After having covered the Shariah governance aspect of Islamic banking, particularly the part where I explained that the parameters of Islamic financing contracts did not need to undergo any changes during and after the global financial crisis of 2008 whereas wholesale changes were brought to the conventional banking side in almost all countries of the world, we shall now comprehensively examine as to what these Shariah financing contracts are that are used by Islamic banks which have endured the test of time on several occasions.
We shall start with the understanding of the legal definition of a contract under Islamic Shariah and the essential ingredients that complete a contract. A contract in Arabic is called Aqd. The literal meaning of Aqd in Arabic is to bind or to strengthen. The word Aqd is also used in Arabic in the sense of confirming an oath. As such, any covenant, pact, agreement and treaty will also be referred to as Aqd since all of them demonstrate a firm resolve for execution. The plural of Aqd is Uqood or contracts.
According to Shariah, a contract cannot be defined as such unless it has the following four prerequisites:
1. Existence of minimum two parties
A contract cannot be formed with the presence of a single party. Although a single intention may lead to various obligations, such as the remission of a debt or declaration of a gift or donation, etc, these cannot be called a contract in Shariah and hence will not be considered binding on its declarer. If the declarer fulfills what he has uttered, he will be considered a man of integrity. However, if he decides to rescind from his declaration, it will be difficult to prosecute him.
2. Offer and acceptance
It is necessary for a contract to have consent from a minimum of two parties forming the contract over the purpose and content of the contract. In Arabic, it is called Ijab wa Qabool, meaning offer (Ijab) and acceptance (Qabool).
An offer can be made by either party in a contract, ie seller or buyer. Similarly, the acceptance also could come from any of them. As such, if the seller offers to sell his car for AED25,000 (US$6,806.37) and the buyer accepts it, this will form a valid contract. Likewise, if the buyer states that he is ready to buy the car at the aforementioned price and the seller expresses his agreement, this too will constitute a contract.
The offer and acceptance could be written as well as verbal since Islam gives high importance to the fulfillment of one’s obligation under a contract, irrespective of whether it is written or verbal. Also, a Muslim is required to honor his word.
3. Shariah compliant
The offer and acceptance between the parties should be for a purpose not repugnant to Shariah. If the parties agree over an act which is out of line with Shariah, the contract will be void under Islamic law. As such, if Party A signs a contract to borrow money from Party B at a specified interest rate and for a fixed time, it will not be considered a valid contract under Islamic law since Islam forbids the practice of lending and borrowing the money on interest.
4. Contract’s object
The subject matter of the contract must change hands upon the completion of the contract. For example, if the contract is for the sale of a house by Party A to Party B, the ownership of the house must be transferred to Party B upon the conclusion of the contract. Similarly, if Party A agrees to lease the house to Party B, the possession of the house must be granted by Party A to Party B in order to achieve the purpose of the lease contract.
The different nature of contracts
Although the aforementioned major elements may be found in all types of contracts, Islamic jurists have gone to great pains to examine various types of contracts one by one and define their respective nature, parties, roles, conditions, rights and responsibilities.
For instance, a sales contract is different in nature than a lease agreement despite the presence of some common elements such as the presence of two parties, offer and acceptance, Shariah compliance and the subject matter, etc. Will the end result of both contracts be the same? Of course not, since the subject of the lease contract being a house will continue to be the property of the lessor as against the sales contract where the ownership must be changed to the buyer.
We will now examine the importance of an object (or consideration) in a contract under Islamic law. The following are the eligibility parameters for an object of a contract, as defined by Shariah scholars.
Eligibility for transaction
The object of a contract should be fit or suitable for carrying out a transaction, ie it should be executable or doable within the normal business environment. Shariah renders any such contract invalid where it will be impossible to achieve the consideration for which the contract was formed. Let us try to understand this by way of an example. If Party A offers Party B a certain amount of money for selling him 10 goats with the height of seven feet each and Party B accepts the offer, Shariah rules it out as a Batil or invalid contract since it will be impossible to execute it.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions of the Dubai Islamic Economy Development Centre, nor the official policy or position of the government of the UAE or any of its entities. The purpose of this article is not to hurt any religious sentiments either consciously or even unwittingly.
Sohail Zubairi is the projects advisor with the Dubai Islamic Economy Development Centre. He can be contacted at [email protected].
Next Week: Continuation of the explanation of the contracts in Shariah finance.