Islamic Contract Law
Islamic Contract Law
TYPES OF COMMITMENTS
1. Wa‘d –
• • •
– وunilateral promise
One party binds itself to perform a function for another Does not normally create legal obligation Legal obligation is created:
• • Genuine need of the masses – (ر Contingent promise ا س )رد ا ز ن ز ا إذ ا
2.
Muwaa‘ada – ا ة
• • • •
– bilateral promise
Two parties performing two unilateral promises on the same subject Use of two unilateral promises can lead to a forward contract, which is impermissible Not allowed and non–enforceable according to majority (AAOIFI, IFA and others) Some Hanafi/subcontinent scholars allow it provided no other prohibition (excessive gharar or short selling)
3.
‘Aqd –
– contract
Promises do not constitute a contract • Difference between a contract and a bilateral promise is there is no proprietary transfer in bilateral promise
ENFORCEABILITY OF PROMISES
• • • Islam prohibits rolling 2 contracts into one (safaqah-fi-safaqah). Modern financial transactions often need to combine 2 contracts into one eg Hire Purchase. As Islam prohibits client signing agreement binding him to 2 contracts at the same time eg rent and purchase, how can a bank structure an Ijara Mortgage where there is a rental element and purchase element? How can a Bank offer an Islamic Mortgage yet still prevent itself having to hold huge assets on the balance sheet and potentially suffer massive losses on property disposals? Solution is to make client sign one rental contract coupled with a legally enforceable promise to purchase the property exercisable at the end of the term. If client defaults in property purchase, Bank has legal recourse assuming promise can be enforced.
•
• •
Types of ‘AQD (CONTRACT)
• • ‘Aqd literally means ‘to bind’. 2 types of contracts in Shariah with respect to countervalue in exchange 1. Mu‘aawadha ( وcommutative/compensatory)
• • Void conditions and gharar void the contract E.g., sale, purchase,
TYPES OF COMMITMENTS
1. Wa‘d –
• • •
– وunilateral promise
One party binds itself to perform a function for another Does not normally create legal obligation Legal obligation is created:
• • Genuine need of the masses – (ر Contingent promise ا س )رد ا ز ن ز ا إذ ا
2.
Muwaa‘ada – ا ة
• • • •
– bilateral promise
Two parties performing two unilateral promises on the same subject Use of two unilateral promises can lead to a forward contract, which is impermissible Not allowed and non–enforceable according to majority (AAOIFI, IFA and others) Some Hanafi/subcontinent scholars allow it provided no other prohibition (excessive gharar or short selling)
3.
‘Aqd –
– contract
Promises do not constitute a contract • Difference between a contract and a bilateral promise is there is no proprietary transfer in bilateral promise
ENFORCEABILITY OF PROMISES
• • • Islam prohibits rolling 2 contracts into one (safaqah-fi-safaqah). Modern financial transactions often need to combine 2 contracts into one eg Hire Purchase. As Islam prohibits client signing agreement binding him to 2 contracts at the same time eg rent and purchase, how can a bank structure an Ijara Mortgage where there is a rental element and purchase element? How can a Bank offer an Islamic Mortgage yet still prevent itself having to hold huge assets on the balance sheet and potentially suffer massive losses on property disposals? Solution is to make client sign one rental contract coupled with a legally enforceable promise to purchase the property exercisable at the end of the term. If client defaults in property purchase, Bank has legal recourse assuming promise can be enforced.
•
• •
Types of ‘AQD (CONTRACT)
• • ‘Aqd literally means ‘to bind’. 2 types of contracts in Shariah with respect to countervalue in exchange 1. Mu‘aawadha ( وcommutative/compensatory)
• • Void conditions and gharar void the contract E.g., sale, purchase,