Key Issues & Perspective on Islamic
Aspects of Financial Transactions
(Principles of Corporate Mu’amalat)
Prof. Dr. Mohd. Ma’sum Billah
www.drmasumbillah.blogspot.com
Shangri-La- Hotel, Jakarta
Definition of Shari’ah and Fiqh
(affecting Financial Mu’amalat)
Shariah
Fiqh
Defined as a Divine revealed law
Defined as a detailed rulings of law
which Muslim jurists understood and
derived from the Shariah
Categories Of Fiqh
4 Categories
Fiqh
Ibadat
Fiqh Ahwal
Shakhsiyyah
Fiqh
Muamalat
Fiqh
Jinayat
Categories Of Fiqh
Fiqh
Ibadat
Fiqh
Muamalat
Fiqh Ahwal
Shakhsiyyah
Fiqh
Jinayat
relating to worship
relating to transactions
relating to family
matters
relating to crimes,
offences & punishments
Corporate Muamalat Contract

Defined as an Offer and
Acceptance

Could be verbal , in writing, through
signs or any other forms of Offer and
Acceptance.
Categories Of Muamalat
Contracts
1) Acquiring Ownership Contracts (Uqud Tamlikat)
2) Profit Sharing Contracts ( Uqud Ishtirak)
3) Safe Custody Contracts ( Uqud Hifz)
7
Categories
4) Security Contracts (Uqud Tauthiqat)
5) Permissions Contracts ( Uqud Itlaqat)
6) Restriction Contracts ( (Uqud Taqyidat)
7) Releases Contracts ( Uqud Isqatat)
Categories Of Muamalat
Contracts
1) Acquiring Ownership Contracts (Uqud Tamlikat)
a) Contract of exchange ( Uqud Muawadhat)
Examples
 Bai
 Ijarah
b) Contract of Donation ( Uqud Tabarru’at)
Examples
 Hibah
 Sadaqah
Categories Of Muamalat
Contracts
2) Profit Sharing Contracts (Uqud Ishtirak)
Examples


Musyarakah
Mudharabah
3) Safe Custody Contracts (Uqud Hifz )
Example

Wadiah
Categories Of Muamalat
Contracts
4) Security Contracts ( Uqud Tauthiqat)
Examples


Kafalah
Rahnu
5) Permissions Contracts ( Uqud Itlaqat )
Example

Wakalah
Categories Of Muamalat
Contracts
6) Restrictions Contracts ( Uqud Taqyidat )
Example

Taflis
7) Releases Contracts ( Uqud Isqatat)
Example

Ibra’
Shariah Requirements in
Corporate Muamalat Contract
Islam permits trade and commerce .
Rules to be Observed
Avoidance of
prohibitions
Observing that
every contract
possesses all its
essential elements
and that every
essential element
meets the
necessary conditions
Prohibitions In Corporate
Muamalat Contract
2 Types:

Prohibitions which make contracts invalid

Prohibitions which do not make contracts invalid
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
Riba
Means :
Extra
Two kinds
Riba out of lending
and borrowing
( RIBA DUYUN)
Riba in trading
transactions
( RIBA BUYU’)
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
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.
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
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
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.
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)
Gharar
Gharar
Fahish ,
i.e Major
or
Serious
Gharar
Divided into 2:
Gharar Yasir ,
i.e Minor or
Slight Gharar
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.
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.
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:
Profit Sharing
Contracts
Trading Contracts
Other Supporting
Contracts
Trading Contracts
The most widely used transactions are:
2 Broad Categories
Cash Sales
Deferred Payment
Sales
(Debt Financing)
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
Deferred Payment Sales
(Debt Financing)
Bai’ Murabahah
( Cost Plus)
Istijrar
( Supply or Wholesale
Financing)
Bai’ Istina’a
( Sale by Order)
Bai’ Bithaman Ajil
( Deferred Payment
Sale)
Bai’ Inah
Deferred Payment Sales
(Debt Financing)
Qardh Hasan
( Benevolent Loan)
Ijarah Wa-Iqtina’
(Leasing then
Purchase)
Ijarah
( Leasing)
Ijarah Thumma
Bai
( Hire Purchase)
Contracts Of Profit Sharing
(Equity Financing)
They are:
1) Musharakah
(Joint venture
profit sharing)
2) Mudharabah
(Trustee profit
sharing)
3) Muzara’ah
(Leasing of land
for agriculture)
4) Musaqat
(Watering of
orchard)
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)
2) Kafalah ( Guarantee)
5) Hiwalah
(Transfer of Debt)
3) Wakalah ( Agency)
6) Ibra’ (Rebate)
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.
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.
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.)
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.)
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
Essential Elements and Necessary
Conditions in Contract
(..continued)
(iv) It must be of pure substance.
(Mjl.Art. 199:It 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.)
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.)
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.)
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.)
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.
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.)
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.)
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.)
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.)
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.)
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.)
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.
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.
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.
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.
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.
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.
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.
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.)
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.
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.
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.
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.
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.
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
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.
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
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.
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.
Thank you