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ISLAMIC COMMERCIAL LAW – Book Sample

Contents – ISLAMIC COMMERCIAL LAW

• List of Abbreviations xiii
• Acknowledgments xv
• Introduction: An Overview of Prohibited Elements 1
• Usury (Riba) 2
• Ambiguities in a Contract (Gharar) 3
• Gambling (Maysir) 4
• Prohibited (Haram) Properties 5
• 1 The Contract of Sale (Bay’ ) 7
• Introduction 8
• The Pillars of a Sale Contract 9
• Prohibited Sales and Practices 14
• Contentious Sales 19
• Chapter Questions 29
• 2 Types and Classifi cations of Sales 33
• Trust Sales (Buyu’ al-amanah) 35
• Def erred Payment Sale (Bay’ Bi-thaman Aajil) 36
• Islamic Banks and a Sale Contract 37
• Future Commodity Sale (Bay’ al-Salam) 39
• Manufacturing Sale (Bay’al-Istisna’) 43
• Currency Exchange (Bay’ al-Sarf) 47
• Chapter Questions 49
• 3 The Contracts of Employment and Lease (Ijarah),
• Borrowing (I’arah), and Reward (Ja’alah) 51
• Introduction 52
• The Pillars of the Ijarah Contract 53
• The Contract of Borrowing Things (al-I’arah) 60
• The Contract of Reward for Service (al-Ja’alah) 61
• Chapter Questions 64
• 4 The Contract of Agency (Wakalah) 67
• Introduction 68
• The Pillars of an Agency (Wakalah) Contract 69
• The Types of Agency 70
• Agency in Sale 71
• Agency in Purchase 73
• The Effects and the Rights and Liabilities of the Contracting Parties 74
• An Agent Appointing Another Agent 75
• Unauthorised Agency (al-Fadhalah) 76
• Termination of an Agency 76
• Chapter Questions 77
• 5 The Contract of Loan (al-Qard ) 79
• Introduction 80
• Loan (Qard), Debt (Dayn), and Borrowing Things (I’arah) 81
• A Loan That Provides Conditional Benefi t to the Lender 82
• Waiting or Giving Time to a Borrower Is a Commendable Act 84
• Chapter Questions 84
• 6 The Contract of Safekeeping (al-Wadi’ah) 87
• Introduction 88
• The Pillars of Wadi’ah Contracts 89
• Relationship Between the Parties 89
• When Is the Depository Held Liable? 90
• CHAPTER 1: Contents / ix
• Using Deposited Money for Investment 91
• Wadi’ah and Islamic Banks 92
• Termination of Wadi’ah 92
• The Differences Between the Contracts of Wadi’ah and Qard 93
• Chapter Questions 93
• Notes 94
• 7 Partnership (al-Sharikat) 95
• Introduction 96
• Division of al-Sharikat 96
• Capital Partnerships (Sharikat al-Amwal) 98
• Management of Partnership (Sharikat al-’Inan) 101
• Partnership of Services (Sharikat al-a’mal) 101
• Partnership of Reputation or Creditworthiness (Sharikat al-Wujuh) 102
• Partnership (Sharikat al-’Inan/Musharakah) and Islamic Banks 104
• Dissolution of Partnership 106
• Chapter Questions 107
• Notes 109
• 8 Silent Partnership (Mudarabah/Qirad ) 111
• Introduction 112
• Pillars of Mudarabah Contract 113
• The Status of Sahib al-mal and Mudarib 114
• Distribution of Profi t and Treatment of Losses 114
• Types of Mudarabah 115
• Personal Expenses of the Mudarib 116
• What the Mudarib Cannot Do 117
• Void Mudarabah 117
• Termination of Mudarabah 118
• The Differences Between Musharakah and Mudarabah 119
• Chapter Questions 119
• Notes 121
• 9 Pledge, Mortgage, or Pawn (al-Rahn) 123
• Introduction 124
• The Pillars of Pledge (Rahn) 125
• The Use of the Pledge by the Pledgee 126
• Forfeiture of the Pledged Property 127
• Chapter Questions 128
• Notes 128
• 10 Guarantee (al-Kafalah) 129
• Introduction 130
• Pillars of Kafalah 131
• The Effects of Kafalah 132
• Immediate, Conditional, and Suspended Kafalah 132
• x / CONTENTS
• Types of Kafalah 132
• Charging a Fee for the Service of Guarantee 133
• Letter of Guarantee 134
• Termination of Kafalah 134
• Chapter Questions 135
• Notes 136
• 11 Transfer of Debt (al-Hawalah) 137
• Introduction 138
• Pillars of Hawalah 140
• Types of Hawalah 140
• Transfer of Right (Hawalat al-Haqq) 141
• Bill of Exchange (Suftaja) 141
• Termination of Hawalah 142
• The Differences Between Hawalah and Kafalah 142
• The Difference Between Hawalah and the Sale of Debt (Bay’ al-Dayn) 143
• Chapter Questions 143
• Notes 144
• 12 The Contracts of Absolution (al-Ibra) and Set-Off (al-Muqassah) 145
• Introduction 146
• The Subject-Matter of Ibra 146
• The Pillars of Ibra 147
• Types of Ibra 149
• The Effect of an Ibra 149
• The Differences Between Absolution (Ibra) and Gift (Hibah) 150
• The Contract of Set-Off (al-Muqassah) 150
• Classifi cation of Muqassah 150
• Chapter Questions 152

Preface

Islamic commercial law is an important component of al-fiqhal-mu’amalat. Its fundamental prin- ciples are provided by the Qur’an and the Sunnah. In the light of these principles, Muslim jurists have provided in great detail scholarly works on each individual contract. Islamic contracts are seen as a means that provide various options in order to obtain permissible (halal) earnings. Earning in a permissible way is considered an act of worship (‘ibadah) in Islam.

Muslim jurists in their voluminous books on Islamic Fiqh have discussed together the rules pertaining to worship (fiqh al-’ibadat) and the rules pertaining to commerce and business (fiqh al-mu’amalat) and give them equal treatment and significance. A chapter would discuss the pillars (arkan) and condi- tions (shurut) for prayer (salat), while the next chapter would discuss the pillars and conditions of sale (bay’) or partnership (musharakah) contracts.

Any discussion on a certain contract would take into account the prohibitions of usury (riba), ambiguity (gharar), gambling (maysir), and other unlawful practises. The holistic approach adopted by Muslim jurists would also relate dis- cussions on an individual contract to the objectives of Shari’ah, which further supplemented the already existing body of literature on Islamic commercial and financial laws.

Islamic banking and finance is contract-based banking and finance. An Islamic bank has to establish Shari’ah-compliant contractual relationship with its customers both on deposit and financing sides. Various Islamic contracts are also used in different sukuk structures for raising funds and their subsequent use. The knowledge of Islamic contracts is therefore central to any commercial, business, and banking activity. Thus, there is a renewed and growing interest in the study of Islamic contracts. However, there is also an increasing tendency among both students and practitioners of Islamic banking and finance to study individual contracts and transactions with- out referring to their philosophical foundations and the objectives of Shari’ah.

 There is a danger that there would be a greater emphasis on procedural and legal formalities of contracts while their substance and the purposes for which they are intended may largely be ignored. This would be a departure from the holistic approach that characterised Islamic law of transactions for centuries.

Each individual contract has its own pillars and conditions. Pillars (rukun, plural arkan)

refer to the main constituent element of a contract without which a contract is not complete. Generally, pillars of a contract include the parties to a contract, the subject matter of a contract, and the offer and acceptance (which show the mutual consent of the parties). There are also conditions for each pillar of a contract—for instance, conditions related to the parties to have the requisite legal capacity (ahliyyah), conditions related to the object of the contract to be well defined and known, or conditions related to the language of an offer and acceptance to be clear.

Conditions in a contract are meant to avoid ambiguities (gharar), usury (riba), gambling (maysir), and other prohibited elements. One of the important functions of conditions is to protect both parties and to manage possible risk that may arise from the contract. We have discussed the pillars for each individual contract and its important conditions. Since conditions related to the legal capacity of the contracting parties are universally applicable to all contracts, in this book unless necessary I have not repeated them for each individual contract. The assumption is that the par- ties to a contract have the requisite legal capacity. Instead the focus is on other conditions that are unique to that individual contract.

This book developed during my years of teaching at the Kulliyyah of Economics and Management Sciences, International Islamic University Malaysia. I was motivated to write this book primarily by the shortage of English books on Islamic commercial and financial transac- tions that would combine the theory with the practise. There was a need for a textbook that would discuss Islamic contracts with a view to practise them and to avoid discussions on detailed issues that fill volumes in the available works of Fiqh. At the same time, the book should not only dis- cuss the form of individual transactions but also their substance and purposes.

This book begins with an introductory discussion on the prohibited practises. The first two chapters discuss the contract of sale and its various types. In the succeeding chapters other contracts are discussed. A chapter is devoted to a discussion on an individual contract. However, in certain chapters two or three contracts are combined due to their similarities. The book also uses diagrams to explain contractual relationships between the parties and where necessary discusses their applications. At the end of each chapter, true/false and short answer questions are provided to enable read- ers to evaluate their understanding of the various contracts.

Answers to the true/false questions can be found at the end of the book. For the sake of accuracy and convenience I have provided both the Arabic origin and the English translations of the Qur’anic verses and ahadith (singular hadith).

The Contracts of Absolution (al-Ibra) and Set-Off (al-Muqassah)

The Subject Matter of Ibra

The proper subject matters of ibra are debt (dayn), right (haqq), and claims over a nonfungible property or a thing (‘ain). Debts are the most common subject matter of ibra in situations in which a creditor drops his debt and releases the debtor. Accordingly, debts of fungible proper- ties, such as rice, sugar, or money, can be dropped or annulled as they are considered as an obli- gation (dayn) that could be established as a liability.

Ibra can also be exercised in relation to rights that concern humans. For instance, a credi- tor may release a guarantor in a contract of kafalah, or a creditor may release a transferee in a contract of hawalah. Similarly, a person may waive his right to use a certain property, or his right to cancel a contract based on the option of defect, or his right to claim compensation for the destruction of his property. Ibra is not valid with regard to the rights of Allah (swt) (huqullah). For instance, the punishment for a perpetrator of rape, false accusation, or theft cannot be waived after the matter has reached the court and a judge convicts him. However, ibra can be made by the heirs of a murder victim with regard to the right of retribution for killing or murder.

Borrowing of nonfungible properties such as a book or a computer is not considered a debt (dayn) and cannot be dropped. The book or the computer will remain in the ownership of the lender. In such cases, a mere drop of right in favour of the borrower of the book or computer is not enough, but a clear transfer of ownership through other contracts such as a gift or sale is needed.

 However, other claims regarding a nonfungible property (‘ain) could also become the subject matter of ibra. These may include, for instance, the right to demand the return of a cer- tain thing, such as a book or a car, or the delivery of a sold item. In such cases, the rights could be dropped, but the ownership over those items remains with the owner. In contrast to debt (dayn), which can be dropped by an ibra, it is not possible to use ibra in relation to a thing itself (‘ain) because it amounts to the dropping or cancellation of ownership right over that thing, which is not accepted by all Fiqh schools.

The Pillars of Ibra

The Hanafii jurists argue that the contract of ibra has only one pillar of offer because they view ibra as a dropping of a right. According to the majority of the jurists, ibra has four pillars. They are:

1. The creditor or a person who has dropped his right.
2. The debtor or a person who is absolved from an obligation.
3. The claim, right, or debt that is dropped.
4. The offer and acceptance.

The majority of the jurists view ibra in substance as the dropping of a creditor’s right. They argue that ibra becomes effective when a person declares the dropping of his or her right or cancels his or her debt. They say that acceptance by the debtor is not required. For instance, a creditor may say to a debtor, “I release you from the debt, or I have no claim on you, or I have no right on you, or you have settled the debt fully.” In these situations the debtor does not need to accept the offer. The Maliki jurists, on the other hand, view ibra as a transfer of ownership of a debt to the debtor. They argue that ibra is similar to a gift and it therefore requires acceptance on the part of the debtor. The Shafi’is and Hanbalis are of the opinion that ibra’ is valid even if rejected by the debtor.

The Hanafiis and Malikis, on the other hand, think that ibra’ is not valid when rejected. The Hanafiis argue that although ibra does not require acceptance, it is invalid if rejected. Thus, if a creditor releases the debtor from the debt, ibra is still valid, even if there is no acceptance from the debtor. However, in case of rejection by the debtor, ibra has no effect. Hence, if one person releases another from debt, there is no condition that the person released should accept it. However, if he does not accept it, the ibra has no effect.2

Important conditions for ibra:

• The creditor should have complete legal capacity. Ibra is not valid from a prodigal or a bank- rupt person.
• The creditor should be the owner of the right or an agent acting on behalf of the owner.