Islamic Commercial Law

ffirs.indd i 23/10/12 2:07 PM

Islamic Commercial Law

ffirs.indd i 23/10/12 2:07 PM

Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the

United States. With offi ces in North America, Europe, Australia, and Asia, Wiley is globally com￾mitt ed to developing and marketing print and electronic products and services for our custom￾ers ’ professional and personal knowledge and understanding.

Th e Wiley Finance series contains books writt en specifi cally for fi nance and investment

professionals as well as sophisticated individual investors and their fi nancial advisors. Book top￾ics range from portfolio management to e-commerce, risk management, fi nancial engineering,

valuation, and fi nancial instrument analysis, as well as much more.

For a list of available titles, please visit our website at www.WileyFinance.com.

ffirs.indd ii 23/10/12 2:07 PM

Islamic Commercial Law

Muhammad Yusuf Saleem

John Wiley & Sons Singapore Pte. Ltd.

ffirs.indd iii 23/10/12 2:07 PM

Copyright © 2013 by John Wiley & Sons Singapore Pte. Ltd.

Published by John Wiley & Sons Singapore Pte. Ltd., 1 Fusionopolis Walk, #07–01, Solaris South Tower,

Singapore 138628

All rights reserved.

No part of this publication may be reproduced, stored in a retrieval system, or transmitt ed in any form or by any

means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as expressly permitt ed

by law, without either the prior writt en permission of the Publisher, or authorization through payment of the

appropriate photocopy fee to the Copyright Clearance Center. Requests for permission should be addressed

to the Publisher, John Wiley & Sons Singapore Pte. Ltd., 1 Fusionopolis Walk, #07–01, Solaris South Tower,

Singapore 138628, tel: 65–6643–8000, fax: 65–6643–8008, e-mail: [email protected].

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best eff orts in prepar￾ing this book, they make no representations or warranties with respect to the accuracy or completeness of the

contents of this book and specifi cally disclaim any implied warranties of merchantability or fi tness for a particular

purpose. No warranty may be created or extended by sales representatives or writt en sales materials. Th e advice

and strategies contained herein may not be suitable for your situation. You should consult with a professional

where appropriate. Neither the publisher nor the author shall be liable for any damages arising herefrom.

Other Wiley Editorial Offi ces

John Wiley & Sons, 111 River Street, Hoboken, NJ 07030, USA

John Wiley & Sons, Th e Atrium, Southern Gate, Chichester, West Sussex, P019 8SQ, United Kingdom

John Wiley & Sons (Canada) Ltd., 5353 Dundas Street West, Suite 400, Toronto, Ontario, M9B 6HB, Canada

John Wiley & Sons Australia Ltd., 42 McDougall Street, Milton, Queensland 4064, Australia

Wiley-VCH, Boschstrasse 12, D-69469 Weinheim, Germany

ISBN 978–1–118–50403–1 (Paperback)

ISBN 978–1–118–50404–8 (ePDF)

ISBN 978–1–118–50405–5 (Mobi)

ISBN 978–1–118–50406–2 (ePub)

Typeset in 11/14pt, Arno Pro by MPS Limited, Chennai, India.

Printed in Singapore by Markono Print Media.

10 9 8 7 6 5 4 3 2 1

ffirs.indd iv 23/10/12 2:07 PM

In the Name of God, the Merciful, the

Compassionate

Praise be to God, Lord of the Universes,

Th e Gracious, the Merciful,

Master of the Day of Judgement.

You alone we worship; You alone we implore for help.

Guide us unto the straight path—

Th e path of those whom You have blessed,

Th ose who have not incurred Your displeasure,

Th ose who have not gone astray.

Amen

Qur ’an, 1: 1–7

ffirs.indd v 23/10/12 2:07 PM

ffirs.indd vi 23/10/12 2:07 PM

Contents

Preface xi

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

Notes 30

ftoc.indd vii 25/10/12 11:04 AM

viii / CONTENTS

2 Types and Classifi cations of Sales 33

Introduction 34

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

Notes 50

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

Notes 65

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

Notes 78

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

Notes 86

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

ftoc.indd viii 25/10/12 11:04 AM

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

ftoc.indd ix 25/10/12 11:04 AM

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

Notes 153

Answers to True/False Questions 155

Bibliography 161

About the Author 165

Index 167

ftoc.indd x 25/10/12 11:04 AM

Preface

Islamic commercial law is an important component of al-fi qhal-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

( fi qh al-’ibadat ) and the rules pertaining to commerce and business ( fi qh al-mu’amalat ) and give

them equal treatment and signifi cance. 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. Th e 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 fi nancial laws.

Islamic banking and fi nance is contract-based banking and fi nance. An Islamic bank has

to establish Shari’ah -compliant contractual relationship with its customers both on deposit and

fi nancing sides. Various Islamic contracts are also used in diff erent sukuk structures for raising

funds and their subsequent use. Th e knowledge of Islamic contracts is therefore central to any

commercial, business, and banking activity. Th us, 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 fi nance to study individual contracts and transactions with￾out referring to their philosophical foundations and the objectives of Shari’ah. Th ere is a danger

fpref.indd xi 23/10/12 2:08 PM

xii / PREFACE

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. Th is 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 matt er of a contract,

and the off er and acceptance (which show the mutual consent of the parties). Th ere 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

defi ned and known, or conditions related to the language of an off er 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. Th e 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.

Th is 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 fi nancial transac￾tions that would combine the theory with the practise. Th ere 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 fi ll 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. Th is book begins

with an introductory discussion on the prohibited practises. Th e fi rst 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. Th e 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 ).

I take this opportunity to express my gratefulness to Allah (swt) for granting me the abil￾ity, health, and patience to complete this work.

Muhammad Yusuf Saleem

International Islamic University Malaysia

Kuala Lumpur

Ramadhan 1433

July, 2012

fpref.indd xii 23/10/12 2:08 PM

List of Abbreviations

swt Subhanahuwata’ala

pbAbuh Peace and blessing of Allah be upon him.

mAbpwh May Allah be pleased with him/her.

mAbpwt May Allah be pleased with them.

Abbreviations

flast.indd xiii 23/10/12 2:08 PM