05 Lecture, EOIF - Fall 2013.ppt

7/23/2019 05 Lecture, EOIF - Fall 2013.ppt

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Essentials of Islamic Banking and FinanceIQRA University North Campus. MBA Fall, 201

!alha "aleem #apa$ia talhasaleem%apa$ia&'mail.(om

Islamic law of contractIslamic law of contract



Contents of the lectureContents of the lecture

Defnition o contract; Types o contract;

Basics o the contract;

Conditional contract;

Application o law o contract;

Types o sale;

Q & A;



Islamic law of contractIslamic law of contractand types of saleand types of sale



Denition of contractDenition of contract

Legally a contract is an agreement between two ormore persons or parties or doing something;

According to Islam eery action or wor! that ta!esplace between two or parties is a contract;

Thereore" e#change o goods" receiing a git"

accepting a woman as wie thro$gh %i!ah andagreement on partnership etc etc come $nder the$mbrella o 'contract';

Contract has di(erent types or which the r$les andlaw are di(erent;



A contract can be o two nat$re) ) Compensatory or nancial contract;This is a contract in which there is e#change o either

goods or serices against an agreed compensation * price *ee * charges;

) Non Compensatory or social contract;This is a contract in which there is e#change o either

goods or serices against an agreed compensation * price *ee * charges;

Types of contract Types of contract



Basics of a contractBasics of a contract

A +inancial Contract is allowed in Islam with someconditions)

) The contract should not contain any element of Riba(explicit or implicit;

) The contract should not ha!e element of "harar (excessi!e

uncertainty;

) The contract should conform to the rules laid down by#hari$ah for execution of contracts;

) The contract should not be for those acti!ities which ha!ebeen considered impermissible (%aram i&e& 'eneralprohibitions;

,lement o -iba can easily be recogni.ed andeliminated;



The conormity with laws o /hari'ah and theelement o 0harar are important points that needelaboration;

,ery contract has some basic elements whichsho$ld conorm to r$les o /hari'ah;

The elements o a contract are)

) arties)persons to contract (those who enter in a contract;

) *ordin's of contract;

) #ub+ect matter of contract (the thin')tas, meant by thecontract;

) Compensation (remuneration)price for exchan'e;

) -echanics of the contracts (ri'hts and responsibilities;




1arties to contract sho$ld be) ) .li'ible to enter in such a contract;

) #ane;

) -ature enou'h to understand the nature of transaction;

) /e'ally allowed for executin' of such transaction(licence)permit re0uirement etc& etc&;




2ordings o a contract sho$ld) ) Contain 12er from one party and 3cceptance from other

( I+ab4o45obool in session of contract (-a+lisul 3$0d;

) This 12er and 3cceptance can be63ral*erbal 4Qa$li5" p$rchase thro$gh bargaining;

Implied*$nderstanding 4Ishsraa5" p$rchase in s$permar!et;

) Be resent i&e& they must create sense of immediate e2ect(words 'i!e sense of future are not allowed7 8I will buy it9does not ma,e sense of immediate e2ect;

) :nconditional and Non4contin'ent conditional wordin' donot create immediate e2ects7 8I will accept if my fatherallow it9 is a conditional wordin';




/$b6ect matter o a contract sho$ld be) ) /awful le'ally and Islamically allowed;/$b6ect matter and the $nderlying ca$se m$st be law$l;

The transacted ob6ect m$st be legally owned by theparties to a contract;

) .xistent somethin' that exists7 contract of supply ofman'oes in <anuary;

) Deli!erable can be transacted and exchan'ed7 sale of shin water or bird in air;

) #pecied in clear manner7 Toyota corolla7 =/i7 en'ine > andchassis >;

) 5uantied if 0uantiable7 =?@@@ ,' of wheat;




Compensation 4rem$neration*price or e#change5) ) Conditions apply to #ub+ect matter also apply here;

) In case of barter system the application becomesimportant;

) /awfulness7 .xistence7 Deli!erability7 #peciability and5uantiability become important;

) In normal trade specication of currency is enou'h;




-echanics of the contracts (ri'hts and responsibilitiesshould be clear;

Both parties should bear the responsibility and ha!e theri'hts which are re0uired by the nature of transaction;

In case of sale ownership related ris,s should be born byowner durin' the ownership7 after its transfer the owner isnot responsible7 (reason behind the secured nature of

credit sale;

3ny condition inserted which is a'ainst the mechanics ofthe contract is in!alid7 (ma,in' a lessee in a leasetransaction responsible for ownership related expenses isnot allowed& "uaranteein' of principle in a partnership is




Conditional contractConditional contract

Conditional contract are not permissible in Islam;

%owe!er7 business norms allow conditional contractsespecially in current business scenario;

:lema and scholars ha!e described the method forinsertin' a condition in a contract;

Three types of conditions are allowed while one type is notallowed;



Conditional contractConditional contract

3 condition7 which is not a'ainst the basic ob+ecti!e of thecontract7 is a !alid condition7 e&'& a condition of freedeli!ery to buyerAs premises;

3 condition7 which is a'ainst the basic ob+ecti!e of thecontract7 but is in the mar,et practice7 is also a !alidcondition7 e&'& condition of !e4year warranty and oneyear free ser!ice;

3 condition7 which is a'ainst the basic ob+ecti!e of thecontract7 not in the mar,et practice and not in fa!our ofany contractor7 is a !alid condition7 e&'& a charity imposedon a transaction;

3 condition that is a'ainst the basic ob+ecti!e of the



#ummary#ummary

3 contract7 whether it is a sale contract or I+arah contractor partnership contract7 should conform to these basicrules;

iolation of these rules ma,e the contract unacceptable to

#hari$ah;

3s a matter of principle a contract in one sector may di2erin application of these rules from other contract in other

sector;

1il sector has di2erent meanin' for specication and0uantication from what su'ar industry has;



3pplication3pplication

Islamic law o contract applies on all types ocontracts;

7ere we will see its application to sale 4being theast mode o fnancing in Islamic ban!ing ind$stry5;

According to Islamic laws o sale these are !ey

elements o a sale transaction)

) Contract of sale62ordings ie 3(er & Acceptance 4 I6ab8o8Qobool5

3ral*erbal 4Qa$li5 or Implied 4Ishsraa5;

1arties to contract 4b$yer and seller5 9:$taa<$adain=m$st be /ane and :at$re;

Does not contain any $nacceptable element ie sale m$stbe non8contingent" immediate and $nconditional;



3pplication3pplication

) #ub+ect -atter (sold 'ood -abee$6/ho$ld be ,#isting" >al$able and ?sable" Capable o

ownership*title;

Delierable" /pecifed and Q$antifed;

/eller sho$ld hae title and ris!

) rice6Q$antifed 9:aloom=

/pecifed and certain 9:$taayyan=;

Time and mode o payment sho$ld be well !nown;

) Deli!ery and ossession of the sold 'oods6

Deliery and possession either 1hysical*Act$al orConstr$ctie;

1lace and method o deliery sho$ld also be !nown;



Types of sale 4 alidity E In!alidity Types of sale 4 alidity E In!alidity

The application of the law of contract into #ale andurchase elaborates to us the way an Islamicallyacceptable sale should be;

3 sale sometimes does not comply with these laws and

misses some or one of the important elements;

In such case the sale is considered unacceptable to Islam;

There di2erent le!els in unacceptability to #hari$ah;

Comin' slide elaborate these le!els and types;



Types of sale Types of sale

According to the nat$re o contract the sale haso$r types)

) alid sale ( Bai #ahih6A sale that meets all re<$irements laid down by /hari'ah

or its contract$al nat$re;

) oid)Non existin' #ale Bai$4e4Baatil;A sale that does not meet basic re<$irements o its

contract$al nat$re;

) .xistin' sale but !oid due to defect (hun' sale Bai$4e4Fasid;

A sale that meets basic re<$irements o its contract$alnat$re b$t contains an impermissible element;

) alid but disli,ed sale (Bai -a,rooh6A sale that meets basic re<$irements o its contract$al

nat$re b$t e#ec$ted in bad*$nethical manners




>alid sale 4 Bai'8e8/ahih5) ) 3 sale that meets all re0uirements laid down by #hari$ah for

its contractual nature;

) 3 sale that executed by6,ligible parties;

2ith proper wordings;

+or e#change o a permissible thing which is identifed"<$antifed and well !nown to both parties;

2ith specifc price; and

Deliery o the sold goods

) .xchan'e of a $CitiGen cxH@@ 'olden chain with blac, dial$watch a'ainst cash payment of R ?@7@@@)J withimmediate deli!ery is a alid #ale transaction;




>oid*%on e#isting /ale 9Bai'8e8Baatil=; ) 3 sale that does not meets some or all basic re0uirements

laid down by #hari$ah for its contractual nature;

) 3 sale that executed6By ineligible parties; or

+or e#change o a impermissible thing; or

+or a thing which is not owned by seller; or

+or a thing which is not delierable;

) #ale of stolen watch is an in!alid (Baatil sale which doesnot benet in creation of ownership for buyer nor the pricerecei!ed by seller is %alal for him;




,#isting sale b$t oid d$e to deect 4h$ng sale59Bai'8e8+asid=;

) 3 sale that meets basic re0uirements of its contractualnature but contains an impermissible element;

) 3 sale that executed6

2ith element o 0harar;+or an $nspecifed thing; or

2ith $n!nown price;

Conditionally or contingently;

/ale o one Toyota corolla rom a lot o cars with

e#plaining the specifcations;

) #uch sale is a hun' sale meanin' the ownership transferredif the buyer ta,es deli!ery but the status will be hun'unless the element is remo!ed;



>alid b$t disli!ed sale 4Bai'8e8:a!rooh5) ) 3 sale that meets basic re0uirements of its contractual

nature but executed in bad)unethical manners&A sale that e#ec$ted at the time o A.aan or @$m'ah;

/ale o grapes to wine ma!er;

/ale o tran<$ili.er to addictie person;Interr$ption in an ongoing deal between two;

) #uch sale is allowed but disli,ed by #hari$ah andsometimes hi'hly discoura'ed;




Types of sale Deferment of ayment E Deli!ery Types of sale Deferment of ayment E Deli!ery

/pot /ale) #imultaneous exchan'e of 'oods formoney;

Deerred /ale) Deferred payment sale7 commonly ,nownas a credit sale;

Adanced /ale) #ale with immediate payment anddeferred deli!ery;

+$t$re /ale) Deferred payment sale with deferreddeli!ery of sub+ect matter& This transaction isnot acceptable accordin' to Islamic #ales

Contract&



5uestionsK5uestionsK

05 Lecture, EOIF - Fall 2013.ppt

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