Contracts in islamic commercial Finance

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islamic 266 contract 136 contracts 121 sale 96 financial 87 financing 81 banking 63 commercial 61 bay 57 application 51 banks 51 price 41 exchange 40 debt 35 legal 35 payment 33 conventional 32 profit 29 equity 28 musharakah 28

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no doubt issues of commercial transactions unlike devotional issues ibadat are ever lasting and bound to change due to the changing circumstances and situations of both the object and subject of the transactions
contracts in islamic commercial and their application in page of modern islamic financial system contracts in islamic commercial and their application in modern islamic financial system assoc

the mechanism of contract formation depends on the fundamental conception of contract s under islamic law its interrelation with other modes whereby an obligation may be generated the extent of the freedom of the parties and the grouping of contracts according to different classifications of the close interaction of all these factors
contracts in islamic commercial and their application in page of modern islamic financial system idea that man is social by nature and that social life is essential to him stating that in view of the fact that man is social by nature he cannot live in solitude like other animals but is need of co operation with his fellow men in order to promote an urban society

the whole idea of having a contract is to satisfy the consent of both parties to a contract and it seems not only in islamic legal system but also in other legal system contract is the best available means to reflect the intention and accordingly the consent of the parties
contracts in islamic commercial and their application in page of modern islamic financial system with a common theme of keeping promise none the less there are few verses which reveal a relatively advances stage of commercial contracts such as sale and hire charges in rem or personal guarantee as security fiduciary contracts such as deposit and the like

again another provision of law which is attached to islamic law is the notion of khiyar al majlis ie right to revoke the concluded offer and acceptance provided both the parties are still available in the session of the contract left the session the right to do so ceases to exist
with reference to an expression of both offer and acceptance islamic law of contract recognizes both express contracts as well as what has been described as contract by conduct

accordingly the object of that promise need not be in existence at the time of the contract but must be possible and definite that is it must be capable of being defined and delivered
it must be of legal value that is its subject matter maha and underlying cause sabab must be lawful and it must not be proscribed by islamic law nor a nuisance to public order or morality

puberty is attained for boys and girls with a the appearance of coarse hair around the sexual parts of the body although this sign is not given any significance by the hanafis with b voluntary or involuntary emission of seminal fluid or with c the attainment of a given age except for malik himself not his school who do not consider age as indicative of puberty
in islamic law no person can validly conclude a legal transaction without first having attained physical and intellectual maturity that being the equivalent of majority to enjoy full capacity a person whether male or female should attain physical puberty bulugh and enjoy sound judgement known also as prudence rushd in his or her judgment

while the former is gratuitous in character and does not require the consent of the recipient the latter is more bound to strict rulings and guideline since it requires the consent of both the parties to a contract also what is normally tolerated in unilateral contract would not necessarily be the case in bilateral contract
contracts in islamic commercial and their application in page of modern islamic financial system contracts such as granting loans or guarantees whereas contracts which could end up by being either beneficial or detrimental are subject to the guardian s ratification

for example contract of security deal not only with surety ship kafalah but also with pledge rahn and transfer of debt hiwalah because the very purpose of these sub contracts under contracts of security was to protect the interest of the parties to a contract particularly the interest of the party in whose favour the respective contracts are concluded
for example contract of exchange will primarily concern trading as well as selling and buying activities inclusive of their subdivisions such as cash sale deferred payment sale deferred delivery sale sale on order sale of debt sale of currency auction sale and so on and so forth

this is clear from the definition of both sale and hire in islamic law sale is defined as the exchange of one commodity for another one of which is called the object and the other the price or the transfer of ownership of property for another
both these two contracts constitute the main activities of commercial activities because the remaining contracts are largely dependent on these two contracts therefore the law on sale as the contract par excellence and next to it on hire was greatly expanded in islamic law literature

therefore it is relevant to conclude that islamic commercial law consists of many different types of contracts to suit different needs and circumstances in other words theoretically islamic commercial law would be able to satisfy the need of a person to buy a commodity on credit or the need to have the guarantor against the third party or the need to have the fund for business enterprise purposes or the need to have in advance the capital to manufacture or produce agriculture produce or perhaps the need to have a transferee to settle the debt owed by a third party transferor and the like
interestingly enough riba which is prohibited by islamic law originates or comes to exist from two types of exchange namely unequal exchange of two ribawi or usurious commodities riba al fadl or riba a buyu or an exchange of money for money with different quantities riba a fadl or without simultaneous transfer and immediate delivery riba alnasi ah or riba al duyun or involving both possibilities which render the contract of exchange of money for money null and void based on both riba a fadl as well as riba a nasiah

in islamic legal terminology this includes the sale of an article of goods which is not present at hand or the sale of an article of goods the consequence or outcome of which is not yet known or a sale involving risk or hazard where one does not know whether the commodity will later come to be or otherwise
such contracts are like bay al mulamasah bay al hasat bay al munabadah bay al muwafah bay muzabanah bay al mukhadarah

from this brief introduction we may infer that as far as barter trading and currency exchange are concerned the principles of islamic law which govern those transactions are more concerned with the questions of equality between two items of exchange and the immediate and simultaneous delivery or transfer of the items because these two types of exchange are vulnerable to riba element
contracts in islamic commercial and their application in page of modern islamic financial system bay al muhaqalah al haml bay al hayawan bi al lahm bay al samak fi al ma darbat al gha is bay atan fi bay ah or safqatan fi safqah bay a kali bi al kali bay wa salaf etc

to be more specific we should confine our present discussion to the contracts of exchange a uqud al mu awadat which will include a variety of contracts which differ from one another in terms of specific legal requirements rights obligations and liabilities but common to each other in terms of the result of the contract namely the transfer of ownership from one party to another
the immediate answer would be that trading differs from gratuity contracts because the former is a bilateral contract which requires an exact knowledge of the property to fulfil the requirement of legal consent while the latter does not require such knowledge since the consent of the recipient is not necessary

however to the best of the writer s knowledge based on the maxim cited and the principles of islamic law of transactions the sale of wafa should be perceived as the contract of pledge with the combination of hibah since the mortgagor has released his right to use the usufruct of the pledged property to the mortgagee
this transaction is perceived by the majallah as a pledge contract not because of the words and forms used in the offer and acceptance but rather due to the intention and meaning as it is clearly expressed in the maxim cited earlier

therefore with special reference to the thing sold sales are divided into four categories as follows i sale of property to another person for a price and this is the most common category of sale and is consequently specifically called sale ii sale by exchange of money for money which is known as sarf transaction which consists of selling cash for cash iii sale by barter ie exchange of object for object whereby neither of which is money payment each of the two commodities constitute both the price and the object and iv sale by immediate payment against future delivery such as bay alsalam forward sale and bay al istisna sale on order
bay al wadi ah al bay almua ajjal bay al salam bay alistis na bay al muqayadah bay al sarf bay al muzayadah etc

according to the manner of payment there are three possibilities of payment pertaining to a sale contract as follows i cash sale in which the purchaser is under obligation to settle the purchase price agreed upon when concluding a contract if the buyer could not settle the payment for one reason or another the seller has a right of retaining the thing sold until he has received the payment of the price

this is the practice in normal sale transaction whether it involves musawamah or murabahah or salam or istisna and other types of sale with the exception of tawliyyah sale since the price offered in the latter must not go beyond the original cost price
contracts in islamic commercial and their application in page of modern islamic financial system manner of payment is applicable to all types of sale except in the case of bay alsalam iii lump sum payment payable in the future

contracts in islamic commercial and their application in page of modern islamic financial system iii the price in some sale transactions is divided into two stages the second payment is pending on the ultimate decision of the buyer to proceed with the contract or otherwise
if he decides to buy the commodity the amount paid will be deducted from the purchase price but if he declines or fails to buy the commodity the advance payment is forfeited to the seller

contracts in islamic commercial and their application in page of modern islamic financial system i the lessor must be the absolute owner of the thing or the agent of the owner of his natural or legal guardian
iii in a contract of hire it is necessary to make known the use to which the thing hired is to be put so as to avoid later dispute

however the transferee would b e released from his liability in any of the following four situations i by payment of the debt ii by further transferring the debt to another person if the creditor accepts
contracts of security thus type of contract consists of three contracts which are hiwalah kafalah and rahn explanation of each of the contracts is as follows

vii if the time for paying the debt has arrived and the pledgor refuses to make payment the pledgee may approach the court to compel the pledgor to sell the thing pledged in order to pay the debt
one important point to be stressed is that kafalah unlike hiwalah would not release the principal debtor in whose favour the contract is concluded because kafalah is only an obligation in addition to the

introduction to coventional and islamic banking conventional banking in the western world has been evolved about two and a quarter centuries ago having contemporary with the emergence of industrial civilisation the industrial revolution saw a tremendous expansion in the number of traders manufacturers industrialists and other entrepreneurs but whose own financial resources were not enough for them to embark on their respective industrial activities

the raison d etre of islamic banks generally speaking is the followings i the absence of interest nased transactions ii the avoidance of commercial transactions involving gharar uncertainty iii discouragement of the production of goods and services which contradict the value pattern of islam and iv the payment of an islamic tax the zakat
contracts in islamic commercial and their application in page of modern islamic financial system in short the establishment of an islamic bank at mit ghamr in egypt brought a remarkable impact on the real implementation of banking practices according to the shari ah principles

the islamic banking products offered in malaysia s dual system are therefore much more sophisticated and covering a wider range of services compared to the products offered in the conventional plus system as is the case in the countries listed above more surprisingly the malaysian model of a dual system has proved to overwhelm the model of islamic banking in some countries such as iran pakistan and sudan which have an entirely islamic banking system leaving no room and avenue for conventional banking system the advantages of the malaysian model are as follows
islamic financial system in malaysia an overview the introduction of the interest free banking scheme known in its bahasa melayu acronym as sptf namely skim perbankan tanpa faedah in malaysia in was premised on a dual banking system a full fledged islamic banking system operating on a parallel basis with a sophisticated conventional banking system

second the islamic banking products in the dual system can also be expected to have a higher level of sophistication compared to the islamic banking products in the single islamic system in other words islamic banks operating in the dual system would have no choice but to create similar sophisticated products on an islamic basis as did the conventional banks
in short the sources of fund for interest free banks may come from these means which are as follows shareholders equity customers deposit in current account customers deposit in savings account customers deposit in general investment accounts and customers deposit in special investment accounts

under the conventional system the nature of the contractual legal relationship between a bank and his customer is that of a debtor and creditor relationship in the sense that the bank is the debtor and the customer is the creditor
however under islamic financial system particularly in malaysia the islamic banks counters accept deposit for both saving and current accounts under the contract of wadi ah safe custody coined together with another contract namely dhaman suretyship contract

the bank will subsequently sell the goods to the customer at all agreed price comprising its purchase price and a profit margin and allow the customer to settle this sale price on a deferred term of days days days or any other period as the case may be
application of fund in islamic financial system in the area of application of fund interest free banking system has relied heavily on two instruments of financing which are murabahah and bay bi thaman ajil

this kind of financing becomes more and more popular as the ministry of finance has issued a directive that all major malaysian infrastructure projects have to have an islamic financing component as in the case of kuala lumpur international airport klia project at sepang which has secured a portion of islamic financing in all its stages of construction

obviously the notes issuance could be used inter alia for working capital requirements and capital expenditures which are useful for any project financing in addition to what has been said the idea of islamic private debt securities ipds would also be significant in promoting the project financing under interest free banking operations a good example of ipds is the one issued under the contract of al musharakah which was undertaken fnr sarawak shell berhad in

the process of securitization is a form of financing by converting the assets tangible or otherwise into cash without increasing the leverage on the balance sheet by selling those assets to a special purpose vehicle spv which in turn issues debt securities to finance the purchase
new direction for islamic financial system so far islamic financial system has been concentrated on debt financing neglecting equityfinancing which is more appealing for the development of islamic financial system as the conventional banks may be likely unwilling or unable to undertake this type of financing

naturally both mudarabah and musharakah require substantial trust between the banks and their customers if a bank acts only as a capital provider as in mudarabah or leaves all aspects of management to the customer as in the case of musharakah the bank will have to totally trust the customer in terms of honesty integrity management and business ski s
needless to say that banks are conservative and risk averse by nature as they are responsible not to their shareholders but also to their depositors as their depositors comprise both small and large depositors banks look upon themselves as trustees for these funds

in mudarabah and musharakah financing banks are committing their fund in medium to long term ventures and as such resulting in mismatch of the tenures of sources and uses of fund most islamic banks being very new and young cannot afford to undertake musharakah as they have not built up their equity and shareholders fund sources vet related to this is the longer period taken to realise the returns from mudarabah and musharakah financing islamic banks being business entities are primarily concerned with profit maximisation especially at this stage of development

even though the islamic banking act gives more flexibility to islamic bank in terms of financing products other aspects are very similar to conventional banks flexibility is not elaborated and in practice the interest free banking scheme sptf guidelines issued by bank negara also do not clearly provide the guidelines for mudarabah and musharakah financing
contracts in islamic commercial and their application in page of modern islamic financial system more straight forward and easily done in murabahah and bay bi thaman ajil than in mudarabah and musharakah

the above list of problems which seems to discourage the role of equity financing requires a comprehensive response and solutions to overcome some if not all of the said problems in this context the bankers must be creative enough with the assistance of shari ah experts to be able to undertake the above challenges positively and constructively and this surely will require the restructuring of the concept and modus operandi of islamic equity financing to make it more feasible and attractive

as islamic commercia law allows the third party to be the guarantor as well as to furnish the collateral on behalf of the entrepreneur on the basis of wakalah it follows that this third party might be another financial institution which is willing to take the liability which might arise from both mudarabah and musharakah
the same would be equally applicable to credit guarantee corporation this islamic guarantee window will manage a separate pool of funds solely for the purpose of meeting the liability of guaranteeing financing facility granted under the islamic banking concept irrespective of whether the facility is a debt or equity financing

in the event this scheme ceased to operate this fund may be refunded to all participating institutions provided that all guarantee covers have been terminated and the window s liability under this scheme has been completely relinquished the establishment of an islamic guarantee window or even corporation would be useful and workable provided it is governed by a detailed legal framework so as to establish negligence or otherwise on the part of the entrepreneur
as mentioned elsewhere in the modern application the banks can screen the client the prospective entrepreneur appraise the project monitor implementation and if necessary take part in actual management in order to ensure the anticipated results are achieved

on the other hand it is hoped in the near future that the islamic banks are able to have their own yardstick to screen and evaluate the potential entrepreneurs to asses the project proposed not only in terms of profitability and feasibility but also most importantly in terms of enhancing the islamic world view in economic and commercial developments be it in manufacturing sector service sector agriculture sector trading sector construction sector etc

it should be pointed out that this proposal does not mean that there will be a loss in revenue for the country because the loss can be more than compensated for the tax potential of the newly created firms financed by musharakah and the individuals who are employed under these fir miss as for the high risk that both mudarabah and musharakah would assume it may be pointed out that some projects can be quite safe if for example the nature of the profit sharing is to cater for government contracts or established and reputable companies

conclusion the foregoing explanation has illustrated that the islamic financial system has been closely attached to various forms of transactions available in islamic commercial law it also explains that the system has been working quite well in the past years as it has been able to meet various needs of the customers
contracts in islamic commercial and their application in page of modern islamic financial system potential for equity financing particularly musharakah in project or infrastructure financing is unlimited and islamic financial institutions should be always encouraged to step out from their conventional banking mentality and conservative stance

however it is respectfully submitted that more emphasis should be equally given to equity financing particularly in the area of project financing which constitutes the current need of the nation
contracts in islamic commercial and their application in page of modern islamic financial system both the depositors and fund users

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DOCUMENT WORD ANALYSIS

Main Category

AlHuda Material\islamic banking

KeyWords

contract price sale asset financing lease client purchase ijarah payment profit musharakah lessee amount commodity housing agreement contracts ownership project

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Number of Pages

42

Published Date

2001-07-16 10:40:30

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Contracts in islamic commercial Finance

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