Key Issues

1
Key Issues Perspective on Islamic Aspects of
Financial Transactions (Principles of Corporate
Muamalat)
Prof. Dr. Mohd. Masum Billah www.drmasumbillah.bl
ogspot.com
Shangri-La- Hotel, Jakarta
2
Definition of Shariah and Fiqh(affecting
Financial Muamalat)
Shariah
Defined as a Divine revealed law Defined as a
detailed rulings of law which Muslim
jurists understood and derived from the Shariah
Fiqh
3
Categories Of Fiqh
4 Categories
Fiqh Ibadat
Fiqh Muamalat
Fiqh Ahwal Shakhsiyyah
Fiqh Jinayat
4
Categories Of Fiqh
Fiqh Ibadat
relating to worship
Fiqh Muamalat
relating to transactions
Fiqh Ahwal Shakhsiyyah
relating to family matters
Fiqh Jinayat
relating to crimes, offences punishments
5
Corporate Muamalat Contract

• Defined as an Offer and
• Acceptance
• Could be verbal , in writing, through
• signs or any other forms of Offer and
• Acceptance.

6
Categories Of Muamalat Contracts
1) Acquiring Ownership Contracts (Uqud Tamlikat)
2) Profit Sharing Contracts ( Uqud Ishtirak)
7 Categories
3) Safe Custody Contracts ( Uqud Hifz)
4) Security Contracts (Uqud Tauthiqat)
5) Permissions Contracts ( Uqud Itlaqat)
6) Restriction Contracts ( (Uqud Taqyidat)
7) Releases Contracts ( Uqud Isqatat)
7
Categories Of Muamalat Contracts

• 1) Acquiring Ownership Contracts (Uqud Tamlikat)
• a) Contract of exchange ( Uqud Muawadhat)
• Examples
• Bai
• Ijarah
• b) Contract of Donation ( Uqud Tabarruat)
• Examples
• Hibah
• Sadaqah

8
Categories Of Muamalat Contracts

• 2) Profit Sharing Contracts (Uqud Ishtirak)
• Examples
• Musyarakah
• Mudharabah
• 3) Safe Custody Contracts (Uqud Hifz )
• Example
• Wadiah

9
Categories Of Muamalat Contracts

• 4) Security Contracts ( Uqud Tauthiqat)
• Examples
• Kafalah
• Rahnu
• 5) Permissions Contracts ( Uqud Itlaqat )
• Example
• Wakalah

10
Categories Of Muamalat Contracts

• 6) Restrictions Contracts ( Uqud Taqyidat )
• Example
• Taflis
• 7) Releases Contracts ( Uqud Isqatat)
• Example
• Ibra

11
Shariah Requirements in Corporate Muamalat
Contract
Islam permits trade and commerce .
Rules to be Observed
Observing that every contract possesses all its
essential elements and that every essential
element meets the necessary conditions
Avoidance of prohibitions
12
Prohibitions In Corporate Muamalat Contract

• 2 Types
• Prohibitions which make contracts invalid
• Prohibitions which do not make contracts invalid

13
Prohibitions In Muamalat Contract
5 Prohibitions make contracts invalid
Riba
Gharar i/e ambiguity or uncertainty
Producing or selling impure goods
Gambling i.e anything that involves betting
Producing or selling goods, that are of no use
therefore of no value
14
Riba
Means
Extra
Two kinds
Riba in trading transactions ( RIBA BUYU)
Riba out of lending and borrowing ( RIBA DUYUN)
15
Riba

• Riba out of lending and borrowing ( RIBA DUYUN)
• - is the extra amount of money
• Imposed by lender on the borrower in the
  contract or
• Promised by the borrower in the contract or
• Charged because of late payment

16
Riba
Riba in trading transactions ( RIBA BUYU )
- may arise out of an exchange between 2 ribawi
materials in the same category if the
rules are not observed.
17
Riba
Categories of RIBAWI Materials

• Medium of Exchange
• with classifications
• as follows
• gold in any form,
• silver in any form, and
• currencies
• the currency of each
• country is considered as
• one type.

• All kinds of foodstuffs
• with broad categories
• as follows
• grains
• meats
• vegetables
• fruits, and
• salts which include
• sugars, candies and medicines

18
Riba

• - Occurrence of Riba in Trading
• Occurs when rules concerning the trading of
• RIBAWI materials are not observed.
• Rules
• Same classifications in the same category
• Different classifications in the same
  category
• Others

.
19
Same Classifications in the Same Category

• Examples 916 gold exchange with 750 gold, or
• basmathi rice exchange with A1 rice.
• Conditions
• The weight or measurement or units of the
  materials
• must be the same, and
• Their exchange must be immediate.
• Effect
• If the first rule is not observed Riba Fadhl
  occurs
• If the second rule is not observed then Riba
  Nasiah occurs.

20
Different Classifications in The Same Category

• Examples RM380 exchanged with USD100,
• 2.5 tonnes of rice with 2 tonnes of wheat.
• Conditions
• Their exchange must be immediate, at the one and
• the same meeting.
• Effect
• If the rule is not observed then Riba Nasiah
  occurs.

NOTE No rules are required to be observed for
different categories, (Example wheat or palm
oil exchanged with money)
21
Gharar
Gharar Yasir , i.e Minor or Slight
Gharar
Gharar Fahish , i.e Major or Serious Gharar
Divided into 2
22
Gharar

• The Gharar that causes a contract to be NULL and
  VOID
• is a major Gharar which arises out of one of the
  following
• Asset or Merchandise does not exist.
• Asset or Merchandise cannot be delivered or
• Asset or Merchandise not according to
  specification.

23
Other Prohibitions Which Do Not Make Contracts
Invalid

• Deception/ Deceit (Taghrir / Tadlis)
• Contract of Sale during the Friday
  Prayer
• Unfair Loss due to deception/deceit
• (Ghubn Fahish wa Taghrir / Tadlis)
• Others.

24
Permissible Muamalat Contracts
After taking out the types of Muamalat (
transactions) that are prohibited those are
permitted can be divided into three broad
categories.
3 Broad Categories
Trading Contracts
Profit Sharing Contracts
Other Supporting Contracts
25
Trading Contracts
The most widely used transactions are
2 Broad Categories
Cash Sales
Deferred Payment Sales (Debt Financing)
26
Cash Sales

• Normal Cash Sales ( Bai Naqdi)
• Foreign Currency Exchange ( Bai Sarf)
• Exchanges between Ribawi materials of different
  
• classifications within the same category
• (Gold with money or wheat with rice)
• Bai Dayn
• Bai Salam

27
Deferred Payment Sales (Debt Financing)
Bai Bithaman Ajil ( Deferred Payment Sale)
Bai Murabahah ( Cost Plus)
Bai Inah

• Istijrar
• ( Supply or Wholesale
• Financing)

Bai Istinaa ( Sale by Order)
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Deferred Payment Sales (Debt Financing)

• Ijarah Wa-Iqtina
• (Leasing then
• Purchase)

• Qardh Hasan
• ( Benevolent Loan)

• Ijarah Thumma
• Bai
• ( Hire Purchase)

Ijarah ( Leasing)
29
Contracts Of Profit Sharing(Equity Financing)
They are
1) Musharakah (Joint venture profit
sharing)
2) Mudharabah (Trustee profit sharing)
3) Muzaraah (Leasing of land for
agriculture)
4) Musaqat (Watering of orchard)
30
Supporting Contracts
The Shariah also permits contracts to support and
facilitate trading and mobilisation of capital.
They are
1 ) Rahnu ( Mortgage)
4) Wadiah (Safe Custody)
5) Hiwalah (Transfer of Debt)
2) Kafalah ( Guarantee)
6) Ibra (Rebate)
3) Wakalah ( Agency)
31
Essential Elements and Necessary Conditions in
Contract
To make a permissible contract valid, it must
have essential elements and each essential
element must meet the necessary conditions.
32
Essential Elements and Necessary Conditions in
Contract
1- Contract of Sale The essential elements and
the necessary conditions in a contract of sale
are 1. Contract Offer Acceptance
(i) In definite and decisive language and
absolute. (The Majelle - Majallah
Al-Ahkam Al-Adliyah - complete code of Islamic
Civil Law, provides as follows Art. 169
For the offer and acceptance the past
tense is generally used. Art. 170
By aourist tense like Alirim and
Satarim if the present tense is meant, the sale
is concluded, and if the future is
meant, the sale is not completed.

33
Essential Elements and Necessary Conditions in
Contract

• (..continued)
• Art. 171 A sale is not concluded by words in
  the future tense, such as I will take,I will
  sell which mean merely a promise.
• Art. 172 A sale is also not concluded by words
  in the
• imperative tense, such as sell,buy. But a
  sale is
• concluded by an imperative which of
  necessity indicates the present.)
• (ii) The acceptance must agree with the offer.
• (Mjl. Art. 177 If one of the contracting
  parties make an offer for something in any
  manner whatsoever, the other party must make
  the acceptance of it, so as exactly to
  correspond with the offer. He has no right to
  separate either the price or the subject matter
  of the sale.)

34
Essential Elements and Necessary Conditions in
Contract

• (..continued)
• (iii) The contract must be made at the one and
  the same
• meeting.
• (Mjl. Art. 183 After the offer and before
  the
• acceptance, if one of the two parties
  gives an indication of dissent, whether by
  word or act, the offer becomes void, and there
  is no longer room for an acceptance.
• Art. 185 On new offer being made before
  acceptance, the first offer becomes void, and
  consideration is paid to the second offer.)

35
Essential Elements and Necessary Conditions in
Contract

• 2. The Thing Sold
• (i) It must exist
• (Mjl. Art. 177 The existence of the
  thing sold is
• necessary.)
• (ii) The thing sold must be capable of
  being delivered.
• (Mjl. Art. 198 It is necessary that
  the delivery of the thing sold be possible.)
• (iii) The thing sold must be of value, and
  

36
Essential Elements and Necessary Conditions in
Contract

• (..continued)
• (iv) It must be of pure substance.
• (Mjl.Art. 199It is necessary that
  the thing sold should be mal mutaqawwim.
• Art. 126 Mal is a thing which naturally is
  desired by man, and can be stored for times of
  necessity. Art. 127 Mal mutaqawwim is a
  thing the benefit of which is permissible by
  law to enjoy.)
• (v) The thing sold must be known.
• (Mjl. Art. 200 It is necessary that
  the thing sold
• should be known to the buyer.
• Art. 201 The thing sold becomes
  known by a
• description of its qualities and
  state, which will
• distinguish it from other things.)

37
Essential Elements and Necessary Conditions in
Contract

• (..continued)
• (vi) The thing sold must be owned by the seller.
• (Mjl. Art. 365 In order that a sale
  may be nafiz, it is a condition that the
  seller should be the owner of the property
  sold, or agent, or natural or appointed
  guardian of the owner of the property, and
  that there should be no right in any one else.)

38
Essential Elements and Necessary Conditions in
Contract

• 3. The Price
• It must be known in currency and the absolute
  amount.
• (Mjl. Art. 237 It is necessary that the
  price should be named at the time of the
  sale.
• Art. 238 It is necessary that the price
  should be known.
• Art. 239 The knowledge of the price comes
  by a
• statement of its description and amount if
  it does not
• come by seeing it when it is shown.)

39
Essential Elements and Necessary Conditions in
Contract

• 4. The Seller and 5. The Buyer
• (The Two Parties to the Contract)
• (i) The two parties to the contract must be
  capable of
• taking responsibility.
• (Mjl. Art. 361 In the making of the
  sale, there is a
• condition, that the essence of the
  contract, should
• emanate from intelligent persons, that
  is to say, from
• reasonable persons, who possess
  judgement, and
• that they should attach to a subject
  of sale, which
• admits of the consequences of a sale.
• Art. 957 Infants, madmen and people
  of unsound
• mind are of themselves prohibited from
  dealing with
• their property.)

40
Essential Elements and Necessary Conditions in
Contract

• (ii) The two parties to the contract must not be
  prohibited
• from dealing with their property,
  i.e. they must not be
• bankrupts and prodigals (safih).
• (Mjl. Art. 958 A person who is
  prodigal can be
• prohibited by the judge.
• Art. 959 A debtor also, on the
  application of his
• creditors, can be prohibited from
  dealing with his
• property by the judge.)
• (iii) There is no coercion or compulsion exerted
  on
• either of the two parties to the
  contract.
• (Mjl. Art. 949 Ikrah is of two
  sorts. The first sort is Ikrah mulgi. It
  leads to destruction of life in loss of a limb
  or one of them. It is the compulsion, which is
  by a hard blow.

41
Essential Elements and Necessary Conditions in
Contract

• (..continued)
• The second sort is Ikrah ghair mulgi. This
  causes
• only grief and pain. It is compulsion
  which is by things
• like a blow or imprisonment.
• Art. 1006 When they (transactions) take
  place in
• consequence of compulsion which is
  taken into
• consideration, an exchange of property,
  and a
• purchase, and a letting, and a
  conveyance, and a
• compromise about property, and an
  admission, and a
• postponement of a debt and causing of a
  right of
• preemption to cease, are not held good,
  whether the
• compulsion be mulgi or ghair mulgi.
  But if the
• person compelled give his consent after
  the compulsion
• has ceased, in that case they are held
  good.)

42
Essential Elements and Necessary Conditions in
Contract

• 2 - Contract of Leasing
• The essential elements are
• 1. Lessor
• (The necessary conditions are the same as those
  for buyer and seller in the contract of sale.)
• 2. Lessee
• (The necessary conditions are the same as
  those for buyer and seller.)

43
Essential Elements and Necessary Conditions in
Contract

• 3. Contract
• The necessary conditions are
• (i) In definite and decisive language.
• (Mjl. Art. 443 Like sale, letting becomes
  a concluded contract by a proposal and
  acceptance.
• Art. 435 Hiring like sale becomes a
  concluded contract by the past
  tense, it does not become a concluded contract
  by the future tense.)

44
Essential Elements and Necessary Conditions in
Contract

• (ii) Acceptance must agree with offer.
• (iii) Offer and acceptance must be made at the
  same meeting.
• (Art.445 As in sales, so also in making
  a contact of hire, the agreement of the
  proposal with the acceptance, and the unity of
  the meeting for making the contract is a
  condition.)

45
Essential Elements and Necessary Conditions in
Contract

• 4. Asset
• The necessary conditions are
• (i) Belongs to lessor.
• (Art. 446 The letter who makes a contract of
  letting must be the absolute owner of the
  thing, or the agent of the owner, or his
  natural or legal guardian.)

46
Essential Elements and Necessary Conditions in
Contract

• (ii) Specified and known
• (Art. 449 The designation of the thing given
  for rent is necessary. Therefore, if a letter
  be made of one of two shops, without giving
  the choice or designating one of them, the
  letting is not valid.)

47
Essential Elements and Necessary Conditions in
Contract

• (iii) Delivered to lessee.
• (Art. 474 In case there is a condition
  for a deferred payment of the hire, it becomes
  necessary for the lessor to make delivery
  of the thing hired, first. The payment of the
  hire is only necessary on the expiration of
  the time of payment agreed upon.
• Art. 475 When there is a hiring without
  condition for payment in advance on
  afterwards, .the delivery of the thing let by
  the letter must be made first.

48
Essential Elements and Necessary Conditions in
Contract

• (iii) (.. continued)
• Art. 582 The delivery of the thing
  hired to the person who hires it, is the
  giving of leave and permission by the letter,
  in a way that the hirer can derive benefit
  from it without hindrance.
• Art. 583 When a good contract of hiring
  has been made for a time or distance, it is
  necessary that delivery be made to the hirer,
  for the thing to remain constantly and
  continuously in his possession, until the
  completion of the distance on the end of the
  time.

49
Essential Elements and Necessary Conditions in
Contract

• (iii) (.. continued)
• Art. 478 If the benefit from the thing
  hired ceases to exist, than the rent becomes
  no longer payable.)
• Example
• 1. The share of the hire for the time
  when a bath is under repair, remaining
  unused, is not payable.
• 2. The rent for an idle time of mill,
  consequent on the water of the mill being
  cut, is not payable from the time of the
  cutting of the water.

50
Essential Elements and Necessary Conditions in
Contract

• 5. Benefit
• It must meet these necessary conditions
• (i) It can be fixed in value.
• (ii) The lessor has the power and capability
  to use and lease the asset.
• (iii) It must be permissible.

51
Essential Elements and Necessary Conditions in
Contract

• (iv) It is known.
• (Art. 451 In a contract of hire it is
  necessary to make known the use to which the
  thing hired is to be put, in such a way as to
  put a stop to dispute.
• Art. 452 As regards things like a
  house, shops, and a wet nurse, the benefit is
  known by a statement of the time of the
  hiring.

52
Essential Elements and Necessary Conditions in
Contract

• (iv) (.. continued)
• Art. 454 When land (Arazi) is taken on
  rent, together with the time fixed, it is
  necessary to say for what business it has been
  hired, and if it is for agriculture, to fix
  what will be sown, or to make it general,
  saying for sowing whatever the hirer wishes.
• Art. 457 It is a condition that the
  benefit must be able to be received.)
• (v) The benefit must not be in the form of any
  material thing.

53
Essential Elements and Necessary Conditions in
Contract

• 6. Rental
• Its necessary condition is that
• (i) It must be known.
• (Art. 450 It is a condition that the
  rent be known.
• Art. 464 if the consideration for the
  letting is cash, it is known by fixing its
  quantity - like the price of a thing sold.

54
Essential Elements and Necessary Conditions in
Contract

• (i) (.. continued)
• Art. 465 If the consideration (Bedel)
  for the letting is composed of merchandise
  (Aruz), or things measured (Mekilat) on
  things weighed (Meozunat) or things numbered
  which are alike (Adediat Muteqarribe) it is
  necessary to declare the description as well
  as the quantity.
• Art. 477 As regards, the obligation to
  pay the hire, it is a condition that the thing
  hired should be delivered, that is to say, the
  rent is considered to run from the time of
  delivery.)

55
Essential Elements and Necessary Conditions in
Contract

• 3 - Bai Inah
• Bai Inah must meet the following requirements
• 1. There must be two separate contracts
  properly executed. First the contract of sale
  by bank to customer on deferred payment term.
  Second the contract of repurchase by bank from
  customer on cash term.
• 2. The merchandise or the asset must not be a
  ribawi material in the medium of exchange
  category (gold, silver or currency) because all
  payments for purchases are made in money.
• 3. Each of the two contracts must have the
  essential elements and each of the essential
  element must meet the necessary conditions.

56
Essential Elements and Necessary Conditions in
Contract

• 4 - Bai Dayn
• The requirements of Shariah concerning Bai Dayn
  are
• 1. A debt must have been created through a
  contract of deferred payment sale of goods or
  service.
• 2. The goods must have been delivered or the
  service must have been rendered.
• 3. The trading of the debt must be on cash
  term.

57
Essential Elements and Necessary Conditions in
Contract

• 5 - Qardh Hasan
• In giving Qardh Hasan the two following matters
  must not be contravened
• 1. The lender must not impose any extra
  payment in the contract.
• 2. The borrower must not promise in the contract
  to pay anything extra.

58
Essential Elements and Necessary Conditions in
Contract

• 6- Mudharabah
• The essential elements and necessary conditions
  of Mudharabah are
• 1. Owner of capital - (same as buyer and
  seller)
• 2. Entrepreneur - (same as buyer and seller)
• 3. Capital - money only.
• - not debt.
• - specific amount.
• - paid to entrepreneur.
• - from owner of capital only.

59
Essential Elements and Necessary Conditions in
Contract

• (..continued)
• 4. Business - halal
• - managed by entrepreneur only.
• 5. Profit / Loss sharing - profit shared
  according to agreement in fraction, ratio
  or percentage not in absolute amount.
  - loss borne by owner of capital only.
• 6. Contract - in definite and decisive
  language.
• - acceptance must agree with offer.
• - offer and acceptance made at the one
  and same meeting.

60
Essential Elements and Necessary Conditions in
Contract

• Other characteristics - based on trust of
  owner of capital in entrepreneur.
• - capital cannot be used
  for overheads.
• - sharing of profits at gross.
• - profits shared after realisation

61
Some Characteristics of Contract

• 7 - Security
• The Shariah allows the owner of debt to ask for
  security for his debt from debtor. Securities
  are in the form of
• (i) Rahnu (mortgage in the form asset), and
• (ii) Kafalah (guarantee being a person).
• Among characteristics of Rahnu are
• - Sale of mortgaged property is invalid
• - Mortgaged property can be sold by court order
  to pay for the debt for which it is mortgaged.
  The balance if any, after payment of debt is to
  be returned to mortgagor.

62
Some Characteristics of Contract

• 8 - Wakalah
• In Wakalah the agent must mention the principal
  in the following transactions
• (i) Hibah
• (ii) Lending and borrowing
• (iii) Deferred payment sale
• (iv) Wadiah
• (v) Rahnu
• (vi) Musharakah and,
• (vii) Mudharabah

63
Some Characteristics of Contract

• 9 - Wadiah
• There are two forms of Wadiah
• (i) Wadiah Yad Amanah (Trustee Safe Custody)
• (ii) Wadiah Yad Dhamanah (Guaranteed Safe
  Custody)
• Originally Wadiah is of Yad Amanah where the
  custodian has the duty to protect the property
  by
• (i) Not mixing or pooling the properties
  (money) under his custody.
• (ii) Not using the properties.
• (iii) Not charging any fees for safe custody.
• If he failed any of the above Wadiah changes to
  Yad Dhamanah where
• - he has to return (replace) the properties to
  the owners if they were lost or destroyed.

64
Some Characteristics of Contract

• 10 - Hiwalah
• In Hiwalah the debt is transferred
• - in full amount and,
• - at maturity
• 11 - Ibraa
• Ibraa is where a creditor lets go of his right
  to a debt. Normally it is given for early
  settlement of debt.
• Two of the most important characteristics of
  Ibraa are
• (i) The amount of Ibraa must be known and
  specified, and
• (ii) When the Ibraa is given and accepted it is
  forbidden and invalid for the party who gives
  to withdraw it.

65
Thank you