of chance involving money) and insuring ones' wealth or
property (also considered a game of chance). The Hadith, in addition to prohibiting
gambling (games of chance), also prohibits Bay‘u `l-Gharar.
In the Islamic concept, Gharar is excessive danger, deception, uncertainty and
trading in risk. In the Hanbali school, Al-Gharar is seen as "that whose consequences are
unknown" or "that which is undeliverable, whether it exists or not." According to the
Hanafi Madh-hab in Islam, Gharar is "that whose consequences are hidden." In the view
of the Shafi‘Gharar is "that whose nature and consequences are hidden" or "that which
admits two possibilities, with the less desirable one being more likely." Ibn Hazm wrote,

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"Gharar is where the buyer does not know what he bought, or the seller does not know
what he sold."
The modern scholar of Islam, Professor Mustafa Al-Zarqa, is of the opinion that
Gharar is the sale of probable items whose existence or characteristics are not certain, due
to the hazardous nature that makes the trade similar to gambling. There are a number of
(Apostolic Traditions (Ahadith) that forbid trading in Gharar, often giving specific
examples of Gharar transactions (e.g., selling the birds in the sky or the fish in the water,
the catch of the diver, an unborn calf in its mother's womb etc.). Jurists have sought many
complete definitions of the term. They also came up with the concept of Yasir (minor
risk); a financial transaction with a minor risk (Yasir), which is deemed permissible
(Halal), while trading in non-minor risk (Bay‘u `l-Gharar) is deemed to be prohibited
(Haram).The Muslim jurists have not fully decided on the implications of Al-Gharar
because of the complication of having to decide what is and what not a minor risk is.
Derivatives instruments (such as stock options) have only become common of recent.
Some Islamic banks do provide brokerage services for stock trading.
Gharar (Uncertainty) makes a transaction un-Islamic as it will result in an unjust
or unfair outcome for the parties involved. It is where the quantity and the quality involve
in the transaction is not predetermined and known which may makes the contract void or
voidable. The prohibition of Gharar can be deduced from the following verse:
O ye who believe! Eat not up your property among
yourselves in vanities, but let there be amongst you
traffic and trade by mutual good-will, nor kill (or
destroy) yourselves, for verily Allah hath been to you
Most Merciful. (Q4: 29)
Prohibition of Gharar transaction is reaffirmed by the following Hadith:
Abu Hurairah (R.A) reported that Prophet Muhammad
(S.A.W) forbade a transaction determined by throwing
stones, and the type which involves some uncertainty.
(Muslim)
Gharar can be categorized as follows:
a. Minor (Yasir) Gharar: Minor Gharar does not render a sale
contract defective because it does not affect the principal components (Arkan or
essential elements) of the contract and necessary conditions of the essential
elements (e.g. requirements relating to asset, price, language of the contract etc.)
Major (Fahish) Gharar: In general terms, major Gharar is an uncertainty which is
so great that it becomes unacceptable; or it is so vague that there is no means of
quantifying it. Major Gharar causes a contract to be invalid.
Maysir (Gambling): The word Maysir means getting something too easily or getting a
profit without working for it. It means any gains derived on the basis of opportunity or
luck. It also can be defined as easy acquisition of wealth by chance, and also any business
activity where monetary gains are derived from mere chance and speculation. Islam
forbids all forms of business in which the monetary gain comes from mere chance or
speculation and not from work. Unlike Gharar which is tolerated to a certain degree,
Maysir is not accepted at all.

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 O Believers! Intoxicants and gambling -and divining
arrows are an abomination of Satan’s handiwork. Leave
it aside in order that you may prosper. (Q5: 90)

Essential Requirements (Elements) of Valid Contracts:

For a valid contract to take place in Islamic law, certain conditions are to be met.
From the foregoing definition of the contract, it appears that a valid contract bases itself
on six elements, namely the offeror and offeree; offer and acceptance; and the subject
matter and the consideration.
1. As for the parties to a contract, they must be legally competent to enter into a
contract. The competence to transact in Islamic law is measured largely by two aspects,
namely prudence and puberty as revealed in the Quran 5:4, "Prove orphans till they reach
the marriageable age; then if you find them of sound judgment, deliver over unto them
their fortune. In Islamic law, no person can validly conclude a legal transaction without
first having attained physical and intellectual maturity that being the equivalent of
majority to enjoy full capacity, a person, whether male or female should attain physical
puberty (bulugh) and enjoy sound judgment known also as prudence (rushd) in his or
her judgment. The Shafi'i school of law adds a third requisite for majority and that is
sound judgment in regard to religion. Puberty is attained for boys and girls with:
(a) The appearance of coarse hair around the sexual parts of the body although
this sign is not given any significance by the Hanafis.
(b) Voluntary or involuntary emission of the seminal fluid or with
(c) The attainment of a given age except for Malik himself (not his school), who
do not consider age as indicative of puberty.
(d) Other signs of puberty particular to girls are menstruation and pregnancy.
As mentioned above, for the majority of scholars, prudence (rushd) equates to
sound judgment in financial matter. As for the argument of the Shafi'is, this is weak
simply because an impious Muslim might well be of sound judgment with regard to
business matters. In brief, a person is deemed of age and enjoys full capacity. However,
between infancy and majority a minor will normally reach the age of discernment or age
of reason (sinn al-tamyiz) admittedly being six or seven. Hanafis and Malikis give value
to some transaction performed by a discerning minor; they authorize the discerning minor
to conclude contracts fully beneficial, such as acceptance of gifts of bequests without his
guardian's authorization. He is forbidden to conclude fully detrimental contracts such as
granting loans or guarantees, whereas contracts which could end up by being either
beneficial of detrimental, are subject to the guardian's ratification. Under Hanbali
teaching a minor, whether discerning or not, cannot enter any kind of financial
transactions but the contracts are valid with the approval of the guardian. Shafi'i has
disapproved the contracts of a minor out rightly. Apart from this general requirement of
the legal capacity to enter into any kind of contract, Islamic law also imposes certain
legal interdictions in the interest of third parties. The third party may confirm or annul
the disposition of a person who is interdicted from disposing of his property. Therefore,
the insolvent (al-muflis) is interdicted from disposing of his property by the judge in the
interest of his creditors. Also, a person ill with death sickness is interdicted in the
interests of person's heirs or creditors.

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 2. With reference to an expression of both offer and acceptance, Islamic law of
contract recognizes both express contracts as well as what has been described as contract
by conduct. It presupposes the making of an offer orally, by writing or by conduct. In
certain cases, acceptance may also be implied from a party silence. Pertaining to both
offer and acceptance, classical Islamic law seemed to insist on the notion of contracts
inter presenters in the sense that the contracting parties should hear other's declaration
which is, it is respectfully submitted, devoid of legal relevance. Contracts inter absentees
by means of representatives or modern communication systems such as the telephone,
telex, fax, e-mail, and letter are equally valid provided they are performed in one single
session of contract.
3. As for the subject matter of contract, both the item and consideration
(thaman/badal), Islamic law stresses on the following matters, i.e., lawfulness, existence,
deliverability and precise determination. Lawfulness requires that the object must be
lawful, that is something which is permissible to trade. It must be of legal value that is, its
subject matter (mahal) and the underlying cause (sabab) must be lawfull; and it must not
be proscribed by Islamic law, nor a nuisance to public order or morality. Also inherent in
the lawfulness of the object is the condition that the object must be legally owned (or
authorized) by the parties to a contract. The issues of existence presuppose that the object
of a contract must be in existence at the time of contract. Thus, it is illegal for example to
sell fetus. Delivery, on the other hand, indicates that the object must be capable of certain
delivery. The classical jurists therefore, prohibit the sale of a camel which has fled, a bird
in the air or a fish in water. Finally, the object of a contract must be determined precisely
as to its essence, its quantity and its value. As for the consideration of price, Islamic law
does not restrict it to a monetary price, but it may be in the form of another commodity.
The Islamic prohibition against uncertainty requires that the price must be in existence
and determined at the time of the contract and cannot be fixed at a later date with
reference to the market price, nor can it be left subject to determination by a third party.
Note: In contract of money-exchange (sarf), the rule of riba must be adhered to
render the contract valid. Payment may be spot or in the future. The capability of the
parties to contracts is of prime importance for the validity of the contract.

Doctrines of Majalis al-Aqd (meeting place for the formulation of contracts)

However, Islamic law is distinct from other legal systems that it insists on the
session of contract (majlis al-'aqd) in the sense that both the offer and acceptance are to
be jointly connected in one single session without any gap in time or place. Therefore, the
session occurs in any natural place where the parties meet to form their agreement. The
session therefore creates the essential unity of the time and place necessary for the dual
declarations of intention and consent.Based on the above prescription which is agreeable
to all schools of law, it may be said that certain interruptions during the session such as
stopping to pray, or discussing other subjects, changing positions or attitudes, or even
falling asleep are held to terminate the majlis and therefore the offer. Also under this
principle of law, the acceptance should be immediate. However, before the offeree gives
his acceptance, the offeror may withdraw his offer. Again, another provision of law
which is attached to Islamic law is the notion of khiyar al-majlis i.e. right to revoke the
concluded offer and acceptance, provided both the parties are still available in the session
of the contract, if they left the session, the right to do so ceases to exist.

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 As there are various interpretations surrounding the exact meaning of majlis or
session of contract, but appeal to customary practice of any society to decide on the
separation from the session of contract is more inclined to.

Classification of Contract:
Contract, from an Islamic legal perspective is conceptually divided into two main
categories, namely unilateral and bilateral contract. While the former is gratuitous in
character and does not require the consent of the recipient, the latter is more bound to
strict rulings and guideline since it requires the consent of both the parties to a contract.
Also what is normally 'tolerated' in unilateral contract, would not necessarily be the case
in bilateral contract. Therefore, the (strict) conditions required for both the offeree and
the subject matter of the bilateral contract would cease to apply in a unilateral contract.
Unilateral contract comprises of transactions in favor of the recipient such as gift (hadiah,
Hibah), off-set of the debt (ibra), will (wassiyyat) endowment (Waqf) and loan (qard).
The bilateral contract covers the remaining transactions in Islamic law which can be
further divided into different classifications according to the very purpose and reason
d’être of the deal and agreement. In this regard, we may perhaps, classify these contracts
to six classifications which are as follows:
1. Contracts of exchange ('uqud al-mu'awadat)
2. Contracts of security ('uqud al tawthiqat)
3. Contracts of partnership (shirkah)
4. Contracts of safe custody (wadi'ah)
5. Contracts pertaining to the utilization of usufruct ('uqud al manfa'ah) and
6. Contracts pertaining to do a work (e.g. wakalah and ju'alah)

This classification is not meant to be exhaustive because in the future many new
contracts with different features would possibly come to exist on the basis of the doctrine
of permissibility (ibahah), as previously discussed, that would render all commercial
transactions permissible in the absence of a clear prohibition. Nevertheless, the above
classification seems to be quite comprehensive to cover all existing contracts found in
Islamic fiqh literature. Mention should be made that each of these classifications consists
of different transactions but contribute to the same purpose a reason d’être of the
underlying contract. For example, contract of exchange, will primarily concern trading as
well as selling and buying activities inclusive of their subdivisions such as cash sale,
deferred payment sale, deferred delivery sale, sale on order, sale on debt , sale on
currency, auction sale and so on and so forth. Similarly other types of contracts also
include many sub-divisions relevant to respective classification. For example, contract of
security deal not only with surety ship (kafalah) but also with pledge (rahn) and transfer
of debt (hiwalah) because the very purpose of these sub contracts under contracts of
security was to protect the interest of the parties to a contract particularly the interest of
the party in whose favor the respective contracts are concluded. As far as contract
pertaining to the utilization of usufruct are concerned, it also cover a few sub-contract
such as ijarah (hire and lease) ariyah (loan of tangible asset), Waqf (endowment), qard
(loan of money), etc. The contract of partnership (shirkah) also includes different types of
partnership such as mudarabah (profit and loss sharing) musharakah (profit and loss
sharing), sharikah al-abdan (partnership by contributing effort and skill), sharikah al-

11
Wujuh (partnership based on credit and reliability), muzara'ah (partnership in farming),
musaqat (partnership in fruit trees), etc.

Reflection and Overview on the Classifications of Contracts:

Although contracts in Islamic law of transactions are classified into different
categories, it seems that the basic contract, in many cases and situations are the contract
of exchange and utilization of usufruct. The former presupposes the transfer of ownership
while the later the transfer of usufruct of a property from one party to another. This is
clear from the definition of both sale and hire in Islamic law Sale is defined as "the
exchange of one commodity for another, one of which is called the object and the other
the price", or "the transfer of ownership of property for another. Hire or ijarah is defined
as the transfer of the usufruct for a consideration. Both these two contracts constitute the
main activities of commercial activities because the remaining contracts are largely
dependent on these two contracts. Therefore, the law on sale as the contract par
excellence and, next to it, on hire, was greatly expanded in Islamic law literature. These
two contracts are the bases for the other contracts to take place. In other words, other
contracts are dependent on these two contracts to exist and to give effect. On the
contrary, these two contracts, relatively speaking, can be concluded between two parties
without any need for other (supporting) contracts. For instance, hiwalah, kafalah and rahn
cannot stand by itself in the sense that they are all dependent on the contract of exchange
be it sale or lease/hire.

In the case of hiwalah which means transferring a debt from one debtor to
another, it cannot take place unless the debt relationship has already established between
the transferee, the transferor and the principal creditor. The debt relationship, on the other
hand, may take place either out of deferred payment sale or out of direct loan (qard)
contract. Hence, it is obvious that hiwalah originates from the sale transaction (as well as
from loan transaction) kafalah, rahn, etc. This shows, inter alia, that contracts are inter-
related to form a complete system of Mu’amalah to ensure justice as well as to meet the
needs of people which vary from one condition to another. Therefore, it is relevant to
conclude that Islamic commercial law consists of many different types of contracts to suit
different needs and circumstances. In other words, theoretically, Islamic commercial law
would be able to satisfy the need of a person to buy a commodity on credit, or the need to
have the guarantor against the third party, or the need to have the fund for business
enterprise purposes, or the need to have in advance the capital to manufacture or produce
agriculture produce or perhaps the need to have a transferee to settle the debt owed by a
third party (transferor) and the like.

Contracts of Exchange (Mu'awadat):

The main contract of exchange in Islamic commercial law is the contract of sale.
Sale, generally speaking, involves an exchange of a commodity for another commodity
(barter trading) or of a commodity for money (sale) or of money for money (sarf).
Interestingly enough, riba which is prohibited by Islamic law, originates or comes to exist
from two types of exchange, namely unequal exchange of two Ribawi or usurious
commodities (riba al-fadl or riba al-buyu') or an exchange of money for money with
different quantities (riba al-fadl) or without simultaneous transfer and immediate delivery

12
(riba al-nasi'ah or riba al-duyun) or involving both possibilities which render the contract
of exchange of money for money null and void based on both riba al-fadl as well as riba
al-nasiah. The first impression that comes across to our mind is that both types of riba,
while quite similar to both contracts of barter trading and currency exchange (sarf), are
not similar in any way to an exchange of a commodity for money.
This, among other reasons, makes the trading distinct and free from any element
of interest. However, contracts of exchange dealing with barter trading and currency
exchange are susceptible to riba elements and for this reason, Islamic law has relatively
laid down more strict principles to ensure the legality of these contracts and most
importantly to free these two contracts from both riba al-fadl and riba al-nasiah
respectively. Trading activities i.e., contracts of exchange of a commodity for money
however, are relatively more exposed to the element of Gharar, literally hazard or risk. In
Islamic legal terminology, this includes the sale of an article of goods which is not
present at hand; or the sale of an article of goods, the consequence or outcome of which is
not yet known; or a sale involving risk or hazard where one does not know whether the
commodity will later come to be or otherwise. Gharar may render the contracts of trading
void or voidable. Several reasons were given for the prohibition of bay' al-Gharar. Some
of them were related to fraud since such a sale amounts to obtaining the property of
others by selling unavailable goods and also the contract may lead to disputes and
disagreements between the parties in the contract.
While in Islamic law, an agreement must bring an immediate and certain
obligation. Therefore, it is not surprising to find that Islamic law has prohibited many
pre-Islamic periods’ contracts of exchange because they were either uncertain or not
known to one or both parties to the contract which may eventually lead to dispute and
injustice.
Such contracts are like bay' al-mulamasah, bay' al-hasat, bay' al-munabadah, bay'
al muwafah, bay'muzabanah, bay al-mukhadarah, bay' al-muhaqalah, al-haml, bay'atan fi
bay'ah or safqatan fi safqah, bay' al-kali bi al-kali, bay' wa salaf, etc. All of the above
examples reflect clearly the hazardous elements that each of them contains and therefore,
render the contract either void or voidable. From this brief introduction, we may infer that
as far as barter trading and currency exchange are concerned, the principles of Islamic
law which govern those transactions are mire concerned with the questions of equality
between two items because these two types of exchange are vulnerable to riba element.
On the contrary, the possibility of riba interference dies bit arise in the case of trading
since trading activities are basically free from riba but are always exposed to exploitation
and fraud. The question of equal amount and simultaneous transfer of the property being
exchanged is irrelevant in trading activities simply because these two factors do not
inflict any legal effect on the sale contract. This, the golden principle in trading is that the
contract should not contain any element of either Gharar or Jahalah (lack of knowledge)
because otherwise, the contract is deemed either void or voidable according to the degree
of Gharar or jahalah respectively. Also, for this reason, it is respectfully submitted, that
the issues of the first possession of the property before the second sale qabd, the capacity
to deliver the property, etc., are always questioned by, and debated amongst, the jurist
only ill relation to trading (alone) because these two issues and the like are concerned
with Gharar and jahalah and not with riba.

13
 On the contrary, the issues of Gharar and jahalah, have no effect whatsoever in
certain contracts in the Islamic law of transactions because the nature of this type of
contract does not require and demand a precise specification and identification of the
property being transferred from one party to another. This is absolutely applicable to the
contracts of gratuity ('uqud al-tabarru'at) such as hadiah, Hibah, wassiyyat, etc. Why
Gharar affects trading and not gratuity contracts is a question worth of reflection. The
immediate answer would be that trading differs from gratuity contracts because the
former is a bilateral contract which requires an exact knowledge of the property to fulfill
the requirement of legal consent while the latter does not require such knowledge since
the consent of the recipient is not necessary. Again, the classification of contracts as
given earlier would help the jurists to ascertain the legal position of the respective
contracts in a given situation. Interestingly enough, the difference between the two types
of contract such as between the contract of exchange and gratuity would induce different
legal effects e.g. khiyar or the right to revoke the contract. While khiyar (option) is
undoubtedly part and parcel of the sale transaction, it finds no place in gratuity contract.
Should we continue to examine the similarity and dissimilarity between one type of
contract with another in issues pertaining to legal position, rights, obligations, liability,
risk, merits, modus operandi, etc., we would have certainly produced so many pages on
the topic which is not the intention of the present paper.
To be more specific, we should confine our present discussion to the contracts of
exchange ('qud al-mu'awadat) which will include a variety of contracts which differ from
one another on terms of specific legal requirements, rights, obligations and liabilities but
common to each other in terms of the result of the contract, namely the transfer of
ownership from one party to another. Therefore, the element common to all contracts
under contracts of exchange is the transfer of the ownership and possession from one
party to another. Should this be absent and lacking in a contract, the contract is no longer
a contract of exchange. The relevant legal maxim which governs this situation reads as,
"In contracts, attention is given to the objects and meaning, and not to the words and
forms". The maxim clearly states that it is the object and aim of a transaction which will
be determinative to the legal position of that transaction. The maxim cited is related to
another maxim describing the function of intention in all aspects of Islamic law which
reads as follows, "matters are determined according to intention.
The maxim governing the legal position of a contract is basically a sale of
commodity on the condition that the seller is allowed to get the commodity back upon
paying its price. Therefore, in bay' al-wafa', the seller by returning the price, can demand
back the thing sold, and the buyer, by returning the thing sold, can ask for the price to be
reimbursed. Also, neither the seller nor the purchaser can sell to another a thing sold by
bay' al-wafa'. This transaction is perceived as a pledge contract, not because of the words
and forms used in the offer and acceptance but rather due to the intention and meaning.
The bay' al-wafa' is a transaction peculiar only to the Hanafi School of law. In addition,
bay' al-wafa' is so unique because it is termed as a sale while in actual fact it is rather a
pledge (rahn) contract. That is to say, the relationship between the two parties to that
contract could not be between the buyer and seller since the transfer of property and
corresponding consideration is not final and ultimate. Rather, the contractual relationship
would be between mortgagor (seller) and mortgagee (buyer) neither the seller nor the
purchaser can sell to another a thing sold by bay' al-wafa'.

14
 Contracts of exchange in the classical Islamic law of transactions, as mentioned
earlier, include a number of contracts such as bay' al-musawamah, bay' al-murabahah,
bay al-tawliyyah, bay' al-wadi'ah, al-bay' al-mua'ajjal, bay' al-salam, bay' al-istis'na', bay'
al-muqayadah, bay' al-sarf, bay' al-muzayadah, etc. Apart from these types of sale, there
are also other types of sale which are disputable among the jurists such as bay al-'arabiin,
bay'al-'ayyinah and bay' al-dayn. In dealing with these different categories of sale
contracts, the writer is more inclined to classify them into appropriate sections for the
sake of clarification and distinction. The classification is based on certain factors which
distinguish one contract of sale from another. Therefore, with special reference to the
thing sold, sales are divided into four categories as follows:
i. sale of property to another person for a price and this is the most common
category of sale and is consequently specifically called sale
ii. sale by exchange of money for money which is known as sarf transaction which
consists of selling cash for cash
iii. sale by barter i.e., exchange of object for object whereby neither of which is
money payment; each of the two commodities constitute both the price and the
object; and
iv. sale by immediate payment against future delivery such as bay' al-salam (forward
sale) and bay' al-istisna' (sale on order). The item of the sale is yet to exist in the
future date.

From another perspective i.e., the nature of profit agreed upon in the contract, sales
are also divided into four categories as follows:
1. Musawamah sale which is basically a sale by mutual consent completed and
concluded through negotiations between the seller and buyer in which no
reference be made to the original cost price. It is also a 'profit sale' but the actual
cost price and the amount/percentage of the profit is unknown to the buyer
because the seller is not bound, in musawamah sale, to disclose the cost price.
2. Murabahah sale which is the sate of a commodity for the price at which the seller
has purchased it, with the addition of stated profit known to both the seller and
buyer. In short, it is a cost-plus-profit sale in which the profit is expressly
disclosed by the seller. From this, we can infer that murabahah sale in its original
Islamic connotation is simply a sale. The only feature distinguishing it from other
kinds of sale is that the seller ill murabahah expressly tells the purchaser how
much cost he has incurred and how much profit he is going to charge in addition
to the cost. Therefore, if a person sells a commodity for a lump sum price or
instalment basis without reference to the cost, this is not murabahah, even though
he is earning some profit on his cost because the sale is not based on a 'cost-plus'
concept. In this case, the sale is called musawamah. Due to speciality of
murabahah, it has been considered by the jurist as a sale based on trust (amanah).
3. Tawliyyah sale which is a sale at cost price without any profit for the seller. It is
similar to murabahah with reference to the basis of the sales, namely amanah.
4. Wadi'ah sale which takes place when the seller agrees to sell a commodity at a
lower price than that of the cost price. Since the seller is selling the commodity at
a lower price, it is also a trust sale.

15
 According to the manner of payment, there are three possibilities of payment
pertaining to a sale contract as follows:
ii. Cash sale in which the purchaser is under obligation to settle the purchase price
agreed upon when concluding a contract if the buyer could not settle the payment
for one reason or another, the seller has a right of retaining the thing sold until he
has received the payment of the price.
iii. Deferred payment sale which is payable on installment basis. This is permissible
provided the period thereof is definitely ascertained and fixed manner of payment
is applicable to all types of sale except in the case of bay' al-salam.
iv. Lump sum payment payable in the future. This manner of payment is also lawful
provided the date of the payment is fixed in advance. Also, this manner of
payment would be applicable to all types of sale with the exception of bay' al-
salam.
v. Earnest money (bay' al-'arabun) in which advance payment of sum of money is
made to the seller which constitutes part of the purchase price should the buyer
decides to buy the good. Otherwise, the advance payment is forfeited to the seller.

According to the subject matter of the sale, it can be divided into three categories
namely, sale of commodity (movable and immovable), currency (sari) and debt (dayn).
As for the very purpose of sale contract, it may classified into two categories that are
exclusively of exchange purposes and the other for exchange as well as for financing
purposes. Apart from the previous perspectives on which sales are usually classified,
sales are also divided into a few categories according to the nature of the price whether is
has been fixed from the very beginning or otherwise. This is however, the writer's
personal reflection on certain contracts of sale available in the Islamic law of
transactions. These categories are as follows:
i. The price is mentioned by the offeror and accepted by the offeree. This is the
practice in normal sale transaction whether it involves musawamah or murabahah
or salam or istisna' and other types of sale with the exception of tawliyyah sale
since the price offered in the latter must not go beyond the original cost price.
ii. The price is mentioned by the buyer and later accepted by the seller, seller, in this
context, is not bound by any 'offer' of the buyer but, on the contrary is bound to
honor the highest price offered by the respective buyer or 'bidder'. This is called
as bay' al-muzayadah or bay' man yazid or sale based on auctioning. In this
transaction, the price will be fixed only by the highest offer made by the bidders.
iii. The price in some sale transactions, is divided into two stages; the second
payment is pending on the ultimate decision of the buyer to proceed with the
contract or otherwise. This takes place in bay' al-'arabun (earnest money) in which
the buyer agrees to purchase a commodity and pays to the seller an amount of
money in advance. If he decides to buy the commodity, the amount paid will be
deducted from the purchase price, but if he declines or fails to buy the
commodity, the advance payment is forfeited to the seller.

The fundamental basis of sale contract consists of one piece of property being
exchanged for another. Offer and acceptance are also referred to as the fundamental basis
of sale, since they imply exchange. As for the object, it must be in existence, deliverable

16
and known to the purchaser. These conditions are applicable to many types of sales
except in few contracts such as bay' al-salam and istisna'.

Specific contracts and dispositions: Mudarabah:

Mudarabah is a form of partnership where one of the contracting parties, called
the sahib al-mal or the rabb al-mal (the financier), provides a specified amount of capital
and acts like a sleeping or dormant partner, while the other party, called the mudarib
(entrepreneur), provides the entrepreneurship and management for carrying on any
venture, trade, industry or service with the objective of earning profits. The mudarib is in
the nature of a trustee as well as an agent of the business. As a trustee he is required to
act with prudence and in good faith and is responsible for losses incurred due to his
willful negligence. As an agent he is expected to employ and manage the capital in such
a manner as to generate optimum profits for the Mudarabah business without violating
the values of Islam.
The Mudarabah agreement could also be consummated between several
financiers and entrepreneurs. Mudarabah is also synonymously termed qirad in which
case the financier is called muqarid. In general, the Hanafiyyah, Hanbaliyyah and
Zadiyyah schools of Muslim jurisprudence have used the term Mudarabah while the
Malikiyyah ans Shafi’iyyah have preferred the term qirad. The Mudarabah agreement
could be formal or informa, and written or oral. However, in view of the Qur’anic
emphasis on the writing and formalizing of loan agreements (al-Qur’an, 2: 282-3), it
would be preferable for all Mudarabah agreements to be writing, with proper witnesses,
to avoid any misunderstanding.
Mudarabah contracts could also be unrestricted or restricted. In the unrestricted
case, the Mudarabah agreement does not specify the period, the place of business, the
specific line of trade, industry or service, and the suppliers or customers to be dealt with.
A restriction in terms of any one of these renders the Mudarabah into a restricted one. In
the case of restricted Mudarabah, the Mudarib must respect the restrictions imposed by
the Sahib al-mal. If the Mudaribacts contrary to the restrictions, he is alone responsible
for the consequences. In the case of Mudarabah restricted by time, the Mudarabah is
dissolved with the expiry of the specified time period.
In the case of unrestricted Mudarabah, the Mudarib has an open mandate and is
authorized to do everything necessitated by the Mudarabah in the ordinary course of
business. If he is guilty of willful negligence, fraud or misrepresentation, he is himself
responsible for the consequences, and the resulting loss, if any, cannot be charged to the
Mudarabah account. All normal expenses related to the Mudarabah business, but not the
personal expenses of the Mudarib, can be charged to the Mudarabah account. The
Mudarib is not entitled to a fixed remuneration or to an absolute amount of profit
specified in advance. His only entitlement beyond the normal expenses of business is to
a proportionate share in the profit as a reward for his management services. The net profit
is to be divided between the Sahib al-mal and the Mudarib in accordance with a just
proportion agreed in advance and explicitly specified in the Mudarabah agreement. There
cannot be a distribution of profits until the losses have been written off and the equity of
the Sahib al-mal has been fully restored. Any distribution of profits before the
conclusion of the Mudarabah agreement will be considered as an advance.

17
 In the case of a continuing Mudarabah, it may be permissible to specify a
mutually agreed accounting period for the distribution of profits, treating each period
independently. However, it seems that even in such an agreement, the net loss in any
given accounting period would need to be written off by charges against profits in future
periods unless the Mudarabah agreement has come to a final conclusion. Hence in the
case of a continuing Mudarabah, it may be advisable to build reserves from profits to
offset losses.
All losses incurred in the ordinary course of business must be charged against
profits before they can be charged against the equity of the Sahib al-mal. The net loss
must however be borne by the Sahib al-mal and any stipulation that it will also be shared
by the Mudarib would be void and unenforceable. The general principle is that ht Sahbi
al-mal risks only his capital while the Mudarib risks only his time and effort. This is
probably the reason why Mudarabah is sometimes referred to as ‘partnership in profit’. If
it has been agreed that the entire profit will be taken by the Mudarib, then the Sahib al-
mal would be considered a lender and the Mudarib would be required to bear all losses
and be responsible for returning the principal (which is, in this case, qard hasan) to the
lender (sahib al-mal) in accordance with the agreement. If it has been agreed that the
entire profit will be entitled to the customary remuneration (ajr al-mithl) for his services
and decides to forego the remuneration, the transaction becomes bida’ah. This has often
been the case in history, particularly when the capital of widows, orphans and charitable
institutions was involved or when services were rendered by businessmen to each other
by way of mutual cooperation.
The liability of the sahib al-mal in a Mudarabah contract is limited to the extent
of his contribution to the capital and no more. This is an important point because it would
not be appropriate for the Sahib al-mal to be a sleeping partner if his liability is unlimited.
The mudarib is not allowed to commit the Mudarabah business for any sum greater than
the capital contributed by the Sahib al-mal. And if he does so he is on his own and
eligible for loses. Goods purchased on credit in the course of normal business operations
within the framework of the general consent of the Sahib al-mal in the Mudarabah
agreement would be on the responsibility of both the Sahib al-mal and the mudarib in
accordance with the principles of shirkah al-wujuh (discussed under shirkah). In case the
mudarib also contributes a specified amount to the capital of the Mudarabah, he takes the
entire profit related to his portion of the total capital, the balance of the profit being
divided as agreed. The loss, if any, would be divided among them in portion to their
share in the total capital, for losses, according to the fuqaha’ are an erosion in equity and
must be charged to the capital. The Mudarabah would become dissolved with the
completion of the venture for which it was undertaken, or the expiry of the specified time
period, or the death of either the sahib al-mal or the mudarib, or the serving of notice by
either of the two partners of his intention on dissolve the Mudarabah. The mudarib is
required to work with honesty and sincerity and to exercise the maximum possible care
and precaution in the exercise of his functions.
In the words of al-Jaziri, the mudarib should discharge his duties like “A Muslim
who does not commit a breach of trust, does not lie and does not act insincerely; such is
the man with whom the sahib al-mal will be at ease and in whom he will have confidence
for the safety of his investments…. The sahib al-mal should not give his funds to

18
someone who is unwary, spendthrift or untrustworthy, because the care and safety of
wealth are imperatives and its waste and dissipation are prohibited.

Shirkah:
Shirkah (or sharikah) refers to partnership between two or more persons. 5 It may
be of two kinds: shirkah al-milk (non-contractual) and shirkah al-‘uqud (contractual).
Shirkah al-milk (non-contractual partnership) implies co-ownership and comes into
existence when two or more persons happen to get joint-ownership of some asset without
having entered into a formal partnership agreement; for example, two persons receiving
an inheritance or gift of land or property which may or may not be divisible. The
partners have to share the gift, or inherited property or its income, in accordance with
their share in it until they decide to divide it (if it is divisible, e.g., land) or sell it (if it is
indivisible, e.g., a house or a ship). If the property is divisible and the partners still
decide to stick together, the shirkah al-milk is termed ikhtiyariyyah (voluntary).
However, if it is indivisible and they are constrained to stay together, the shirkah al-milk
is characterized as jabriyyah (involuntary). Shirkah al-milk, the essence of which is
common ownership of property, cannot be considered a partnership in a strict sense
because it has not come into existence by mutual agreement to share profits and risks.
Shirkah al-‘uqud (contractual partnership) can, however, be considered a proper
partnership because the parties concerned have willingly entered into a contractual
agreement for joint investment and sharing of profits and risks. The agreement need not
necessarily be formal and written. It could also be informal and oral. However, as
indicated under Mudarabah, it would be preferable if the shirkah al-‘uqud is also
formalized by a written agreement with proper witnesses, specifically stating the agreed
terms and conditions in conformity with the Qur’anic teachings about loans and
important business transactions (2:282-3). Just as in Mudarabah, the profits can be
shared in any equitably agreed proportion. Losses must, however, be shared in
proportion to capital contributions.
Shirkha al-‘uqud has been divided in the fiqh books into four kinds: al-
Mufawadah (full authority and obligation); al-‘Inan (restricted authority and obligation);
al-Abdan (labour, skill and management); and al-Wujuh (goodwill, credit-worthiness and
contacts).
In the case of mufawadah the partners are adults, equal in their capital
contribution, their ability to undertake responsibility and their share of profits and losses,
have full authority to act on behalf of the others and are jointly and severally responsible
for the liabilities of their partnership business, provided that such liabilities have been
incurred in the ordinary course of business. Thus each partner can act as an agent (wakil)
for the partnership business and stand as surety or guarantor (kafil) for the other partners.
‘Inan on the other hand implies that all partners need not be adults or have an
equal share in the capital. They are not equally responsible for the management of the
business. Accordingly their share in the partnership contract. Their share in losses would
of course be in accordance with their capital contributions. Thus in shirkah al-‘inan the
partners act as agents but not as sureties for their colleagues. Hence their liability towards
third parties is several but not joint. Shirkah al-abdan is where the partners contribute
their skills and effort to the management of the business without contributing to the
capital.

19
 In shirkah al-wujuh the partners use their goodwill, their credit-worthiness and
their contacts for promoting their business without contributing to the capital. 10 Both
these forms of partnership, where the partners do not contribute any capital, would
remain confined essentially to small-scale businesses only. These are of course models.
In practice, however, the partners may contribute not only finance but also labou,
management and skills, and credit and goodwill, although not necessarily equally. The
‘inan partnership, which implies unequal shares and is recognized by all school, may tend
to be the most popular.
In this case, the profits would be divided in accordance with a contractually
agreed proportion, since the Shari’ah admits an entitlement to profit arising from a
partner’s contribution to any one of these three business assets. However, the Shari’ah
makes it absolutely imperative that losses be shared in proportion to the contribution
made to capital. This is because losses, as already indicated, constitute an erosion in
equity according to the ijma’ of the jurists and must be charged to the capital. If a loss
has been incurred in one period, it must be offset against profits in the subsequent periods
until the entire loss has been written off and the capital sum has been restored to its
original level. This may be done in one stroke or in installments depending upon
circumstances and the understanding of the partners. However, until the total loss has
been written off, any distribution of ‘profits’ will be considered as an advance to the
partners. Accordingly, it would be desirable to build reserves from profits to offset
automatically any losses that may be incurred in future.
Just as shirkah or partnership may not fall into any one of the specific models
indicated above and may be a combination of all three forms, mudarabah may also not
fall into the classical category. The real world situation may be a combination of
mudarabah and shirkah where all partners contribute to the capital but not to the
entrepreneurship and management. In this case profits need not to be shared in
accordance with capital contributions. They may be shared in any proportion agreed to
by the partners, depending on their contribution to the success and profitability of the
business. The only requirement of the shari’ah would be justice, which would imply that
the proportional shares in profit must reflect the contribution made to the business by
their capital, skill, time, management ability, goodwill and contacts. Anything otherwise
would not only shatter one of the most important pillars of the Islamic value system, but
also lead to dissatisfaction and conflict among the partners and destabilize the
partnership. The losses must, however, be shared in proportion to capital contribution
and the stipulation of any other proportion would be ultra vires and unenforceable.
It is important to indicate here that there is no specific direct discussion in the fiqh
literature on the nature of the partners’ liability, limited or unlimited, with respect to third
parties. This is however, understandable because the nature of liability gains prominence
under interest-based loan financing which makes it possible to raise a large superstructure
on a small equity base. In such a situation it is important to know the extent of the
equity-holder’s liability. Limited liability helps confine the degree of the equity-holder’s
risk to the extent of his share in total equity. However, in an Islamic economy, since all
financial participation in business would be essentially in the form of equity, the only
exceptions being suppliers’ credit and qurud hasanah, the liability of the partners would
in reality be limited to their capital contributions. Prudence would induce the ‘suppliers’

20
to keep an eye on total equity, movement of sales and cash flows of the business
concerned, while qurud hasanah, as already pointed out, would tend to be limited.
All other participants in the business (whether by way of loan or equity) would be
treated as equity holders and would share in the risks of business. Since interest-bearing
loans are not allowed, the total obligations of the business could not be out-of-step with
the total assets, and any erosion in their value may not exceed the total assets, and any
erosion in their value may not exceed the total equity. Hence, in the ultimate analysis
liability would essentially be limited to the extent of the total capital (including ploughed-
back profits) invested in the partnership business. However, it may be desirable to make
this point clear in the legal reform being undertaken in Muslim countries in conformity
with their Islamisation programme.
Sharikatul-Amwal (Company Transaction):
Sharikatu `l-Amwal is a business venture or contractual agreement by two or
more parties to form a company in partnership with one another. They jointly contribute
the capital with the intention of investing in a company, participation in its running,
sharing its profits or loss, on percentage, as agreed upon at the time of forming the
contract.
This kind of business venture is called Sharikatu `l-Amwal (partnership or
company contract) because it involves contribution of a specific capital, property or
money, in cash or in kind (mal). The item contributed must have a recognized value in
the economy and in the Islamic law (Malun Muqawwam). Those who engage in small-
scale businesses, companies and contemporary finance houses usually adopt it as a
method of investment. This kind of business venture has a legal backing in Islamic Law.
The Muslim Jurists of all schools are unanimous that this partnership or company
venture (Sharikatu `l-Amwal) is Islamic. Partners in business contracts are allowed to
contribute their respective shares in currency made of gold and silver. They can also
share their profits in cash currency made of gold or silver, as agreed upon; and as long as
it is acceptable in the local or international market. Moreover, the partners can contribute
the same or different kinds of currency i.e. dollar, pound sterling, euro, Dinar or Naira.
This can be done on the conditions that they are mutually agreed among themselves and
that such currency would not impose unnecessary hardship on a partner or a party.
Maliki and Hanbali schools permit similar properties or chattels (mithliyyah), i.e.
agricultural crops or dissimilar chattels (qimiyyah), i.e. animals, as capitals. They also
allow the contribution of money or money worth chattels. This should be with the
specification that at the time of making the contract the properties should constitute the
share of the contributing partner. This provision is necessary because the sharing formula
of profits or responsibility for the loss should be rated according to the contributions of
the partners to the capital. In this kind of venture, the properties jointly owned and
contributed by partners initially constitute their joint venture. All the Muslim Jurists are
of the opinion that non-permissible, unauthenticated, doubtful or yet to be valued capital
cannot be offered in contractual obligations. The partners should strictly limit their
operations and dispositions to the agreement accented to, in terms and measures,
according to the value of the capital invested. Each partner is a principal in his own share
of capital.

21
Sharikatu `l-Abdan:
Can be defined as occupational/professionals’ business venture contract. It is the
partnership entered into by two or more professionals. The contracting partners could be
from the same or different professions. Each of them contributes his skills expertise and
experience in the joint venture with agreement that they shall share the profits or loss
among themselves. Architects, surveyors, construction engineers, carpenters, electricians,
painters, etc can enter upon such a joint venture. Teachers belonging to different
professions to establish a private school could reach it. The schools of Hanafi and
Hanbali approved professionals’ venture (Sharikatu `l-Abdan), whether the partners come
from the same profession or not.
The significance of professionals’ venture cannot be underestimated. It is an easy
way of procuring capital, personnel, expertise and labour for a joint venture. It affords the
underprivileged artisans to invest their services to procure profits like the capital
partnership. This kind of business operation boosts business transactions and greatly
reduces unemployment in the society. It manifests glaringly, the significance, flexibility,
elasticity, comprehensiveness and adaptability of Shari‘ah positively to all aspects of
human endeavor. It encourages setting up of vocational companies and centers for the
purposes of generating large-scale employment, development of human capital, sharing
profits and reducing economic hardships of the society.

There is the need for Muslim organizations, Islamic Trusts and Foundations, as
well as Islamic banks to set up vocational centers where Sharikatu `l-Abdan mode of
investment will be practiced. This will provide healthy-opportunity for the teeming
skilled but unemployed population to render diverse services to industrial, contracting
and constructing firms. This Islamic social contract method will engender massive
production of the required goods accelerated sufficiency of various kinds of goods and
materials in the society. Eventually, poverty, crime-wave, immoral practices, indolence
and insecurity to life and property would be reduced to the barest minimum.

Sharikatu Al-Wujuh (Credibility Contract):

Credibility venture in the Shari‘ah is termed Sharikatu Al-Wujuh. In this kind of
business partnership, a partner provides the entire capital, in cash or in kind, to form
partnership in trade (Tijarah). The other partner has no capital to contribute. The owner of
the capital enters into trade partnership with him because of his credibility, track record,
prestige and confidence he reposes in him. The capital owner employs him because of his
skill, expertise, honesty and experience in order to carry out certain services in trading
business on a specific solid agreement. The capital, in terms of money, kind or material is
supplied by the capitalist to the other party who acts as the agent to the creditor to sell or
deliver certain goods on credit.
After selling or delivering the goods to the market, the owner of the capital or
goods will receive his capital. In addition, he will receive the share of the profits accruing
from the trading, and the agent will receive his own share based on the sharing formula
agreed upon when entering into the contract. It should be recalled that in the operation of
the Sharikatu `l-Amwal the partners in business jointly supply the capital and the entire
partners share the profit or loss on ratio basis. Contrarily, in the Sharikatu `l-Wujuh, the
capital owner provides all the capital and suffers all the loss that might be incurred. While

22
the creditor (other party) uses the capital or goods for sale. Understandably, the agent has
no capital to contribute so; he cannot share from the capital. Based on his services, he can
only share from the profit and not from the loss. Islam recognizes this business
partnership whereby two parties can enter into business venture a long as both parties
abide by the injunctions of the Shari‘ah and their contractual agreements. Giant and
small-scale companies, factories and industries are in the practice of assigning their
products to distributors and agents for disposal on agreed bases.

Summary:
1. Sharikatu Al-Amwal is a business venture between two or more parties who
contribute capitals for investment in a particular business with an agreement
on the roles and rights of every contracting party. This is known as Company
social Contract
2. Sharikatu Al-Abdan is a business venture by the parties in the same or
different professions with the agreement on their respective roles, sharing of
profits or loss on a stated ratio. This kind of business relationship is referred to
as Occupational/Professionals’ Social Contract
3. Sharikatu `l- Amwal is the social contracts between the provider of the entire
capital and the competent worker or agent. Both share profit, but only the
capital provider incurs loss that affects the capital.

Sharikatu Al-Munarabah (Joint Partnership Business):

Technically, Sharikatul-Munarabah is business contract between two parties. One
of them is the owner of the entire capital. He provides, lends or gives out his capital to the
other partner who is the worker or agent (‘Amil or Munarib) who contributes his skill,
labour and time to the investment. The contract agreement is made between the capital
provider and labour provider on the agreement that the capital will be for the owner,
while the owner of the capital and the worker will share the net profit and loss pro rata.
This is often used in real estate or property, investment projects, letters of credit, and the
purchase. It is worthy of note that trading normally involves travelling or movement from
one place to another. The Shari‘ah permits this kind of partnership. The Iraqi Jurists call
it Sharikatu `l-Munarabah, while the Madinah Jurists call it Sharikatu `l-Qiran or
Sharikatu Al- Muqaranah.
The term “Munarabah” is an Arabic word, which is also found in the Glorious
Qur’an, Chapter 4, verse 101. The term “Qiran” is an Arabic word, which connotes a
transaction whereby an owner of capital gives out money to another to invest on the
agreement that they will share the profit on a particular ratio. If there is a loss, it will only
be incurred by the provider of the capital. Hence, the people of Hijaz call it Qiran or
Muqaran which signifies cutting off the nose. In essence, it is the capital provider who
loses his wealth or his capital to trading business, while the agent losses some of the
profit from the investment to the creditor. This concept is different from fixed-income
investing (i.e. issuance of loans). If the Bank provides capital, the same conditions apply.
This financial hazard justifies the bank's claim to part of the income. Each partner may or
may not partake in carrying out the business. A working partner gets a greater profit share
compared to a non-working fellow worker.

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Differences between Sharikatu Al-Wujuh and Sharikatu Al-Mudarabah:
The difference between Musharakah and Madarabah is that, in Musharakah, every
partner contributes some capital, whereas in Madarabah, one partner, e.g. a bank or a
financial institution provides all the capital, while the entrepreneur, who is the other
partner, provides no capital but service. It is important to note that Musharakah and
Madarabah have differences and common characteristics. There are certain differences
between Sharikatu Al-Wujuh (Islamic Credibility Contract) and Sharikatul-Mudarabah
(Joint Contract. The former does not involve investment like the latter. The similarities
are that one party provides the entire capital and the partner provides labour. Both of
them share the profits accruing from the investment. Only the provider suffers the loss
incurred as far as the capital is concerned. Both partners will lose profit sharing, if there
is no gain or profit. The profit sharing will be based on the particular ratio agreed upon
during the contractual agreement. Joint social contract affords a golden opportunity to the
wealthy, but not talented, not capable, not-skilled and having no much time, or not able to
move about with goods, to come over to the qualified one to enter into profitable venture
with him.
Salam (Payment in Advance): Definition and Legality
Salam is terminologically defined as selling something whose price is paid in
advance and it is to be delivered later. Almighty Allah says:
(O you who believe! When you contract a debt for a
fixed period, write it down...) (Qur’an: 2:282)

It has been narrated that Ibn Abbas, may Allah be pleased with him, said:
I testify that debt, which is guaranteed for a fixed
period, has been made lawful and permitted by Allah in
His Book.

Then Ibn Abbas recited the above-quoted verse. It has moreover been narrated
also on the authority of Ibn Abbas, who said:
The Prophet (PBUH) came to Medina and (i.e., when) the
people were used to paying in advance the price of dates to
be delivered within two or three years. He said (to them),
‘Whoever pays in advance the price of something to be
delivered later should pay it for a specified measure at
specified weight for a specified period

Applying Salam to Something Not Possessed:

It is not stipulated that the person who is to deliver the thing which has been
bought through salam has this thing in his possession at the time of the deal. It has been
narrated that Muhammad Ibn Abul-Mujalid said:
Abdullah Ibn Shadad and Abu Burdah sent me to ‘Abdullah
whether the people in the lifetime of the Prophet (PBUH)
used to pay in advance for wheat (to be delivered later).
‘Aduilah replied, ‘we used to pay in advance to the peasants
of Ash-Sham for wheat, barley, and olive oil of a known

24
 specified period.’ I asked (him), ‘Was the price paid (in
advance) to those who had the things to be delivered later?”
‘Abdullah replied, ‘We were not used to asking them about
that’. Then they sent to ‘Abdur-Rahman Ibn Abza and I
asked him (about the same thing). He replied, ‘The
Companions of the Prophet (PBUH) used to practice salam
in the lifetime of the Prophet (PBUH); and we were not used
to asking them whether they had standing crops or not

Money to trade in – is not liable for the money unless he transgresses or violates
the conditions agreed upon. Ibnul-Mundhir said:
They (scholars) have agreed that if the owner of the money
forbids the labourer to sell on credit, i.e, sale based on delay
of payment, and the labourer does otherwise, he is to be held
liable for the money.

To his effect it has been narrated that Hakim Ibn Hizam, a Companion of the
Prophet (PBUH), used to set certain conditions when giving his money to a person in
mudarabah and tell him that if he violated those conditions he would be liable for the
money.

Ijarah (A Contract for Hire or Lease): Definition and Legality:

Iharah can be defined as a contract granting use or occupation of an item of
property during a specified period in exchange for a specified rent. This also applies to
hiring someone for doing a certain job for specified wages. Ijarah is mentioned in the
Qur’an and the Sunnah, Almighty Allah says,
(… Then if they give suck to the children for you, give
them their due payment…) (Qur’an: 65:6)
(and said one of them (the two women): ‘O my father!
Hire him! Verily, the best of men for you to hire is the
strong, the trustworthy.) (Qur’an 28:26).

(… Then they found therein a wall about to collapse and

the (Khidr) set it up straight. (Musa (Moses) said, ‘If
you had wished, surely, you could have taken wages for
it!) (Qur’an: 18:77)

It has also been narrated that A’ishah, may Allah be pleased with her, said:
The Messenger of Allah (PUBH) nad Abu Bakr hired a
mand from the tribe of Banud-Dil as an expert guide
who was a pagan (follower of the religion of the pagans
of Quraysh). The Prophet (PBUH) and Abu Bakr gave
him their two riding camels and took a promise from
him to bring their riding camels in the morning of the
third day to the Cave of Thawr.

25
In What Is Ijarah Permissible?
Ijarah can be applied to everything which can be used with the remaining of its
ayn (object, substance), i.e., the thing used should not disappear as a result of ijarah. To
illustrate this, a man can use an apartment for a specified time and this is included in
ijarah but he cannot make use of a small quantity of water in a utensil by drinking them
and call this ijarah. Thus, everything which can be used with the remaining of its ‘ayn can
be hired or leased as long as this is not forbidden due to some shar’i reason. Also, the
rented object must be known, i.e., defined, and so must be the remuneration which is to
be paid, the period of rent, and the kind of work or use for which this thing is rented or
hired. Almighty Allah says in t he story of Prophet Musa with father of the two women,
(He said (To Musa): ‘I intend to wed one of these two
daughters of mine to you, on condition that you serve me
for eight years, but if you complete ten years, it will be
(a favour) from you…) (Qur’an: 28:27).

When Is It Impermissible To Take Wages:

Almighty Allah says:
(… And force not your maids to prostitution, if they
desire chastity, in order that you may make a gain in the
(perishable) goods of this worldly life. But if anyone
compels them (to prostitution), then after such
compulsion, Allah is Oft-Forgiving, Most Merciful to
those women)). (Qur’an: 24:33).

According to this verse, it is not permissible that any person take wages for
prostitution. Also, the Prophet (PBUH) forbade this, as it has been narrated on the
authority of Abu Mas’ud Al-Ansari, may Allah be pleased with him, that the Prophet
(PBUH) forbade the utilization of the price of a dog, the earnings of a prostitute, and the
earnings of a fortuneteller. Furthermore, it has been narrated on the authority of Ibn
Umar, may Allah be pleased with him, that the Prophet (PBUH) forbade taking a price
for animal copulation. Generally speaking, it is not lawful for the Muslim to take wages
or the like for doing anything unlawful. This applies, for example, to things such as
bringing drugs, a prostitute, belly-dancer, or anything of the kind to someone, for this is a
form of helping others to commit sins. Therefore, since this is prohibited in principle, it
is also forbidden to take wages for doing it.

Rulings Concerning Payment Of Wages:

A person who hires another to do some job for him must give him his dues. The
Prophet (PBUH) said, as narrated on the authority of Ibn ‘Umar, may Allah be pleased
with him,
Give the wageworker his wages before his sweat dries.

And still, he (PBUH) warned those who might not give those wages to employees. It has
been narrated on the authority of Abu Hurrayrah, may Allah be pleased with him, that the
Prophet (PBUH) said:

26
 Allah says, ‘I will be against three persons on the Day
of Resurrection; (i) one who makes a covenant in my
Name, but he proves treacherous, (ii) one who sells a
free person (as a slave) and eats the price, and (iii)
one who employs a labourer and gets the full work
done by him but does not pay him his wages

Ijārah (Hire Purchase Contract) on the other hand is the transfer of right of use
(usufruct) of property for a consideration. It means lease, rent or wage. Generally, Ijarah
concept means selling the benefit of use or service for a fixed price or wage. Under this
concept, the Bank makes available to the customer the use of service of assets or
equipments such as plant, office automation, motor vehicle for a fixed period and price. It
affords the contractual parties to come into effect in sequence to form a complete lease/
buyback contract. The first contract is an Ijarah that outlines the terms for leasing or
renting over a fixed period, and the second contract is a Bay‘ that generates a sale or
purchase once the term of the higher purchase is complete. For example, in a ship
financing facility, a customer enters into the first contract and leases the ship from the
owner (bank) at an agreed amount over a specific period. When the lease period expires,
the second contract comes into effect, which enables the customer to purchase the ship at
an approved price.
Many benefits can accrue from the Islamic Hire Purchase Contract. These include
granting permission to the Lessee to access the equipment on disbursement of the first
instalment and using of the equipment that generates income. Allowing up to 100%
financing and conserves the Lessee' capital and enhances commercial scheduling and
budgeting by allowing the negotiation of flexible terms. It provides a splendid
opportunity to the leaseholder to enter into other hire financing arrangements without
influencing his overall debt rating positively due to the opportunity of off-balance-sheet
financing. Taking care of all overheads towards hire purchase bonds as operating
expenses and are therefore fully tax-deductible. Offering tax-advantages to commercial
operations and tolerates the transfer of risk from the Lessee to the leaseholder in
exchange for a higher rent rate as an insurance against rejection in the future.

Loaning and Loans: Excellence and Seriousness:

Just as Islam encourages the Muslim to help his Muslim brothers and sisters who
may need his financial help by lending them what they need as long as he can do so, it
firmly urges him to be free from debt when he dies and warns him against doing
otherwise. It has been narrated on the authority of Abu Hurayrah, may Allah be
pleased with him, that the Prophet (PBUH) said:

He who alleviates one of the sufferings of worldly life

for a (Muslim) brother, Allah will alleviate for him one
of the sufferings of the Day of Resurrection, and he
who finds relief for one who is hard pressed, Allah will
make things easy for him in the Hereafter, and he who
conceal his faults in worldly life and in the Hereafter.

27
 Allah is at the back of a servant (of His) so long as
(this) servant is at the back of his (Muslim) brother…

To the same effect, it has been narrated on the authority of Ibn Mas’ud, may Allah
be pleased with him, that the Prophet (PBUH) said,
Whenever a Muslim lends another Muslim twice, that
will surely be (counted) as a charity of the same amount
(of the money lent) once.

Still, it has been narrated on the authority of Thawban, the mawla of the
Messenger of Allah (PBUH), that he (PBUH) said:
He whose soul departs (his) body when he is free from
three (things), will enter Paradise: from arrogance,
ghulul (taking illegally a part of booty), and debt.

Another hadith, which has been narrated on the authority of Abu Qatadah, reads
that once the Messenger of Allah (PBUH) stood up among them (his Companions) to
deliver a sermon in which he told them that jihad in the cause of Allah and belief in Allah
(with all His Attributes) are the most meritorious of acts. A man stood up and said, “O
Messenger of Allah! Do you think that if I am killed in the cause of Allah, my sins will
be blotted out from me? The Messenger of Allah (PBUH) said, “Yes, in case you are
killed in the cause of Allah and you were patient and sincere and you always fought
facing the enemy, never turning your back upon him.” The he added, “What have you
said (now)? (Wishing to have further assurance from him for his satisfaction), he asked
(again), “Do you think that if I am killed in the way of Allah, all my sins will be
obliterated from me?” The Messenger of Allah (PBUH) said, “Yes, if you were patient
and sincere and always fought facing the enemy and never turning your back upon him,
(all your lapses will be forgiven) except debt. Jibril (Gabriel) has told me this. It is
because all of this that the Prophet (PBUH) disliked the Muslims’ being in debt because
debt is a worry by night and a cause of humiliation by daytime. He used to ask Allah’s
protection from indebtedness, saying:
O Allah, I seek refuge with you against the burden of debt
and against being overcome by men.
He also once said:
I seek refuge with you against unbelief and debt”. A
man asked him, “Do you equate debt with unbelief?”
He (PBUH) replied, “Yes.
Paying a Debt Back:
It has been narrated on the authority of Abu Hurayrah, may Allah be pleased with
him that the Prophet (PBUH) said:
Whoever takes people’s property with the intention of
repaying it, Allah will repay it on his behalf (i.e., will
help him repay it), and whoever takes it in order to spoil
it, then Allah will spoil him.

28
 This means that the Muslim should be keen on paying his debts back and never
think of spoiling any money he may have borrowed from people. This is what Islam
ordains, as Almighty Allah says:

Verily! Allah commands that you should render back the

trusts to those, to whom they are due; and that when you
judge between men, you judge with justice. Verily, how
excellent is the teaching which He (Allah) gives you!
Truly, Allah is Ever All-Hearer, All-Seer). (Qur’an:
4:58).

Debts Are To Be Demanded In A Good Way:

Whenever the Muslim demands his due debts back, he should do that in a good
way as tolerance is a characteristic of Islam and Muslims. It has been narrated on the
authority of Abu Hurayrah, may Allah be pleased with him, that the Prophet (PBUH)
owed somebody a camel of a certain age. When he came to demand it back, the Prophet
(PBUH) said (to some people), “Give him (his due).” When the people searched for a
camel of that age, they found none, but found a camel one year older. The Prophet
(PBUH) said, “Give (it to) him.” On that, the man remarked, “You have given me my
right in full. May Allah give you in full!” The Prophet (PBUH) said:
The best amongst you are those who pay the rights of
others in a good way.
Giving Respite To Those Who Are Insolvent:
If an indebted person is insolvent and thus does not have money to pay his debt
back, the creditor is recommended to give him time until he becomes able to repay.
Almighty Allah says:
(And if the debtor is in a hard time (has no money), then
grant him time till it is easy for him to repay, but if you
remit it by way of charity, that is better for you if you did
but know.)(Qur’an; 2:280)
Besides, it-has-been narrated on the authority of Abul-Yusr, a Companion of the
Prophet (PBUH), that he (PBUH) said:
Let him whoever loves that Allah shades him in His Shade
either grant an insolvent person time (until he is able to
repay) or remit his (debt).
And, it has been narrated on the authority of Ayyub that Abu Qatadah, may Allah
be pleased with him, demanded (the payment of his debt) form his debtor but he
disappeared; later on he found him and he said, “I am hard up financially”, whereupon he
said, “(Do you state it) by Allah?” He said, “By Allah, (it is true).” Upon this Qadatah
said:
I heard the Prophet (PBUH) as saying, He who loves that
Allah saves him from the torments of the Day of
Resurrection should give respite to the insolvent or remit
(his debt).

29
Delay of Payment:
As clarified above, the payment of debt can be delayed especially when the
indebted person is insolvent, but no delay should be made by a rich person because this is
a sign of injustice. It has been narrated on the authority of Abu Hurayrah, may Allah be
pleased with him, that the Prophet (PBUH) said:
Delay (in the payment of debt) on the part of a rich man is
injustice…

Loans and Usury:

A loan may cause a person to fall into the abyss of riba or usury and this takes
place when the loan is connected to interest as in banks which adopt interest-based
loaning. The general rule in this regard states: Whenever a loan brings about a (usurious)
interest, then this is riba.
Muzara’ah (Crop-Sharing): Definition
Muzara’ah is terminologically defined as giving a piece of land to a person to
cultivate it against half of what it will produce or the like of that.
The Expenses of Crop-Sharing:
There is no harm that the expenses be shouldered by the owner of the land which
is to be cultivated in the way of muzara’ah or by the person who is to cultivate it or by
them both. Al-Bukhari said:
Umar contracted (certain) people that if he brought the
seeds (required for cultivation) he would receive half (of
the produce), and if they brought the seeds they would
receive such and such (part of the produce, i.e., a part on
which they would agree).
He also said Al-Hasan judged that: there is no harm that the piece of land is
owned by one of them and both of them pay of the expenses (of cultivating it), and its
produce is to be divided among them (i.e., equally). Az-Zuhri maintains the same.

The Prohibited Form of Muzara’ah:

The Prophet (PBUH) forbade his Companions, may Allah be pleased with them,
to practice another form of crop-sharing which was quite common at that time. This is
because such a transaction clearly involves great uncertainty and risk, and is contrary to
the spirit of justice. It went that the landowner would give out his land conditional to his
getting the produce of one part of its and the cultivator the produce of the remaining part
or perhaps half, or to the owner’s getting a specified weight or measure of the grain
produced and the cultivator the rest.
But sometimes one part of the land produced a crop while the other did not, so
that one of the two would receive nothing or very little, while the other would take
everything or most of the produce. Similarly, if the total produce did not exceed the
specified weight or measure, the owner would get everything while the cultivator would
get nothing. The Prophet (PBUH) saw that justice demands that both should share the
total produce, whether this total is a great deal or little, according to the agreed-upon
ratio. Proportions of the total produce must be specified so that if the crop is bountiful, it
is bountiful for both, if it is meager it is meager for both, and still if nothing is produced

30
neither of them receives anything. This is the fair distribution for both parties. It has been
narrated by Al-Bukhari that Rafi Ibn Khadij said,
We had the most agricultural land in Medina, and one of
us would rent out his land, designating a part of it for
himself. Sometimes a calamity would hit that part while
the rest of the land would be safe, and sometimes the
other way around. Consequently, the Prophet (PBUH)
forbade us to do so.

It has moreover been narrated by Muslim that Rafi Ibn Khadij said:
The people used to lease land in the time of the Prophet
(PBUH) in exchange for what they grew by the streamlets
or at the borders of the fields, or for a fixed quantity of
produce. Sometimes it would happen that the part so set
aside was destroyed while the other was safe and
sometimes the opposite would take place, and the people
had no investments other than that. Hence the Prophet
(PBUH) forbade this practice.

This obviously indicates that the Prophet (PBUH) was eager to establish perfect
justice in his society – and the all in all society of Muslims as a whole entity – and to
remove every source of conflict and discord from the community of the believers. It has
been narrated on the authority of Zayd Ibn Thabit, may Allah be pleased with him, that
two people came to the Prophet (PBUH) disputing about some land, and he said, “If this
is what happens among you, then do not lease your farms. The landowner and the
cultivator must therefore be magnimous and generous to each other; the landowner
should not demand too high a share of the yield and the worker should take proper care of
the land. Finally, it has been narrated on the authority of Ibn Abbas, may Allah be
pleased with him, that the Prophet (PBUH) did not forbid crop-sharing but advised the
owner and the cultivator to be considerate of each other.
Musaqah (Watering Trees for Part of the Crop):
Musaqah is to give certain trees to a person to water and take care of them in
exchange for part of the crop of these trees. It has been quoted earlier that it has been
narrated on the authority of Ibn Umar, may Allah be pleased with him, that the
Messenger of Allah (PBUH) contracted with the people of Khaybar (the trees) on the
condition that he would have half of the produce in fruits and harvest. It has also been
narrated on the authority of Abu Hurayrah, may Allah be pleased with him, that the
Ansar said to the Prophet (PBUH), “Distribute the date palm trees between us and our
emigrant brothers (Muhajirun)”. He (PBUH) said, “No”. the Ansar said (to Emigrants),
Look after the trees (water and watch them) and share the fruits with us”. The Emigrants
said, “We listen and obey”.

Rahn (Mortgaging): Definition and Legality

Rahn is putting up collateral connected to a debt so that it can be used for taking
one’s due in full if the indebted person cannot pay the dept back. Almighty Allah says
right after the verse of debt (Qur’an:2:282).

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 (And if you are on a journey and cannot find a scribe, then
let there be a pledge taken (mortgaging)… (Qur’an:
2:283)
Interestingly enough, connecting this to traveling in the verse is interpreted as
being something that commonly takes place during journeys, yet a relevant hadith
indicates that mortgaging is also permissible in residence (as the opposite of “on a
journey”). It has been narrated on the authority of A’ishah, may Allah be pleased with
her, that the Prophet (PBUH) purchased food grains from a Jew on credit and mortgage
his iron armor to him.

Can The Mortgagee Benefit From The Mortgaged Thing?

It is not permissible for the mortgage to benefit from the mortgaged thing because
of the general rule stating that whenever a loan brings about interest this becomes a form
of riba. However, if the mortgaged thing is a thing that can be taken as a mount or if it
can be milked, the mortgagee can mount or milk it if he spends on it. It has been narrated
in the authority of Abu Hurayrah, may Allah be pleased with him, that the Prophet
(PBUH) said:
A person can ride the mortgaged animal because of
what he spends on it, and he can drink the milk of a
milch animal as long as it is mortgaged.

According to another narration the Prophet (PBUH) added:

...and the one who rides (the animal) and drinks (its
milk) is to spend on it.

When Does Mortgaging Become Ineffective?

Mortgaging becomes ineffective once the mortgaged thing is returned to the
mortgator according to the mortgagee’s will.
Wadi’ah (Trusts Deposited For Safekeeping): Definition
Wadi’ah can be defined as a trust that a person deposits with another person to
keep it for him.

The Shar’i Ruling Concerning Wadi’ah:

Whenever a man entrusts his Muslim brother with something to keep it from him,
it is desirable that he accepts that as long as he knows that he is able to keep it well,
because this is a form of cooperation in righteousness a piety that Islam encourages.
Also, the entrusted person must give the entrusted thing back when he is asked to do so.
This is because Almighty Allah says:
Verily! Allah commands that you should render back the
trusts to those, to whom they are due…) (Qur’an: 4:58)

It is also because the Prophet (PBUH) said:

Give back trusts to those who have entrusted you (with
them)…

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Guaranteeing Trusts:
There is no liability on the part of the entrusted person concerning the entrusted
thing except when he is responsible for ruining or losing it. It has been narrated that the
Prophet (PBUH) said:
Whoever is trusted with a trust, there is no guarantee on
him.

It has also been narrated on the authority of Anas Ibn Malik, may Allah be
pleased with him, that Umar, and may Allah be pleased with him, made him guarantee a
trust that was stolen from among his property. Al-Bayhaqi commented on this saying,
“Perhaps he neglected safekeeping it, so he was made to guarantee it because of that
negligence.

Hawalah (Transferring the Right to Collect a Debt): Definition and Legality

Hawalah is transferring the right to collect a debt from one person to another. This
happens when the troubled person transfers this right to another person from whom the
creditor can get his money back. Islam allows hawalah because it is something that
people need to do to solve some problems that may result as regards payment of debts.
Thus, if “A” is indebted to “B” yet “C” is indebted – at the same time – to “A”, the
Shari’ah allows “A” to make “B” collect his money from “C” who is indebted to “A”.
“B” must accept the transfer of the right to collect the debt in question if “C” is well-to-
do. This is because that the Prophet (PBUH) said:
Delay (in the payment of debt) on the part of a rich
man is injustice. So, If any one of you is transferred
to a well-to-do person (to collect his debt from him),
he should accept the transfer.

The Conditions of the Validity of Hawalah:

1. The acceptance of the person who transfers the right to collect a debt (“A”)
and the person to whom this right is transferred (“B”) is a must as far as the
validity of this transfer is concerned, yet the acceptance of the person from
whom this debt is to be collected (“C”) may not be stipulated here because of
the hadith mentioned above. This is because majority of scholars maintain
that the command mentioned in the hadith is meant for desirability “istihbab”
and not obligation.
2. The two rights – i.e., the debt on “A” and the debt on “C” – must be equal in
terms of type, amount, and time of payment, delay and quality. Thus, hawalah
wll not be valid if a gold-based debt is transferred to be collected as silver, nor
will it be valid if the transferred debt is to be paid immediately and the other
debt is delayed or vice versa. Also, hawalah will not be valid if the two rights
are different in terms of superiority and inferiority.
3. The debt must be stable, in the meaning that if the right to collect a debt is
transferred to an employee who has not received his salary yet, that hawalah
will not be valid.
4. Both rights must be known and defined.
The Consequence of Hawalah:

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 Once hawalah is applies in a valid way, the person who has transferred the right to
collect the debt in question to another person becomes free from liability as regards this
debt. Therefore, if the person from whom the debt is to be collected becomes bankrupt or
dies, the person who has made the hawalah is not to be held responsible for the debt
because of that. This is according to the view adopted by the majority of scholars. And,
Allah knows best.

Ariyah: (Something Lent For Use): Definition:

Ariyah is something whose owner allows others to use without receiving any
remuneration for that.

The Shari’ah Ruling Concerning it:

It is legally desirable to give something to others to use as ariyah. Almighty Allah
says:
(… Help you one another in Al-Birr and At-Taqwa
(virtue, righteousness and piety)…)(Qur’an: 5:2)
(Who delay their prayers from their stated fixed times,
those who do good deeds only to be seen (of men),
and refuse Al-Ma’un (small kindnesses e.g. salt,
sugar, water, etc.).) (Qur’an:107:5-7)

Moreover, it has been narrated that the Prophet (PBUH) said:

… and Allah is at the back of a servant (of His) so
long as (this) servant is at the back of his (Muslim)
brother…

Giving it Back:
Whenever a person gives something to another person to use as ariyah, the latter
must give it back to him after making use of it. This is because it is a trust and Almighty
Allah says:
Verily! Allah commands that you should render back
the trusts to those, to whom they are due…) (Qur’an:
4:58).

Guaranteeing it:
As clarified above, when a person borrows something to use for some time he
becomes “entrusted” with the thing in question, and thus there is no guarantee on his part
except in case of negligence. It has been narrated that the Prophet (PBUH) said:
Whoever is trusted with a trust, there is no guarantee on him.
Also, a person who receives a ariyah is to guarantee it if the person who gives it to
him stipulates that he should guarantee it. It has been narrated on the authority of his
father who said:
The Messenger of Allah (PBUH) said to me ‘when my
messenger come to you give them thirty shields and
thirty camels.’ I said, ‘O Messenger of Allah! Will

34
 that be a guaranteed ariyah or a delivered ariyah?’
He said, ‘A delivered (ariyah).

Commenting on this hadith, Al-Amir As-San’ani said:

Guaranteed ariyah is ariyah whose value is to be
guaranteed if it is ruined, whereas delivered ariyah is
that which is to be delivered back (to its owner) if its
object is still whole and if it is ruined its value is not to
be guaranteed.
He added:
The hadith supports the view that ariyah is not to be
guaranteed except when guarantee is stipulated, and
this is the most evident view.

Luqatah (Findings): Definition

Luqatah refers to every kind of property which has been lost by someone and is
prone to losing and forfeiture and whose owner is unknown.
What to Do With a Finding:
Whenever a person finds any kind of property, he must identify it type and
number then make an upright person to that then keep it and make a public
announcement about it for one year. After that, if a person tells him of a distinctive sign
that proves his being its owner, he is to give it to him, even if this happens after the
passing of one year, otherwise he can make use of it. It has been narrated that Suwayed
Ibn Ghafalah said:
While I was in the company of Salman Ibn Rabi’ah and Suhan, in one
of the battles (of Islam), I found a whip. One of them told me to drop it
but I refused to do so and said that I would give it to its owner if I
found him, otherwise I would make use of it. On our return we
performed Hajj and on passing by Medina, I asked Ubayy Ibn Ka’b
about it. He said, ‘I found a bag containing a hundred dinars in the
lifetime of the Prophet (PBUH) and took it to the Prophet who said to
me, ‘Make a public announcement about it for one year.’ So, I
announced it for one year and went to the Prophet who said,
‘Announce it publicly for another year’. So, I announced it for
another year then went to him again and he said, ‘Announce it for
another year’. So I announced it for still another year then went to the
Prophet (PBUH) for the fourth time, and he said, ‘Remember the
amount of the money, the description of its container, and the string it
is tied with and if the owner comes, give it to him; otherwise make use
of it.

It has also been narrated that the Messenger of Allah (PBUH) said:
Whoever finds a luqatah should make one or two upright
persons testify (to its finding), and he must neither change nor
conceal it. Then, if its owner comes, he is the worthiest to have

35
 it, otherwise it (should be known that) it is Allah’s property
that He gives to whomever He wills.”

When Something Eatable or Trivial is found:

Whoever finds an eatable thing in his way, can eat it; and whoever finds a trivial
thing which no one would yearn to have, can take it and utilize it. It has been narrated on
the authority of Anas Ibn Malik, may Allah be pleased with him that the Prophet (PBUH)
passed by a (palm) date on his way, and he said, “Were I not afraid that it could be of the
charity (goods), I would have eaten it.
Finding Something in the Haram (the Sacred Precincts):
Any luqatah which is found in the Haram can be picked up only for making a
public announcement of it forever, and it is not permissible for anyone to possess it after
the passing of one year as normally done with items of luqatah found elsewhere. It has
been narrated on the authority of Ibn Abbas, may Allah be pleased with him, that the
Prophet (PBUH) said on the day of the conquest of Makkah:
Allah has made this town (Mecca) a sanctuary since the day
He created the heavens and the earth. So, it is a sanctuary by
Allah’s Decree until the Day of Resurrection. Fighting in it
was not legal for anyone before me, and it was made legal for
me only for an hour by daytime. So, it (i.e., Mecca) is a
sanctuary by Allah’s Decree until the Day of Resurrection. Its
thorny bushes must not be cut, it game must not be chased
(i.e., hunted), and its fallen property (i.e., luqatah) must not be
picked up except by a person who will announce it publicly…

Laqat (Foundling): Definition

Laqit is a child who is under the age of puberty and who is found astray in a street
(or any similar place) and whose lineage is not known.
The Shari’ah Ruling concerning Picking Him up:
Picking such a child up is a collective obligation or fard kifayah, and it is one of
the forms of cooperation in righteousness. Almighty Allah says:
(… Help you one another in Al-Birr and At-Taqwa
(virtue, righteousness and piety)…) (Qur’an: 5:2)
If there is any money with him, it is to be spent on him, otherwise his spending is
to be on the public treasury.
The Inheritance of a Foundling:
If a foundling dies and leaves inheritance yet no heirs, his inheritance is to be
taken by the public treasury. The same ruling applies to his diyah (blood money) if he is
killed and a diyah is to be paid for that.
Ascribing Him to Some Lineage:
If a person, male of female, claims that a certain foundling belongs to his or her
family, he is to be ascribed to the lineage of this person as long as this attribution is
possible. If two or more people claim that he belongs to them, the foundling is to be
ascribed to the person who presents proof that supports his claim.

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Shufah {Preemption): Definition
Shufah or preemption can be simply defined as the right to purchase something
before others.
In what is Shufah applied
It has been narrated on the authority of Jabir Ibn Abdullah, may Allah be pleased
with him, that the Prophet (PBUH) gave a verdict regarding shufah in every undivided
joint thing (property), but if the limits are defined (or demarcated) or the ways and streets
are fixed, then there is no preemption. Therefore, whoever has a partner in a land, a
garden, a house, or anything of the kind, should not sell his share until he lets his partner
know that he wants to sell it. If he sells it before informing his partner, the latter is
worthier of the purchased object. It has been narrated also on the authority of Jabir may
Allah be pleased with him, that the Messenger of Allah (PBUH) said:
Whoever has date-palm trees or land, should not sell that
until he offers (the would-be bought thing) to his partner,
It has moreover been narrated that ‘Amr Ibnush-Sharid said:
Al-Miswar Ibn Makhramah came and put his hand on my
shoulder and I accompanied him to Sa’d. Abu Rafi said to
Al-Miswar, ‘Will you not order this (i.e., Sa’d) to buy my
house which is in my yard?’ Sa’d said I will not offer more
than four hundred (dinars or dirhams) in installments over
a fixed period’ Abu Rafi said, ‘I was offered five hundred
(dinars or dirhams) cash but I refused. Had I not heard
the Prophet (PBUH) saying, ‘A neighbour is more entitled
to receive the care of his neighbour,’ I would not have
sold it to you.

Hibah (Gifts and Presents): Definition

Hibah is that a person put another in possession of something that he owns
without remuneration.
Islam Encourages Hibah:
Islam encourages hibah and warns Muslims against depreciating things that they
may receive as gifts or presents. It has been narrated that the Prophet (PBUH) said:
Exchange presents (and gifts) so that you may love one
another.

He (PBUH) also said:

O Muslim women! None of you should look down
upon the gift sent by her she-neighour even if it is the
trotters of a sheep (fleshless part of legs),

Moreover, the Prophet (PBUH) said, as narrated on the authority of Abu Hurayrah:
Even if I should be invited to a meal of a sheep’s trotter,
I will accept the invitation, and even if I should be given
an arm or a trotter of a sheep as a present I will accept
the present

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Rewarding for Hibah:
It is recommended that when a person receives something as a present or a gift, he
may reward the person who has given it to him in any suitable way by giving him
something in return. It has been narrated that ‘A’ishah, may Allah be pleased with her,
said:
The Messenger of Allah (PBUH) used to accept
presents and used to give something in return.

Who Is Worthier of Hibah?

It has been narrated that A’ishah, may Allah be pleased with her, said:
I said, ‘O Messenger of Allah! I have two
neighbours; which of them should I give a gift to?’
The Prophet (PBUH) said, ‘(Give) to the one whose
door is nearer to you.
It has moreover been narrated on the authority of Kurayb, the mawla of Ibn
‘Abbas, that Maymunah Bintul-Harith (the Prophet’s wife) told him that she manumitted
a slave-girl without taking the permission of the Prophet (PBUH). On the day when it
was her turn to be with the Prophet (PBUH), she said, “Do you know, O Messenger of
Allah, that I have manumitted my salve-girl?” He said, “Have you really done that? She
replied in the affirmative and he (PBUH) said, “You would have got more reward if you
had given her (i.e., the slave-girl) to one of your maternal uncles. These narrations
indicate that one’s relatives and neighbours are worthier of one’s gifts and presents,
especially when they are in need of these gifts and presents. And, Allah knows best.

No Preference among One’s Children:

The Muslim should not give preference to one of his children over another when
he gives them gifts. It has been narrated that Amir said:
I heard An-Nu’man Ibn Bashir saying on the pulpit,
‘My father gave me a gift but ‘Amrah Bint Rawahah
(my mother) said that she would not agree to it unless
he made the Messenger of Allah a witness to it. So, my
father went to the Messenger of Allah (PBUH) and
said, ‘I have given a gift to my son from ‘Amrah Bint
Rawahah, bit she told me to make you a witness to it,
O Messenger of Allah! The Messenger of Allah
(PBUH) asked, ‘Have you given (the like of it) to
everyone of your sons?’ He replied in the negative so
the Messenger of Allah (PBUH) said, ‘Be afraid of
Allah, and be just to your children.’ My father then
returned and took back his gift.

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No Gifts are to be given to State Officials:
A State official here refers to any person who has been appointed by the State to
be in charge of a certain job, such as ministers, managers, etc. No employee of the kind
is to receive a gift or a present because it may be given to him as a bribe. Were he is not
appointed in the position in question, he would not – in most cases – be given such gifts.
It has been narrated on the authority of Abu Humayed As-Sa’idi, who said:
The Messenger of Allah (PBUH) appointed a man called Ibnul-
Lutbiyyah from the Asad tribe in charge of sadaqah (i.e., he
was authorized to receive items of charity and Zakah from the
people Zakah from the people on behalf of the State). When he
returned (with the collections), he said, “This is for you and
(this is mine as) it was presented to me as a gift’. The
Messenger of Allah (PBUH) stood on the pulpit and praised
Allah and extolled Him then said, ‘What about a State official
whom I give an assignment and who (comes and) says, ‘This is
for you and this has been presented to me as a gift”? Why did
he not remain in the house of his father or the house of his
mother so that he could observe whether gifts would be
presented to him or not? By Him Whose Hand the life of
Muhammad is, any one of you will not take anything from it
(i.e., from that kind of gift) but will bring it on the Day of
Judgement, carrying on his neck a camel that will be growling,
or a cow that will be bellowing, or an ewe that will be
bleating’. After that he raised his hands until we could see the
witness of his armpits, then he said twice, ‘O Allah! I have
conveyed (the commandments).

Bay‘us-Salam (Advance Payment Contract provision in the Shari‘ah):

Bay‘us-Salam means a contract in which advances disbursement is made for
goods to be delivered later on. The seller assumes the responsibility to supply some
specific goods to the buyer at a future date in exchange of an advance price fully paid at
the time of transaction. It is essential that the quality of the product proposed to be
purchased is fully specified, without uncertainty that can lead to disagreement. The items
of this sale should be goods and not gold, silver, or currencies based on these metals.
Apart from this, Bay‘s-Salam covers almost everything that can be referred to as
quantity, quality, and workmanship.

Basic Features and Conditions of Bay‘us-Salam:

The contract is Advance Payment (Salam) if the buyer has paid the purchase price
to the seller in full at the time of transaction. This is indispensable so that the buyer can
show that they are not flinging into liability with a second party in order to get rid of the
debt with the first party. This is prohibited under Shari‘ah. The foremost idea of Salam is
to provide a means that ensures that the seller has the liquidity expected from entering
into the business. If the price were not paid in full, the fundamental purpose of the
transaction would have been defeated. Muslim jurists are unanimous in their opinion that
full payment of the purchase price is essential for Salam to exist.

39
 Imam Malik is also of the view that the seller may suspend accepting the funds
from the buyer for two or three days, but this postponement should not form part of the
agreement. Advancement Payment Contract (Salam) can be made in only those
commodities, the quality and quantity of which can be specified exactly. The things
whose quality or quantity is not determined by specification cannot be sold through the
contract of Salam. For example, precious stones cannot be sold on the basis of Salam,
because every piece of precious stones is normally different from the other either in its
quality or in its size or weight and their exact specification is not generally possible
Salam cannot be achieved on a particular commodity or on a product of a particular field
or farm. For example, if the seller agrees to supply the corn of a particular field, or the
fruit of a particular tree, the Salam will not be legitimate, because there is a possibility
that the crop of that particular field or the fruit of that tree is spoilt before delivery, and,
given such possibility, the delivery remains uncertain.
The same rule is applicable to every commodity, which should not be supplied
except all uncertainties are removed and all possible details in this respect are expressly
mentioned. It is also necessary that the quantity of the commodity is agreed upon in
unequivocal terms. If the commodity is quantified in weights according to the usage of its
traders, its weight must be determined, and if it is quantified through measures, its exact
measure should be known. What is normally weighed cannot be quantified in measures
and vice versa. Salam cannot be affected in respect of things which must be delivered at
spot. For example, if gold is purchased in exchange of silver, it is necessary, according to
Shari‘ah, that the delivery of both be simultaneous. Similarly, if wheat is battered for
barley, the simultaneous delivery of both is necessary for the validity of sale. Otherwise,
the contract of Salam in this case is permissible.

Summary:
1. Sharikatul-Wujuh is a business partnership entered into by a
supplier of the entire capital to the worker or an agent with the
proviso that both of them would share profit, while only the capital
provider will suffer the loss incurred.
2. The supplier of the entire capital takes the credibility of the worker
into consideration before entering into this kind of contract. Hence,
it is known as Company Social Contract.
3. Sharikatul-Munarabah is the business venture between the capital
owner who supplies the entire capital for a trading venture with the
worker who brings his skill, expertise and labour to the investment.
For this reason, it is called Joint Social Contract.
4. Shari‘ah permits these kinds of social contracts because of their
advantages in solving unemployment and other social problems in
the society.
5. Advance Payment Contract (Bay‘us-Salam) is a social contract in
which one can easily become swindled.

Islamic Bonds (Sukuk):

Sukuk, plural of Sakk, is the Arabic name for financial certificates that are
equivalent to securities or bonds, which are permissible in Islam. It is noteworthy that

40
fixed-income, interest-bearing bonds are not permissible in Islam. Hence, Sukuk are
securities that comply with the Islamic law and its investment principles, which prohibit
the charging or paying of interest. Financial assets that comply with the Islamic law can
be classified in accordance with their tradability and non-tradability in the secondary
markets. It is known as financial paper or cheque that entitles the holder to the amount of
the money shown on it.

Rent-to-Own Social Contract (Murabahah):

This is a fixed-income loan for the purchase of a real asset (such as real estate or a
vehicle), with a fixed rate of profit determined by the turnover margin. This theory refers
to the sale of goods at a price, which includes a profit margin agreed to by both parties.
The procurement and selling price, as well as other costs and the profit margin must be
specified at the instant of the sale agreement.
Although the bank is remunerated for the time value of its money in the form of
the profit margin, it cannot be compensated for the time value of money outside of the
contracted term. The bank cannot charge additional profit on late payments, but the asset
remains as a mortgage with the bank until the default is settled. This type of transaction is
similar to rent-to-own arrangements for furniture or appliances that are common in North
American stores.

Free-Gift Contract (Hibah):

This is a token given voluntarily by a debtor to a creditor in return for a loan.
More often than not, Hibah arises in practice when Islamic banks voluntarily pay their
customers a 'gift' on savings account balances, representing a portion of the earnings
made by using those savings account balances in other performances. The terms Hibah
(Free-Gift), Tabarru‘(Donation) and Şadaqah (Charity) are used interchangeably and
share the common meaning of donation, and not a contribution (Musahamah).
It is noteworthy that it is usually made freely in favour of someone or something
to show affection, love or for spiritual achievement. Once the donation is made,
ownership is transferred in perpetuity from the donor to the recipient. Henceforth, it is
prohibited to the donor to seek any benefit from the donation. According to the Prophet It
is not lawful for a man to give and afterwards to take it back except a father regarding
what he gives his child. The parable of one who gives a gift and takes it back is like the
parable of a dog which eats till when it is satisfied, it vomits and then takes his vomiting
back (Ibn ‘Umar and Ibn ‘Abbas). Although, Free-Gift Contract appears similar to
interest, and can have the same outcome, in reality, Hibah is a voluntary payment or
donation at the wish of the bank. However, the opportunity of receiving Hibah will
encourage customers' savings and provide the bank with capital necessary to create its
profits. If the business enterprises are advantageous, then some of those profits may be
gifted back to its customers as Hibah.

Trust Fund (Wadi‘ah):

In Wadi’ah, a bank is deemed as a keeper and trustee of funds. A person deposits
funds in the bank and the bank guarantees refund of the entire amount of the deposit, or
any part of the outstanding amount, when the depositor demands it. The depositor, at the

41
bank's discretion, may be rewarded with Hibah as a form of appreciation for the use of
funds by the bank.

Sale and Exchange Agreement (Bay‘u Al ‘Ayn/Inah):

Sale and exchange is a financing facility made available by an Islamic bank for
buying and selling transactions between the financier and the customer. The financier
buys an asset from the customer on spot basis. The disbursement under the facility is the
price paid by the financier. Eventually, the asset is sold to the customer on a deferred-
payment basis and the price is payable in installments. The second sale serves to create
the obligation on the part of the customer under the facility. This kind of contract is
practiced in Malaysia. A set of strict conditions must be observed and the like
jurisdictions.

Deferred Payment Sale (Bay‘un Bith-Thamani Al-Ajil):

The Deferred Payment Sale is the sale of goods on a postponed payment basis at a
price, which includes a profit margin agreed to by both parties. Like sale and exchange
agreement, this concept is also used under an Islamic financing facility. There is no
payment of interest because the customer pays the sale price, which is not the same as
interest (usury) charged on a loan. The problem here is that this includes linking two
transactions in one, which is forbidden in Islam. The common observation is that this is
simply basic charging of interest disguised as a sale.
Relief Fund/ Endowment (Waqf):
This is a peculiar Islamic Institution whereby the founder relinquishes his
ownership of a real property on trust for Allah. He can dictate the income or usufruct of
the property in perpetuity to some pious or charitable purposes. This may include
settlements in favour of the founders own family.

Credit Sale (Bay‘un Mu’ajjal):

It is a financing technique adopted by Islamic banks, which take the form of
Murabahah/Mu’ajjal. It is also called Deferred Payment Sale. The bank earns a profit
margin on the purchase price and allows the buyer to pay the price of the commodity at a
future date in a lump sum or in installments in a bond. It has to state the actual cost of the
commodity and the margin of profit is mutually agreed. The price fixed for the product in
such a transaction can be the same as the spot price or higher or lower than the spot price.
However, one of the essential descriptions of interest (Riba) is an unpardonable delay in
payment or either increasing or decreasing the price if the payment is immediate or
postponed. Any issue of Riba has to be totally avoided in the transaction.

Ethics of Business Transactions in Islam:

The term “ethics” in this context simply means moral belief that influences
peoples’ behavior, attitudes and ideas. It also means moral beliefs and rules about right
and wrong things. In the Islam “Mithaq”, is the terminology for covenant, agreement,
contract, treaty, pact, charter or alliance. In essence, Islamic ethics of financial
transactions are the codes of ethics laid down to ensure that the exact contractual
agreements or pacts are carried out in accordance with the teachings of the Glorious
Qur’an, Apostolic Traditions and other authentic books on Islam. Allah has given stern

42
warning to the Muslims to fulfill their agreements in all their transactions. It is taught in
Islam that whenever two people or more want to enter into an agreement, Allah is
together with them as the Surety and the Witness. For example, Allah commanded that:
And fulfill the Covenant of Allah (Bai'a: pledge for Islam)
when you have covenanted, and break not the oaths after you
have confirmed them, and indeed you have appointed Allah
your surety. Verily! Allah knows what you do. (Qur’an 16:
91-92)

Those who break Allah's Covenant after ratifying it, and

sever what Allah has ordered to be joined (as regards Allah's
Religion of Islamic Monotheism, and to practice its legal
laws on the earth and also as regards keeping good relations
with kith and kin ), and do mischief on earth, it is they who
are the losers. (Qur’an 2: 27)

The above Qur’anic verses make it abundantly clear that Allah is aware of all
inner and obvious intentions and actions, including social transactions. He admonishes
that contracts must be agreed upon and confirmed through all the necessary instruments
such as appending signatures of principal members of the parties after all terms of the
contracts have been unambiguous stipulated, understood, considered and freely agreed
upon. Everyone involved in the contracts are strictly warned by Allah to abstain from all
forms of deception because of it inevitable bad consequences, both in this world and in
the next. Moreover, the Prophet Muhammad has warned all dishonest businessman or
associates in fraudulent practices will not gain the pleasure of Allah on the Day of
Reckoning. For an example, Abu Hurayrah reported from the Prophet that the Messenger
of Allah said:
The Almighty Allah said: there will be three persons whose
opponent I shall become on the Resurrection Day: Anyone
who gave in My name and then broke the trust, and a man
who sold a free man and enjoyed his price, and a man who
engaged a laborer and enjoyed full labour and from him but he
did not pay his wages (Bukhari, Vol. II, 1939: 301).

The above Apostolic Tradition further emphasizes the importance of full

compliance with the Islamic ethics of social transactions, on the one hand, and the evil
consequences of refusal to abide by the terms of contract as a grievous sin punishable in
this world and in the Hereafter.
The Ideal Muslim Businessman or Woman:
Characteristics of Islam, it lays down the maxims which seek to guide intentions
and actions of a Muslim in private and public life, religious and spiritual matters,
economic and political as well as cultural and social affairs. While considering proper
human socio-economic life, it takes cognizance of all aspects of life. It also takes a
comprehensive care of the issues of the Hereafter, including the inevitability of
resurrection, accountability and reward by Allah. Allah has stated that:

43
 ...and there are among them (mankind) who will say: Our
Lord! Give us (your bounties) in this world! But they will
have no portion in the Hereafter. And there are (people)
who will say: Our Lord! Give us the good in this world and
good in the Hereafter, and protect us from the torment of
the Hell Fire! (Qur’an 2: 200-201).

Thus Islam advocates balanced equilibriums between the pursuit of this world and
the Hereafter. Also, Islam does not tolerate anyone making himself a burden on another,
especially when he or she is not seriously challenged to the extent that he or she cannot
do anything on his own. Hence, it discourages begging and extols working for ones
earnings or livelihood. Prophet Muhammad was reported to have said that:
Verily it is better for any of you to take your rope and bring a
bundle of wood upon your back and sell it, in which case
God guarded your honour, than to beg of people, whether
they give it or not; if they do not give, your reputation
suffers, and you return disappointed; and if they give, it is
worse than that, for it lays you under obligation (Al-
Suhrawardy, 1979: 57).

The above Tradition of the Prophet exemplifies the importance which Islam
attaches to dignity of labour and critical position it takes against begging. It is to be noted
that begging promotes laziness and over-reliance on others to survive. It could lead to
disgrace of the beggar in the eyes of the giver. While the latter receives blessings and
rewards from Allah, the former can suffer perpetual indignity before the giver and those
who know about his act of begging. However, under certain helpless circumstances, such
as loss or non-availability of money or food in an environment where it is not possible to
access the need by the victim of circumstance, he or she can resort to begging. However,
he or she must desist immediately he or she has relief. Moreover, according to the
teachings of Islam, it is prohibited to engage in sharp practices in any affairs, including
matters of social contract. Allah has cursed those who do not observe the ethics of social
contract. For an example Allah declares that:
Woe to those who deal in fraud. Those who, when they have
to receive by measure from human beings, exact full
measure. But when they have to give by measure or weight to
human beings, 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? Surely, the
record of the wicked is preserved in Sijjin (Qur’an 83:1-6).

This is a serious warning and divine curse onto traders who engage in various
forms of fraudulent practices; they are promised inevitable accountability, reward for
their misdeeds all of which are clearly and comprehensively known by Allah. They are
promised severe punishments in the Hereafter.

44
Usury-Free Banking:
The Usury-Free Banking is an initiative of the Muslim scholars and experts in
financial activities for the Muslims’ financial transactions. The Usury-Free Banking
Facilities are directed mainly towards investment in productions. The fundamental role of
the bank is intermediary between current, savings and deposits of Usury-Free Banking
that constitute binding obligations. Principally, the current and savings deposits must be
refunded on demand. The bank is not expected to gain from the deposits. However, it
may award prizes and bonuses to the holders. Islamic bank accept Short-Time Investment
Deposits to enable the depositor make use of his or her funds as he/she wishes. The bank
can give Long-Time Investment deposit, for at least a year, to give pre-determined
incentives for the depositors on the basis of the contracts stipulated in the Law for usury.
It can also give permission for utilization of deposits on a particular project, and the
refund of principal or deposits is granted. The depositors and the banks shall divide the
accrued profits in proportion to the funds utilized including banks share of resources and
duration of utilization. The banks receive attorney’s fees from the depositors as a charge
for its administrative input from the whole amount of profits. The banks have the right of
utilization of deposits at their disposal for Islamic-Compliant ventures.

Conceptual Framework of Islamic Insurance (Takaful):

Al-Takaful is the Islamic word equivalent of the English term Insurance. It
implies an arrangement whereby a group of people agreed on mutual co-operation,
solidarity and brotherhood, to contribute genuinely to a contract and share a certain risk
or catastrophes that may arise. It is a Shari‘ah-compatible risk intermediation. However,
the principles of Islamic Insurance are different from that of conventional insurance
which is Riba oriented. It is widely believed in Islam that conventional insurance is
against the injunctions of Islamic Law.
As a conceptual framework, a`t-Takaful is acceptable Insurance system because it
does not derive its profits at the detriment of others and there is limitation to the elements
of uncertainty as far as compensation and subscription are concerned. In order to assist
those who are in need of assistance, every policy holder is expected to pay his or her
subscription promptly. This is aimed at dividing losses and spreading liability according
to the community pooling system; hence, it falls under donation contract. Moreover,
according to Islamic jurists, the policy holders are obliged to co-operate among
themselves in order to promote their common good. Generally, Islamic Insurance must be
totally free from any element of usury, uncertainty and unjustified enrichment or risks.

The Nature of Islamic Insurance (Takaful):

It is noteworthy that the nature of the principles of Takaful is fundamentally
different from the principles of conventional insurance. While the nature of the principles
of conventional insurance is based on the business-like, profit at all cost-nature (Riba) of
the western policy- makers and policy holders, the Islamic Insurance is guided by
welfare-concern, constant-consciousness of Allah (Taqwa) and the Day of Accountability
(Yawmul-Qiyamah). Hence, the operations of Takaful must be in compliance with the
principles of Shari‘ah; failure to abide by the principles of Islamic Insurance renders its
operation invalid, null and void, and contra-Sunnah. Generally, the operations of Islamic

45
Insurance are based on the governing principles of profit and loss sharing (Munarabah)
financing technique.

Principles of Islamic Insurance (Takaful):

There must be no hindrance to any of the contractual parties or beneficiaries from
claiming the benefits over the policy. It is fundamental to recognize the legitimate wealth
of every policy holder. Since both the policy and benefits of the policy are legitimate
wealth of the policy holder, no room could be created for cheating. It is a policy of
mutual co-operation, solidarity and brotherhood. Insurable interest must exist between the
policy buyer and the proposed beneficiary because the absence of an insurable interest is
solely for gain, which is contra-Sunnah. Generally, in the field of insurance practices, the
agents and the brokers are the contributors to the development of insurance practices in
the commercial societies, in tandem with the basic general principles of contract
(Al-‘Uqud). An insurance policy is a financial transaction which binds both the operator
and the participant. Although, it is good to set the age of the contracting party at the age
of majority or puberty (Rushd or Balaghah), some jurists do not agree with this view.

Qualification of the Two Parties to Takaful Operation:

Generally, two main parties are involved in the operation of Takaful business.
They are the Takaful operator (Dhamin) and the Takaful participant, otherwise called
Takaful contributor (Mu’amman ‘Alayhi). A Takaful operator is a Muslim who provides
an indemnity or financial security against an unexpected catastrophe or an accident in
consideration of contributions paid by the Takaful participant.
In the Islamic perspective, the insurer is the Takaful operator while the insured is
the Takaful participant or Takaful contributor. Logically, the operator of Takaful is the
dominant party over the entire policy. There is a justifiable apprehension that should a
non-Muslim be permitted to become Takaful operator, he can abuse his dominating
capacity by contravening Shari‘ah provisions and mislead the contributors and bastardize
the rules and regulations.

Guidelines for Participation in al-Takaful:

According to the policy of al-Takaful, the participant or the contributor
(Mua’mman ‘Alayhi) eventually becomes the insured against a defined risk. He pays
certain contributions regularly for the purpose of future security of the subject-matter at
risk. On the other hand, the Takaful operator undertakes to indemnify the participant (the
insured) in consideration of the paid contributions against damage or loss caused
accidentally the subject matter of the policy. Naturally, everybody has the common right
to buy a policy for the material security of life, business ventures or property which is at
unforeseeable risk or danger. This common right is vested by the Glorious Qur’an on
every participant (Chapter 5: 2). However, certain people can be restricted or disqualified
from buying or having a policy in order to sustain the basic objective of mutual co-
operation, solidarity and brotherhood in order to avoid putting themselves into difficulty
(Qur’an 2: 185). Moreover, a minor can be excluded from participating in Takaful and
from being entrusted to manage his own property until he or she has reached the age of
puberty, prudence or maturity according to the portion of the Glorious Qur’an which
states that:

46
 You should not give your property which Allah has given to you as a
means of support to those who are weak of understanding; but feed
them from it and clothe them and speak to them words of kindness and
justice. And test the intelligence of the orphans until they attain the age
of marriage (maturity). Then if you perceive sound judgment in them,
deliver their property to them. You should not consume it wastefully
and extravagantly against their growing up. Whoever is rich, let him
abstain from taking wages; but if he is poor, let him have for himself
what is just and reasonable. And when you want to release their
property to them, call witnesses in their presence. Allah is Self-
Sufficient in taking account (Qur’an 4: 5-6).

Hence, the qualification of minor can be determined through the calculation of his
or her calendar year or puberty (physical maturity), although the opinions of the jurists
vary between fourteen and nineteen years for males, as well as twelve and fifteen years
for females.

Conditions for Legalization of Takaful Operation:

According to some Muslim scholars and economists, before operation of Takaful
can become fully legal, certain conditions must be fulfilled. These include
(i) Registration under a specific act of the country, e. g. the Central Bank,
an Islamic body or an institution in respect of any class of business or
both;
(ii) Availability of adequate or a specific minimum deposit required by the
Act in respect of it;
(iii) Ability to maintain, at all times, a surplus of assets over liabilities of
not less than amount as may be prescribed from time to time;
(iv) The company should be a member of Takaful associations approved
by the country’s Governor of Central Bank or Minister for Finance,
provided that this paragraph shall not apply until such an association is
established;
(v) Provision of contractual capacity in the general principles of
commercial contracts (‘Uqud);
(vi) The Takaful operator must be a Muslim in his capacity as an
individual, a company, partnership or a society which regulates their
activities that are based on the rulings of Islamic Law;
(vii) The restriction of the position of Takaful operator to a Muslim is based
on his sacred duty of sustaining public interest, especially to ensure a
fair co-operation in the Takaful practices;
(viii) The underlying philosophy behind the mandatory restriction lies partly
on the duty of Takaful operator to sustain mutual-co-operation,
brotherhood and solidarity among the contractual parties, while putting
unforeseen risk in proper perspective.

Allah has declared that:

47
 The believers should not take unbelievers for friend
except the believers, if anyone does that, he will not
receive help from Allah, except by way of
precaution, that you may guard yourself from them
(Qur’an 3: 28).

Give bad news to the hypocrites that there is a

painful chastisement for them. Those who take
disbelievers for friends rather than the true Muslims,
do they seek for might from them? Might surely
belong to Allah (Qur’an 4: 139)

It is noteworthy that, as a demonstration of Islamic spirit of sincerity and

avoidance of anything that can jeopardize the interest of Islam and the Muslims, it is
justifiable to disallow a non-Muslim from domineering role over the participant.
Notwithstanding, a non-Muslim seeker of help or co-operation from a Muslim may not be
rejected. This could soften the heart of a non-Muslim to Islam. He could come under a
destitute as long as he is not antagonistic to Islam and the Muslims. It is interesting to
note that if any company which registers under a law that is not Shari‘ah-compliant
wishes to operate Takaful activities can be granted Takaful license. However, this should
be pre-conditioned by the express admittance that it will establish a separate, complete
Takaful unit whereby all its activities, management, principles, including material aspect
are controlled by the Muslim operator of Takaful in accordance with Islamic injunctions.

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