Shariah INCEIF

An Overview of Shariah Principles in Financial Transactions
Unit 14 | 1
An Overview of Shariah
Principles in Financial
Transactions
Unit
14
Topics in This Unit

1-
Introduction
2-
Sale-Based Principles
3-

4-
Leased-Based Principles
5-
Fee-Based Principles
6-

7-

8-
Summary
Learning
Outcomes

!

!"#
$

%

& "
'
!
# $
'
!
'
!
# %

! $

'
!
"
"

!'
!

# %
SH1002 Shariah Aspects of Business and Finance

INTERNATIONAL CENTRE FOR EDUCATION IN ISLAMIC FINANCE 2011/1432 AH
CIFP
Unit 14 | 2

&

(

"

!'
!
#

%

&'
!
#

$

(
Key Terms
Sale-Based
Principles:
Financial transactions that are based on sale such as

Murabahah
Profit Sharing
Principles:
Financial transactions that are based on partnership such

as Mudarabah
Leased-Based
Principles:
Financial transactions that are based on lease such as

leasing
Fee-Based
Principles:
Financial transactions that are based on charging fee such

as wakalah
Free-of-Charge:
Financial transactions that are based on benevolent

(no fee to be charged) such as Qard Hasan
)
$!" $
!

$
$
*( + "#"

!
$"
!
#

(
!

"
!

!'
!
#(

CIFP
Unit 14 | 3
Unit 14.1
INTRODUCTION
, $
!
#

$$

(
'

"
"

!
"
.

$(,

'
!
"" * $$!

"
( &

$ '
!
"
$

'
!

!(

/ '
!
# "

!

"

# "
!

namely mudarabah and musyarakah('"

"mudarabah model
" !
'
!
#(0#"
musharakah ! "

9
!
( :. "
"$
$

"

'
!
# ;!

(
'
!
#.!!
murabahah, bay bithaman
ajil, ijara(

#(&
!!
#

! $

!
ujr( <"$ !
!
'
!
# ;
# qard hasan( +

!

'
!

#

!"(
Unit 14.1.1
CLASSIFICATION OF SHARIAH PRINCIPLES IN

FINANCIAL TRANSACTIONS
' $

!
"
" '
!

( '

!
#

'
!
!

.

#
"#(' $

CIFP
Unit 14 | 4

!#

$ #

!!!

=al-aqd al-munjaz>

"!
;$

! =al-aqd al-mudaf ila al-mustaqbal>

=al-aqd al-muallaq>(/ $

$
=sahih>$
=fasid>
$=batil>(

&
!

*
$
! " $
!

$ $
*( +
"#"

! $"

!
#

(
!

"
!

! '
!
#( <

"

(
(
(
$(
$(
$(

0

$

'
!
.
$

#" '
! !!

"

!

!( '

!

?

9!Shariah

(&
"

"
"

!(<"$

"!

'
!
#

"
(
Unit 14.2
SALE-BASED PRINCIPLES

!

'
!
"(,

!
#

"

"
(
!

'
!

!

"


CIFP
Unit 14 | 5
"

"

=arkan>
"

( @ "

!
!

( '
!
"

"

(+

=
>"
(
,
"

'
!!!

"(

, !

.
"

$
('!
!

'
!
"

!

(
kafalah =

> hawalah =
! >
rahn
= >

!
inter alia
!

$

!

(

& !

'
!

A
( / !
"

"

!
!
"
=bay) and riba(
D$ DEG A

!

(:$

" =H<>"

#
15874
466
Which are the best forms of income generation? The Prophet (PBUH)
replied: A mans labour and every legitimate sale.
& $=
!
$>!

'
!!!

"(, !

.. $
$! A
Sunnah and consensus of
@!* $
"

!
!
!

!

!

!
!!(,

!!

"

&(

.=sighah>(Sighah !
;
=ijab>!

=qabul>! (@!
*
$
"
;

"
!"

(&

CIFP
Unit 14 | 6

!

'
!
"(/
!

sighah
"

"

.(&
.

$$
(

!
! ;

$

" !.!(&
(
;

!!

!
(:$ *;
"

!!!

;!

*

!
!

!
!;

!! (&!
@
# 0
"

=
>

.

(, @
# 0
"!
!

!

(

!!
Shariah Court of

#

$ "

K&
"
Majlis "!

;

!
"

" $

!
#!!
#

!(, !

!

"

" !
9
9(,

;!

"99

"$
!
$

(' Majlis !

"

(M
,

K,!!
"K! M

"
$!
# !!!

!

!! (M

(

,
"
!

(&

!

"
!


CIFP
Unit 14 | 7

('

"

!!

(
!"

!

(
<"$
"
9

!(

(

, *!
!

('

'
!
" !*!

.

(' !!

('
!
"

!
(,

('

!!

(<
!!

*!

('!*!
'
!
"

"
(&! !!

.
$
!

*!
(,
'
!
"
*
!
!!

9

$
('

!
*
*!
!
'
!
"#"
#(

H . *!
!
*
!
!.

."
"
(,
!
*
"
!

( ,
$
. * !
"

$(, @

# 0
" "$ ;(& !
9!

.
=muawadat>

=tabarruat>
(

! !

.

"
"
" ( ',
!

' A
!

!
*?

.!
$
(

, " $"
. * !

"
( '
A
!

CIFP
Unit 14 | 8
"

.

!
=H<> .!

.!
gharar
#

( . !
.
$
"

"( < .
! *

musaqah "
* !

.
"

gharar =
>(
<

K, ! #&
sunnah !
?

;

.
((((
/
sunnah =H<>

"
.

"

.( !$
.
.
sunnah

" $ $"
" *
!
.(N(, $?
$ *!

%

!gharar#

! (,

" . !

.gharar =
>

(M

,

$ *!

!

!
!
#
$
('

#
$

"

$
!
(
Unit 14.2.1
SOME CLASSIFICATIONS OF SALE-BASED

CONTRACTS
&

$ $
$
$ !
" $ !
( ' !

!

!!'
!

!

.

(

CIFP
Unit 14 | 9

$ '
! &

" $

"

$!! &
! (/ '
!
!
!

"

(O
'
! #

(&

"

" '
!

riba "

$

( &

"
" '
!
"

!
"

"(,

!
Q
?"
!
"

" '
! "

!

"

"

'
!!!

(

!

!
=H<> "

" !
"

! ! !
'
! !
# ! gharar
=
>jahalah =
>zulm =*>(

:.
!

bay al-mulamasah =

!

"
>bay al-hasat =

" ! " >bay al-muwsafah =

"

!"
>bay
al-muzabanah =

.

$

!
!

! >bay
al-muhaqalah = .

"
>(

+
!

!

*!"
$

'
!
"(
:.
!

bay al-salam and bay al-istisna(

,

*!
.

(
'
$
1. Bay al-muqayadah ( )
,

"'
!
"(<"$
!!

ribawi !
!

CIFP
Unit 14 | 10

(

' !!

! =( (.
>
!!
$
9
$

$
$(
(
' !;#=( (.

$>

.

!
(, 9!
9

(
2. Bay al-mutlaq ()

,
!
!!

$

!
(@
#

!

$

('

!
*

!
.
"
;!!

(
<'
!
"$

"" !9

!

!!

'
!( &
narrated in one hadith" =H<>*
"!

!
bilal "
!

!

"
!(
, " !
!

!*
9
.
(
R

!$

*.
$

$
!!(
3. Bay al-sarf.
Bay al-sarf .

(, .

!!
(

!"#
''
!
"!
" !

*!

(!
" *!

(<

$ #

(,

$%
,
!

" ! ; !
( ,
$ "
(,

CIFP
Unit 14 | 11

$ *!

(
&' ()bay bithaman ajil)
'

$ *
!
(<"$
!

(
+, ' )bay al-salam)

$

salam
"

$
$ * !

!
(, bay al- salam
#

"
$

!!

(

!
.
$% )bay al-musawamah)
'
#
"

".
*

" !(R!

!
*(<

"

!
#!

(
, ! !!

9!

('
"

;

(
&, ! )buyu al-amanah)
,

!

=>

(< $

=>
!
#!
(&
!
"
$
9
" .

!

"

!

$
! (,
!

=>"
$(

, !

!"

# . $
!
! "

!

CIFP
Unit 14 | 12

(, #

$
/ 0(!)bay al-murabahah)

'

" *

$

!

"

(
b) Tawliyyah
'

" (

/Wadiah
, *

!

" *
"

(
Unit 14.2.2
SOME TYPES OF SALE-BASED CONTRACTS
% )Bay al-musawamah)

' !!!

( '

"

9 *!

('
$

!!

!
(,
!
!
!!

!!
!

!
!"
$"

(
B. Murabahah Bay Bithaman Ajil )/
, !

!'
!
#

murabahah
and bay bithaman ajil =&>(&!murabahah

#"(!!@

murabahah as

"
!
=!
#>
!
#"

$$(, !

!
!

!
" "
!(

murabahah

!('9

(

CIFP
Unit 14 | 13
,
!

$(&

of murabahah '
!
#;!

murabahah

(
H

murabahah

;
('!murabahah'
!
#"

!!
"

#

# ('

#

#
( ,
" *

#

;!

murabahah(

&

#
(O

"
"

!
!
(<
&

$

murabahah, tawliyyah, wadiah $ !

( &

! &! (

, murabahah
&
!
( '

murabahah

! !&

(
'
!

!
!
&

element of murabahah

(<"$ !

&
murabahah @

!;
(
H
&
!
" murabahah is normally utilised for
!
(0#"&
!!
"!

! $
!
DT
"
!
murabahah "!!
!(<"$
!

"
'
!
"('*

!
# !;(
C. Bay al-salam
Contracts of salam and istisna
.

"'
!
"

!
!
('
"#"

!

$

. *!

(@*
. *!
"

.
$
(<"$*
!

.

salam and istisna
(!
*

*!
!

(&
.
salam and istisna(

CIFP
Unit 14 | 14
From this introduction, it is obvious that the allowance of salam and istisna is actually an
exception to the general rule of existence of subject matter and the rule of possession
applied as to other contracts of exchange. Ibn Taymiyyah and his disciple, Ibn al-Qayyim,
however, opposed this assertion. They maintained that the legality of bay al-salam and
bay al-istisna are not based on the exception made to the rule of existence of the subject
matter. To them, these two contracts, in fact, have established a new principle as to the
rule of existence of subject matter in a contract.
Literally, the term salam, salaf, etc. means to advance. It is a contract where the
purchaser pays the price in advance () and the delivery of the subject matter is

! (<salam

of a deferred item in exchange for an immediate (forward) price, or it is the sale of a
liability whose characteristics are described in exchange for a price or capital sum paid in
advance.
Originally, the purpose of a salam was to meet the needs of small farmers who
needed money to grow their crops and feed their family until the time of harvest. Since
they were not able to take out loans, these farmers were allowed to sell their agricultural

$
('
$
$

"

!!salam

!

( <"$ salam contract has
$$!
!
'
!
#

$

able mechanism for fund-raising activities via normal banking activities or capital market
instruments. Now the subject matter of salam has been extended to cover even shares
[
#!
#(
D. Bay al-istisna
Istisna $$'
!
"

!

"#

(<"$
" !

as one of the contracts that makes it possible to meet major infrastructure and industrial
projects such as the building of houses, highways, ships, aeroplanes and various large
machineries.
Literally, the term istisna means to request a manufacturer to manufacture
something. In the same way, this meaning has been used in Islamic law. The

=&(\D]>
K !
#

"
#

CIFP
Unit 14 | 15
!

M( !

istisna

"

#

!

determined price.
It should be noted that in istisna, it is necessary that the material be provided by
the manufacturer. If it is provided by the customer, and the manufacturer uses his labour
and skills only, it will not be a contract of istisna. Instead, it would be a contract of ijara.
,
$

! !
#
$
#"
consideration, it is permissible but it will not be istisna, rather it will be called an ijara
contract. Istisna shares the same criteria of the salam contract in several ways. Among
others, both in fact involve trading an immediate item in exchange for a deferred one,
sales of non-existent objects and in both contracts, the object of sale is established as a
liability to the seller.

, "$;$
"
( *istisna is always a
product that needs manufacturing or construction, while salam can be on anything,
whether it needs manufacturing, constructing or not. Second, a salam contract can only
; !!" 9

9

.

a criterion which is not found in istisna. Third, in a salam contract, the price of the goods
is paid in advance, whilst the payment mechanism for istisna [.(
determining the time of delivery is very essential in salam, but not in istisna. Finally, a
salam
;

"

of istisna can be cancelled before the manufacturer starts the work.
E. Bay al-inah
is a kind of sale contract whereby the seller sells his assets to the buyer at an
agreed selling price to be paid by the buyer at a later date. Thereafter, the buyer
immediately sells back the assets to the seller at a cash price, lower than the agreed selling
(, ;"
(
, $

"
$
( < bay
is actually a combination of two contracts of sale, namely cash and credit, but
involves only one single property and the same two contracting parties.
Jurists unanimously agree that both of these contracts are permissible if they were
to be carried out separately, but they are extremely at variance when these two contracts

CIFP
Unit 14 | 16
are combined and formed as one. In Malaysia, has been applied extensively
in Islamic banking and the capital market such as the practice of BBA in the acquisition

#

'
!
securities in the Islamic capital market.
F. Bay al-dayn
Another contentious subdivision of sale-based contracts applicable in Islamic banking

bay al-dayn. In the banking sector, it is used for a variety of products such
as sale and purchase of trade documents like bill of exchange and bankers acceptance.
Factoring also uses this contract. In the capital market, this contract is widely used in the
secondary market to trade the securities that have been issued based on the concept of
, BBA, istisna, etc.
Two main issues need to be discussed pertaining to bay al-dayn. First, the
meaning of debt and its creations, and second, whether debt can be sold or not. Many

$
$
( & "$
$
almost a similar connotation in that dayn is a constructive asset in the liability of the
debtor. The

dayn
K

= >M(
=
!
>

be said that dayn (debt) is basically a liability of a person to pay a certain amount of
money or its equivalent (in other forms of property), and this liability resides in the
obligation of the person (debtor) till it is completely discharged.

<"$
$
dayn is far from being a
!

'
!
"

property, but it also relates to other liabilities such as the liability of a person to make up
!
!
( <"$

$
!

(
Conceptually, dayn is more general than qard (loan). Al-qard is a contract, in
which the creditor lends money or any item to the debtor, on the condition that the
" $
!

!

source for the dayn to arise. Besides, dayn can also arise from other reasons, such as the
deferred payment price of sale or ijara contracts, qard !

such as dowry of a woman, the cost of damages in civil litigations, etc. So, the loan is only

CIFP
Unit 14 | 17
a type of dayn
$$
(& ;
!!
"

"

of loan and debt. In the contract of a loan, this right arises directly from the loan given by
the creditor. No underlying asset or any economic activity is involved in creating this
situation of indebtedness, whilst in dayn, the situation of indebtedness might be created
from certain economic activities which had taken place between the parties in contract,
such as sale or lease contracts.
The discussion on the position of dayn in Islamic law must also be related to the
(:$ !*

mal (property) in Islamic law, it is almost accepted by all jurists that there is right of
ownership () to debt. Therefore, once a debt is established on a person, he
is liable to pay the creditor and this debt is considered a future property of the creditor.
,

$ (<"$ *
.!
at variance when it comes to the selling of debt especially when this debt is sold to a third
party.
At the outset, it can be said that with regard to the sale of a debt to the debtor, the
majority of jurists upheld that it is permissible, except the Zahiris who maintained that

"$ !(<"$ ;"
comes to the selling of a debt to a third party.

& * !
<

{

the sale of a debt to a third party is disallowed regardless of the types of debt. Contrary to

!
?*= !$
>!

"
! =dayn mustaqir>( !
? *
!
al-Subki and al-Nawawi maintained that this sale is permissible, subject to three
conditions. The conditions are:
i.
The debt must be a spot dayn (dayn muajjal) in nature.
ii.
The debtor must be a rich person and accept the selling, or there must be a
strong evidence to prove the existence of the dayn in case of denials from
the debtor.
iii.
The buyer must pay the price of the debt on a spot basis.

CIFP
Unit 14 | 18
'
A
!
<

*

completely in agreement with the principles of the . Upholding the original ruling
of permissibility, he held that any contract should be considered lawful insofar as there is
no direct prohibition found in the text and there is no violation to any principles of
. The Malikis advocated that the sale of a debt is allowed with certain conditions
"( ,
!
!
'
A
!( <"$
@
#!!
!(
Scrutinising these conditions would show that these conditions are laid down
simply to protect the rights of the third party, to avoid the selling of a debt before
(taking possession of it) and also to avoid riba and (uncertainty).
The prevailing opinion among contemporary jurists, especially those from Middle
Eastern countries, is that even though debt is considered mal, having the substance of
and subjected to , it is not as good as ayn (corporeal),
(usufruct) or even a normal right (>(<

."

9

( ,
!
, '
! Academy in
Jeddah. In one of its declarations, the Academy decreed that the sale of a debt is allowed
to a debtor or to a third party provided that the rules of riba are followed. They
maintained that the sale of a debt to a third party (as practised in sale of receivables) is
allowed provided that the element of and the regulation regarding the sale of one
ribawi item with another is observed.
G. Tawarruq
The structure of tawarruq is a contract that is becoming increasingly popular as a means

!'
!

!( !
" $

adaptations of were employed as the standard mode by many Islamic banks
is actually structured based on the tawarruq principle. It provides Islamic banks with a
!

"
precepts. Despite its increasing popularity, there exist some controversies pertaining to
its admissibility as a genuine Islamic product that could be resorted to constantly by
'
!
#
(, !

tawarruq, developed by
Islamic banks, does incorporate several features that have been expounded by traditional
*(<"$
$

"
(/
original tawarruq is contemplated to have consisted of two contracts of sale, modern
adaptations usually comprise three, or possibly more.

CIFP
Unit 14 | 19
The primary reason for this distinction is that the banking institution, acting as a
mere intermediary, does not possess the commodities that could be readily brought into
the tawarruq

"

an external party for the purpose of facilitating the tawarruq contract. Similarly, the
disposal of such commodities by the client of the facility sometimes needs to be further
! !

(,

extent, more complex, and also more streamlined than the simple form of tawarruq
debated by classical jurists. As a corollary to the smoothness of the whole operation, there
is also the undeniable danger of the transactions merely becoming a formality followed
on paper without a proper regard to the material aspects that should be necessarily
involved. These additional aspects and other variations that have been introduced have
$
!

!
( ,

objection to such modes is that the explicit reason for embarking upon such a facility is
nothing but to obtain cash immediately to be paid more at a later time. This might lead to
a riba-based relationship and the transaction acting only as an unessential formality.
Despite its recognition in its original classical form by several contemporary
'
!
;tawarruq ;$
'
!
#
!

$
!
(/ !

.
'
!
9 "
caution and with stringent conditions imposed. Yet others have refused to accept its
admissibility. Our discussion of tawarruq in this article focusses on the following major
areas; the nature of tawarruq as conceived by jurists, the position of Islamic schools of law
and of individual scholars on its admissibility, and the nature and the level of recognition
"

$'
!
#
tawarruq.

Tawarruq
The Arabic term tawarruq, originating from the root word wariq denotes silver, minted or
otherwise. It has been used to mean seeking or acquiring silver, as in the case of ta allum,
or seeking ilm, that is, learning. Thereafter, the meaning has expanded to include seeking
for, and striving to obtain money in any form, be it silver, gold or other currencies. Thus,

!
!!
!

9(,
!
!

$

$
<

( &

<

!
9$$ "

tawarruq in his .

CIFP
Unit 14 | 20
Besides the term tawarruq, the term has also been used in this context
by some scholars, which bears the literal meaning of increase or growth. The modus
operandi referred to as tawarruq <

#"
in

? (<"$ !
$

of .
Tawarruq, in Islamic legal literature, denotes a particular structure that could be
employed by a mutawarriq or mustawriq that is a person in need of liquidity, without
resorting to borrowing on interest. This comprises the credit purchase of an asset, the
value of which is roughly equal to the amount required by him, usually for a higher price
that could compensate for the delay in settlement, and the subsequent sale of the asset on
cash, so that the necessary amount of money is realised. It is necessary that the second
sale is not concluded with the seller from whom the asset was initially purchased. The
Encyclopaedia of Islamic Law published by the Ministry of Awqaf "

tawarruq as purchasing a commodity on credit and selling it to a person other than the
initial seller for a lower price oncash. This structure has been described in a similar

*(&
<

K'

"

$

*

has been borne out by legal texts. This transaction is named tawarruq.
This structure has been discussed under the topic of by jurists of the
other schools.
The Islamic Academy of Jeddah has described tawarruq as the purchase of a

commodity that is in the ownership and possession of the seller against a deferred price,
and its subsequent sale by the purchaser to a party other than the seller on cash, for the
purpose of obtaining cash, that is, wariq.
There could be three forms of tawarruq as described by jurists:
a)
The person in need of cash purchases a commodity on credit and sells it to

another for cash, without any party being aware of his need or intention.
b)
The person in need requests for a loan from a trader, who excuses himself
from lending to him, but is willing to sell a commodity to him on credit for

CIFP
Unit 14 | 21
its cash price. The mutawarriq then sells it at any possible price, be it more
than the purchase price or less.

, "!

$

"
;(
c)
The third form is similar to the second, except that the trader sells the
commodity to the mutawarriq for a price higher than its market value,
against the delay in payment. This is the form on which jurists have
;
" (
2'Tawarruq Inah

, ; " tawarruq and is that in , one who requires liquidity
purchases an asset from a seller on credit. Thereafter, he sells it on cash basis at a price
lower than the purchase price to the seller himself. According to some, this transaction
has been termed inah because the particular asset purchased (ayn in Arabic) had found
its way back to the original seller. According to some jurists, this fact strongly indicates
that the asset had been utilised merely as a or legal stratagem for earning riba, on
the basis of which they ruled the transaction prohibited.
Tawarruq, on the other hand, indicates an instance where a person who needs
liquidity purchases an asset from someone on credit, and thereafter sells it, usually for a
lower price, to a person other than the original seller, that is, to a third party, so that the
structure does not give a ready indication of a adopted solely for circumventing riba.
Since the asset in this case does not return to the original vendor and it is sold to a third
party, many have regarded the structure as valid and acceptable.
Unit 14.3
PROFIT SHARING PRINCIPLES
and

=) in the
literature.

#
goodwill to venture into a certain business activity. It is divided into two types:
and . implies the joint-ownership of a venture or

CIFP
Unit 14 | 22
activity by two or more persons. It can be involuntary (

) or voluntary
(). cannot be considered as a partnership in the strict sense

! . !

!

#(
Accordingly, it appears in discussion as a peripheral notion.
On the other hand, (contractual partnership) can be considered
as a proper partnership because the parties have mutually entered into a partnership and

$

(may further be divided into
several divisions, based on various perspectives. From the equality of contribution, it can
be divided into two, namely !and inan.
! is created when partners have equally contributed their

$

9

the venture. They also agree to recognise same and equal ability to undertake
responsibility and to have full authority to act on behalf of the other and are jointly and
severally responsible for the liabilities of the partnership business. Thus, each partner can
act as an agent (!) for the partnership business and stand as surety or guarantor for
the other partners. Inan, however, does not require all partners to have equal share in the
capital. Furthermore, they need not be equally responsible for the management of the
$(&
!
9
$"!*
!

" $

(<
inan, the partners act as agents but not as sureties for their partners. Accordingly, their
liability towards a third party is several, not jointly.
From the perspective of the contribution to the business, can be
divided into three divisions, namely, al-amwal, al-abdan and !
.
"
#
; !

!
without contributing to the capital. In !
, the partners use their goodwill
and creditworthiness to buy things on a deferred basis and sell them on a spot basis. Over
! "

!

!
(&"
can see, the practice of modern is normally formed on the basis of the
classical , where the capital contribution is mainly in the form of
al-amwal. This is seen to be more appropriate as the contribution of the partners, the size
;
"
$
9
="
some variations in the opinions of the jurists). , on the other hand, is the
agreement made between two parties (or more), whereby one party will provide capital

CIFP
Unit 14 | 23
(thus becomes rabb al-mal capital provider) while the other party works with the capital
(thus becomes amil entrepreneur).

,

=0>
$!

$

very high risk portfolio due to its inherent inability to contractually guarantee neither

( , !

"

entrepreneurs in the contract of and respectively, have

!
$

on these two principles. As a result, a kind of perception has developed among bankers as
"
!!

!.(
'

"
"

0

!
# "
!

!'
!

!(
!

and perception on these contracts is needed for the time being. The community at large
!

!
"

#
business. The risk may be minimised and managed through expertise, diversifying the
( "
!
#
(, "
0

about.
Unit 14.4
LEASE-BASED PRINCIPLES
The
ijara
K,

#"M(,
was criticised because it only covered one type of ijara(R()(
K,
transfer of usufruct (the use of an object or the services of a person) for a consideration
rent, or
, in the case of hire, and wages, or ajr, in the case of hire for employment.
, !

$

because it
covers both types of ijara.
A.
Ijara means to employ the services of a person on ujr given to him as

consideration for his hired services. It is termed as
.
B.
Ijara means the sale of usufruct of a particular property to another in

exchange for ajr claimed from him. It is termed as ijara al-ayan.

CIFP
Unit 14 | 24
The discourse on the practice of ijara al-ayan in classical writings of

concentrated only on simple leasing activities, which is termed these days as operating
lease. In this practice, the owner of the asset, the lessor, will allow the lessee to derive
manfaat (usufruct) from the leased asset for a certain period of time in return for
compensation (ajr) agreed upon by both of them. At the end of the leasing period (unless
renewed), the asset would be returned to the lessor and the contract of leasing
terminated.

<"$!

'
!

!

" $
!

"

! "
, but have almost the same
structures and features. Contrary to previous practice, a mechanism is created for the
transfer of the asset to the lessee at the end of the leasing period. The transfer of asset will
normally be done via another contract implicated at the end of the tenure. It can be done
by various ways. Among others:
A.
The bank unilaterally promises to make a gift of the asset to the client at
the end of the period, provided that all installments have been fully paid.
B.
A promise to sell the asset to the client at an agreed price, upon the
payment of the remaining instalments.
(
,
"

!
considered to be the price for purchasing the asset.
Unit 14.5
FEE-BASED PRINCIPLES
Beside the previous three main modes in which Islamic banks generate their income,
fee-based transactions are also important to Islamic banks as a component of their
!
! ('
$

chapter will overlap with the ensuing segment, as various contracts employed by the

#

!


CIFP
Unit 14 | 25
contracts of !and . Among the most important principles used to generate
fee-based income are !and .
Unit 14.5.1
WAKALAH
The
=&( \]]> !
K=& >
empowering some other person to perform some acts for him, whereby the latter stands

!

M( $

relationship is created in which the principal (asil) authorises someone to be his agent
(!>

(<
;
"$

principal because the agent only enforces orders and instructions made by the principal.
<
#

(,

all, as long as all his acts were based solely on the order and instruction given to him by
the principal. Contract of agency can be either free-of-charge or with compensation
(bi al-ujr). It is the practice of Islamic banks to opt for the second option.
For instance, in a letter of credit (LC) granted to the clients, Islamic banks can
generate income by imposing certain fees over the granted facility. Besides, some Islamic

#
;$

# $! (,
!

.

$!

$
(
In this contract, the bank will receive a deposit of investment from its client. The
fund collected will be invested in the list of authorised investment, including money
market instruments, Islamic securities, unit trusts and etc. The proposed portfolio will be

9$ !
! [.

protection. In consideration of the services provided by the bank, the client will pay some
fees. These paid-fees could be construed on numerous Islamic contracts and one of which
is contract of !. In this situation, the bank will be considered as an agent to the
customer to work with the money, and it is paid a sum of money for providing the services
( &

# !

!

transaction entered into in the course of managing and investing the fund, except in cases
of negligence and misconduct.

CIFP
Unit 14 | 26
Unit 14.5.2
KAFALAH
Kafalah is also another principle used by Islamic banks to generate income via the
fee-based principle. From the viewpoint of Islamic law, kafalah, together with hawalah
(transfer of debt) and rahn (pledge) have been introduced for the purpose of
safeguarding the right of the creditor and to ensure the safe return of his amount of

('A
!

*

?

of the principal obligor for the discharge of a pecuniary obligation or debt or the delivery
($

!

&(
/

!
have added the liability of the guaranteed person to his liability at the time
of demanding compensation. This is the reason why scholars used the term
conjoining (al-damm). The liability of the guaranteed person is not freed

!

(<

the right to demand from both parties by virtue of the guaranty.
B.
Also, conjoining the guarantors liability to that of the guaranteed does not
increase the creditors right. In fact the creditor is still entitled to only one
repayment, either from the guarantor or from the original debtor
(guaranteed).
C.
Contract of guaranty established the debt as a liability to the guarantor

without excusing the original debtor from that liability. In granting
facilities to clients, the bank may ask the customer to furnish a third party

!
$!(<
the case of payment default, it may have recourse to the guarantor who will
be liable to pay the amount guaranteed to the bank. Islamic banks also
generate income using principle via Bank Guarantee.
Under the Shipping Guarantee, the bank confers a guarantee to
the owner of the shipping vessel, to discharge goods to the importer
pending receipt of the original bill of lading. Under the Bank

#

endeavours that may require such guarantees. Letters of guarantee can be
structured for various functions, among other being Bankers Guarantee,

CIFP
Unit 14 | 27
Tender Guarantee, Labour Guarantee, Performance Guarantee, Shipping

Guarantee, Airway Bill Guarantee, etc.
Unit 14.6
FREE-OF-CHARGE PRINCIPLE
In its report on the practice of Islamic Banking and Finance in Pakistan, the Council of
Islamic Ideology (CII) indicated that ideally the real alternatives to lending on interest
under an Islamic economic system are PLS or qard hasan. Unfortunately, neither PLS nor
qard hasan ;$

(&

qard hasan is concerned, as the banks are
commercial entities, providing qard hasan alone would not be part of their normal
business activities.

'
!
#!
"9

"
;
to the client. However, in certain circumstances, they also grant qard hasan facility alone,
but priority will be given to clients who have previous dealings with the bank. It is very

# " ; qard hasan !

"
$
transactions with the banks.
As a matter of fact, qard hasan

;

!
# !
"
$

( ' !
;
$

arising from bereavement, injury, unemployment or some other unforeseen
!
('

;$
"

$
or occasion, such as a wedding, education, etc.
As it is observed, the scope within which qard hasan facilities can be extended is
very wide and general. Aside from its application to individuals facing hardship, it can be
used in some instances to fuel economic productivity at grass-roots level. In his book
entitled Economic Development and Social Peace in Islam, Dr. Mohammad Abdul
Mannan recounts how in 1984, he established the Bangladesh Social Peace Foundation
whose aims, among others are:

CIFP
Unit 14 | 28
. Spiritual, moral, intellectual and material growth and development of the human
potentialities of the poor and less fortunate people of Bangladesh through carefully
planned, multipurpose social, economic, educational and religious programs and
projects.
One of these projects, established in Upzilla Faridgonj in the Chandpur district of
Bangladesh in 1989 was entitled Making a Living for the Absolute Poor. He reports:
This is a self-employment project involving the absolute poor, unemployed or under
employed people in the rural areas of Bangladesh who cannot provide any asset as
collateral against any conventional loan, if advanced to them, or they have no access to
formal banking facilities.
Those involved in this project were given interest-free loans. While they carried no
interests, repayments could be supplemented by a voluntary contribution to a social
fund.
Income to provide qard hasan facilities can be generated from various sources.
'
!
#

!

;qard hasan
"

( ,

contributions to society. The source of income can also come from the allocation made by
the government. Also, it can come from individuals who wish to contribute to the fund.
This kind of mechanism was outlined in the 1996 annual report of the Jordan Islamic
Bank:
the bank accepts contributions from benefactors who wish to grant interest-free loans,
through the bank, for special purposes. These contributions are deposited in the al-Qard
al-Hasan Fund.
According to the Jordan Islamic Bank, funds generated in this way can be sizeable.
In 1995, for example, the Jordanian Bank advanced interest-free loans to 6,138 individuals
amounting to J$2.1 million.
Besides, there is a proposal which suggests that the proceeds obtained by the bank
from the penalty charged on defaults in payment can also be channeled to this fund. This
proposal, of course, needs further Shariah consideration before it can be implemented.

CIFP
Unit 14 | 29
In general, it can be said that qard hasan can be granted in two ways. First, the
bank will grant the facility without charging any cost at all. What the bank will reclaim is
only the amount of capital.
On the other hand, Islamic banks can charge an extra payment known as service
charge. However, this charge must be reasonable as it is meant to cover the actual
administrative costs only, not for income-generating purposes.
Unit 14.7
SUPPORTING CONTRACTS
These contracts are named as supporting contracts because more often than not, these
contracts serve the purpose of strengthening the application of other contracts in Islamic
commercial law (muamalah). For instance, the main purpose of a contract of sale is to
transfer ownership of a particular object from the seller to the buyer. If the buyer delays
the payment, that is, the payment of the price is deferred to a certain particular time in
the future, the seller is given full right to request the buyer to provide a guarantor or/and
security. In this situation, contracts of kafalah and rahn are employed to strengthen the
sale contract that was concluded between the contracting parties. Kafalah and wakalah,
however, will not be discussed again in this segment. The discussion will, therefore, focus
on the remaining contracts.
Unit 14.7.1
CONTRACT OF HAWALAH
Literally, hawalah means turn, change, shifting or transfer. The same meaning seems to
prevail in its technical meaning. Hence, the word hawalah

!
transfer of debt from the liability of the original debtor to the liability of another person.
The Majallah =&(E>
K!
#

!

debtor account of another. Thus, hawalah is an agreement by which a debtor is freed
from a debt by another becoming responsible for it.

CIFP
Unit 14 | 30
Hawalah ;!kafalah in the sense that the latter entails the conjoining of
liabilities rather the transfer thereof as in the former. As a consequence, transfer of a debt
in hawalah will release the original debtor from the debt (and the creditor has no recourse
to him anymore), which is not the case in kafalah, where he would not be released from
(, !

#"
" hawalah as: Legal term signifying
the removal or transfer of a debt by way of security or corroboration from that of the
original debtor to that person to whom it is transferred.
Unit 14.7.2
CONTRACT OF RAHN
Contract of rahn is another security contract advanced by Islamic law to protect the rights
of a creditor. In fact, it is one of the most powerful means of ensuring against the possible
default of the debtor, compared to a contract of guarantee (kafalah). Literally rahn means

(0

!

!

!
!(0

K

corporeal property of material value in accordance with the law as security for a debt or
pecuniary obligation.

, @
#
# (,

K'

taking a valued property from its owner, as a means of insuring a loan that has matured

!
M(,
? "$
!(,
K,
#
a non-fungible as insurance against a fungible debt, whereby the debt may be extracted
!
M(
?

*
must be of a non-fungible nature. Even though the Hanbalis do not stipulate as such, but
rahn !"
??(, !

that a pawned object is a property used as insurance for a debt so that the debt may be
extracted from the property if it is not possible to recollect from the debtor. The Majallah

K

"!

!
respect of a debt.
Contract of rahn has been used mainly to secure the right of the bank against the
!?
!

!
#('

the asset is secured as collateral. In the case that the customer defaults, the bank has the

CIFP
Unit 14 | 31
right to sell the property to settle the debt that he owes to the bank. The collateral can be

=

&
>

( ,
# "
payment of the instalments is fully paid.
In certain circumstances, the customer is required to place some deposits as
security, as in a cash line facility given to customer. Under this facility, the bank agrees to
provide the customer with a cash line facility using the contract of bay al-inah. Using this
instantaneous buying and selling, the customer will be able to create a credit limit for his
account. This credit limit will be disbursed into his current account and is ready for
utilisation. He has to make sure that he re-deposits the amount that he has utilised so as
Q? !( &

# "
# !

security deposit in an investment account as security (rahn). If the customer fails to settle
the balance that he has withdrawn, this security will be utilised. If he pays the entire
necessary amount accordingly, this security amount will be refunded (together with the
> !
(
Unit 14.7.3
CONTRACT OF WADIAH
Contract of wadiah (or also termed as ida> <

!
.!"!

# ?(&!
!

"(

?

@
#
$

# ?

( :$

! !

!
"

"
depositor and the depositary, i.e. their relationship is trusteeship (the depositary is an
agent for the safekeeping of the property of the depositor).
Due to the condition of the depositary as an agent, he must have legal capacity
=
!

>( <"$
<

people can also be the depositor or depositary. The object of the deposit must be a form
of property that can be possessed physically.

CIFP
Unit 14 | 32
The status of the possession of the depositary over the deposited property,
according to Islamic law, is a trust possession. Therefore, he will only be held responsible
for damages to the property in case of negligence and transgression. However, the status

"

!

the property, re-depositing it with ineligible parties, utilising it, mixing it with his other
?
"

(
As far as the practice in Islamic banks is concerned, an agreement is signed between the
client and the bank, to allow the bank to make use of this fund so long as the fund
remains with the bank. The bank will also mix this fund with that of other clients of the
bank.
In this situation, wadiah yad al-amanah (safe custody based on trust) has changed
status to wadiah yad al-damanah (guaranteed safe-custody). Under this rule, the bank
will make use of the fund and be liable to refund to the client at any time he so desires.
&

#"

#?(<"$

#" !

!
hibah
= >

#?

(
The practice of taking deposits in savings and current accounts is based on this concept.
SUMMARY

'
!
"

"

$

!!(,
[.'
!
"

" !$!!$.

well known Islamic contracts to suit the needs of people at any time. The previous

!

exhaustive, as further extensions of these contracts will be discussed in the module

'
!

(

CIFP
Unit 14 | 33
MULTIPLE CHOICE QUESTIONS

\( H
" "

9

A.
B.
Shirkah and mudarabah

Mufawadah and inan
C.
D.
Shirkah and shirkah al-milk

Shirkah and al-wujuh
D('!

!! !

!!
into the possession of the
whether physical or constructive, in the sense that the commodity must be in his risk,
though for a short period.
A.
obligor
(

C.
guarantor
D.
seller
('!

!!!
supplier and then only sell to the client.The commodity may be such that it has no
!!!
!
#
$(,
$

# "
A.
Unilateral contract
B.
Promise to purchase
C.
Bilateral forward contract
D.
One-sided promise
](@

"

!

!('"

!
sale on .basis.
However, after adding the concept of deferred payment, it has been devised to be used

!

"

!!(
&(

B.
cost-plus
C.
deferred
D.
buy-back

CIFP
Unit 14 | 34
5. One of the well-known approaches in classifying contracts is from the viewpoint of

!
#

(,

as follows EXCEPT as :
A.
Sale-based principle

(

C.
Lease-based principles
D.
Cost-plus based principle
QUESTIONS AND PROBLEMS

Short essay questions:

\(
,

'
!
!
$

;

(=]>
categories and elaborate on them. You are required to provide some
relevant examples to support you answer.

D(
:

!9

(

(
:

!

(
Long essay questions:

\(
@

!@

#

contracts.
2.
Explain the elements and conditions of Musharakah.

(
;@

#
(

CIFP
Unit 14 | 35

&
&"<*(<

=\]>Sales and Contract in Early Islamic
Commercial Law, Islamic Research Institute and International Islamic
University, Islamabad.
&
@
# =\G>Theory of an Islamic Financial System,
Encyclopaedia of Islamic Banking and Insurance, pp.31-49, Institute of
Islamic Banking and Insurance, London.

&O
!
)
=\>Kitab Al-Fiqh Ala Madhahib al-Arbaah,
Dar Al-Thaqalain, Beirut, 1998
&
& !
Q!

'
!

, 9?'O,'
O

(DT

&
<

=DTT]>Mitigating the Juristic Objection to the Sale of
Receivables, paper presented at the Colloquium on Islamic Bond, Securities Commission,

D] )DTT](

*
!
'

al-Muntaqa Sharh al-Muwatta

&

1332 A. H.

@
'Kashshaf al-Qinac can Matn al-Iqnac, ed. Hilal
@
@

<
&
!
\(:(\]T&(<(

#'
!@

=\]>'
!
#
!
?

$'@

0!(

$"
=\G>Q'
!
@!!

?Anthology of
Islamic Banking''
!
#
'
(\TE\\\(
: #O

&
"
=DTT>Q'
!0
"!
'

@

?, Malayan Law Journal DTT@0)$...(
'O
<
&
/
@
!!
& !
@
!!
& !

(1989), Bidayat al-Mujtahid wa Nihayat al-Muqtasid

)(:(\]T&(<(
@ (

#
=\>Q
Exchange in Islamic Transactions, paper presented at
Seminar on Shariah and Legal Aspects of Islamic Banking practice, organized by BIRT,

DT@
\(

'
!!!
0
"
'&
@'
!

System, Unpublished paper, pp. 1-47.

&R
"
"&{
#

@
'

'
al-Majmu Sharh
al-Muhadhdhab, Maktabat al-Irshad, Jeddah, n.d.
R
!
@
Shariah Contracts Used by Islamic Banks
R

$(\E(

1-2, pp. 5-11.

@Q'
!
&
" ?(D]](
O !!

&$!!
DDTT(\D(

/

{
=DTT>Financial Transactions in Islamic Jurisprudence, transalated by
@
!&(:
!
$(\(\\DT]G]]]]GG\]GGGE\GEGEDE(

{
#

"=\>Q,
&,
?'
!
#)(\DT(

CIFP
This page is intentionally left blank

Shariah INCEIF

Transféré par

Informations du document

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

Shariah INCEIF

Transféré par

Droits d'auteur :

Formats disponibles

An Overview of Shariah Principles in Financial Transactions

Topics in This Unit

     

!  

!  $

SH1002 Shariah Aspects of Business and Finance

An Overview of Shariah Principles in Financial Transactions

&   

Financial transactions that are based on sale such as

Financial transactions that are based on partnership such

Financial transactions that are based on lease such as

Financial transactions that are based on charging fee such

Financial transactions that are based on benevolent

SH1002 Shariah Aspects of Business and Finance

An Overview of Shariah Principles in Financial Transactions

CLASSIFICATION OF SHARIAH PRINCIPLES IN

'   $ 

SH1002 Shariah Aspects of Business and Finance

An Overview of Shariah Principles in Financial Transactions

SH1002 Shariah Aspects of Business and Finance

An Overview of Shariah Principles in Financial Transactions

SH1002 Shariah Aspects of Business and Finance

An Overview of Shariah Principles in Financial Transactions

,   

SH1002 Shariah Aspects of Business and Finance

An Overview of Shariah Principles in Financial Transactions

   ! (

   $(, @

SH1002 Shariah Aspects of Business and Finance

An Overview of Shariah Principles in Financial Transactions

        "   

SOME CLASSIFICATIONS OF SALE-BASED

SH1002 Shariah Aspects of Business and Finance

An Overview of Shariah Principles in Financial Transactions

SH1002 Shariah Aspects of Business and Finance

An Overview of Shariah Principles in Financial Transactions

' !!  

'  ! ; # =( (.

2. Bay al-mutlaq ()

 (,   .

   

SH1002 Shariah Aspects of Business and Finance

An Overview of Shariah Principles in Financial Transactions

SH1002 Shariah Aspects of Business and Finance

An Overview of Shariah Principles in Financial Transactions

/  0(!)bay al-murabahah)

SOME TYPES OF SALE-BASED CONTRACTS

%   )Bay al-musawamah)

SH1002 Shariah Aspects of Business and Finance

An Overview of Shariah Principles in Financial Transactions

SH1002 Shariah Aspects of Business and Finance

An Overview of Shariah Principles in Financial Transactions

SH1002 Shariah Aspects of Business and Finance

An Overview of Shariah Principles in Financial Transactions

SH1002 Shariah Aspects of Business and Finance

An Overview of Shariah Principles in Financial Transactions

SH1002 Shariah Aspects of Business and Finance

An Overview of Shariah Principles in Financial Transactions

The debt must be a spot dayn (dayn muajjal) in nature.

SH1002 Shariah Aspects of Business and Finance

An Overview of Shariah Principles in Financial Transactions

SH1002 Shariah Aspects of Business and Finance

An Overview of Shariah Principles in Financial Transactions

SH1002 Shariah Aspects of Business and Finance

!

! $

&

' $

,

!(

$(, @

"

' !!

' !;#=( (.

2. Bay al-mutlaq ()

(, .

/ 0(!)bay al-murabahah)

% )Bay al-musawamah)

The Islamic Academy of Jeddah has described tawarruq as the purchase of a

2'Tawarruq Inah

activity by two or more persons. It can be involuntary (

! "

The discourse on the practice of ijara al-ayan in classical writings of