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Essential Elements of Islamic Business Contracts

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Islamic commercial law of contracts are those that most impact Islamic banking today. However the area of law relating to contracts and their application is a dynamic area of modern-day Sharia’s jurisdiction on commercial laws. Islamic commercial contract prohibits Riba and Gharar, examples of which have been given in classical Islamic jurisprudence called FIQH. Now the accepted thinking is that modern business contracts can be engineered as far as it does not offend anything in the Sharia’s laws pertaining to business

Islamic commercial law is much base around the law of sales termed as bai (an Arabic word for sales). Bai in Islamic commercial law means exchange of one item of property of some value (mal) for another

The Basis of the Law of Sales

 The basis, for most jurists, of the law of sales is that:

  • The parties entering into the sales contract are identified and named
  • The object of the contract is specified
  • That is an offer and acceptance

Basic stipulations

In addition to legal prohibitions in sales contract, there are basic stipulations that need to apply

  • Parties entering into the contract must be sane and legally entitled to do so
  • The object of the contract must be legal and lawful (mutaqawwam)
  • The object of the contract should be specific and known, and the price should be specific and known

Other Stipulations from classical Islamic Jurisprudence

  • Two or more contract should not be connected together in one contract
  • Seller should not sell something is not own by the seller – this prevent short selling in modern day Islamic banking
  • Contract should not be make based on some future event (which may or may not happen)
  • Delaying the beginning of a contract

Relevant to Achievement of Sharia’s Objectives

Objective of Islamic law known as Maqasidal Sharia is important in all business transactions, as it provides toolkits and matrix for legislation and independent reasoning. Earlier and cotemporary Islamic scholars have given below as the general objectives of Islamic law (sharia):

  • Faith                                                                              Life                                        
  • Intellect                                                                       Lineage
  • Property                                                                      Protection of Honour                                    
  • Fulfilment of contract                                            Preservation of ties of kinship
  • Honouring the right of one neighbour            Love of God
  • Sincerity                                                                       Trustworthy
  • Moral purity                                                               Social welfare support
  • Freedom                                                                     Human dignity
  • Human fraternity

 All above objectives of Sharia are upheld and supported by the Quran, and are relevant in our human day to day business transactions for the good of mankind. It erases greediness, and selfishness, and promote fairness and equitable distribution of resources for better societies.

4.      Types of Contracts

Islamic contract can generally be grouped into one of the three types:

  • Mutually onerous – each party has responsibility- e.g. Sales transaction one party buys and the other sells
  • Gratuitous – One party gives something to the other (e.g. a loan)
  • Accessary – One party gives assistance to the other e.g. an agent

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