BWSS2093

CONTRACT IN
ISLAMIC FINANCE AND
BANKING.
Introduction to the theory of
Contract in Islamic Mu‘āmalāt.
 Outline.
 Definition of contract
 Differences between few terminologies
related to the contract such as transaction,
contractual intention, obligation.
 Types of contract: contract of exchange,
charitable contract, tauthiqat contract,
isqatat contract, etc..

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 Definition of Term Contract.
• The word ‘Aqd (contract) in Arabic literary means to
tie, to join, to conclude, to combine, to bind or to
ratify.
• While its plural is ‘Uqūd (contracts).
• It also means covenant, fulfillment, agreement and
determination.
• The usage of the aqad can be found in al-Quran
such as in surah al-Maidah (5:1)
• In Islamic Jurisprudence: contract is an
engagement and agreement between two persons
in a legally accepted, impactful and binding manner.

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 Def…cont…
• Contract can be used from both general and specific sense.
• In general sense, ‘aqd (contract) is applied to every act
which is undertaken in sincerity and with firm determination,
regardless of whether it emerges from a unilateral intention
(irādah munfaridah) such as waqaf, reduction of debts,
divorce or it results from mutual agreement, such as sale,
hire agency and mortgage.
• In the specific sense, it has been defined in different ways.
• ‘Aqd (contract) is defined as the relation between a lawful
offer and acceptance which produces outcomes that are
legally bind (in Buang,p.2).
• It is where the two parties undertake obligations in respect
of any matter which is affected by the combination of an
offer ((ijāb) and acceptance (qabūl). (In Mansuri, 2007.
p.21). 4
 Terminologies Related to Contract.
1. Mithāq
Mithāq is a contract that signifies sincerity and firm
determination on contracting parties to fulfill their
contractual obligation.
In order words. It is a contract that is considered to
be sacred by the contracting parties and has more
sanctity than ordinary contract.
Example: Covenant between man and God; Treaties
by Muslims with other nations and marriage contract.
•The word has been used in a number of verses.
(Q13:20), (Q8:72), (Q4:21),(Q4:90)
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 Cont…
2. ‘Ahd
‘Ahd means a unilateral promise or undertaking,
although it can also includes a bilateral obligation.
The Holy Qur’an has used ‘ahd in both senses.
Surah (Q2:40), (Q2:177), al-Isra (17:34), and surah al-
Nahl (16:91).
3. Al-wa‘ad
Al-wa‘ad is an expression of willingness of a person
to another or a group of people on a particular subject
matter.
.
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 Differences between mithāq e.g. in Marriage and
‘aqd in sale contract.
 Marriage contract, though it is not sacred contract
which not able to be dissolved, however Islamic law
recognized it as mithaq ghaliz (highest degree of an
agreement).
 Dissolving marriage contract is permissible but not
recommended unless there is a valid reason.
 The origin ruling in man and woman relation is
prohibited unless there is evidence shows otherwise.
 While, commercial contracts are permissible unless
there is evidence shows otherwise.

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 Difference between promises and
contracts.
 A mere promise can be unilateral while
contract is bilateral or mutual agreement.
 Promise is voluntary while contract is mutual
obligation.
 Promise cannot be enforced by the law,
although it is strongly recommended to be
fulfilled. While contract is enforceable in a
court of law.

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 Types of (‘Aqd)Contract.
 Contracts (‘Uqūd ) can be classified based on: their
application, purpose or characteristics. However, the
following categories are based on the purpose.
1. Exchange-based Contracts ( ‘Uqud al-mu’awadat ).
 These are contracts between two transacting parties
to acquire ownership of an asset or commodity or
usufruct which end up with transfer of ownership of
the exchanged counter value.
 Example include: currency exchange ( bay sarf) or
forward sale ( bay salam) or manufacturing contract
( bay Istisna’), sales of debt ( bay al-dayn), mark-up
sales ( murabahah).
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 Cont…
2. Charity-based contracts (‘Uqūd al-tabaru’āt) .
 These are contracts effected by someone on the
basis of benevolence and cooperation which does
not require the exchange of something for another
thing.
 Therefore, there is transfer of ownership of an asset
without any counter value.
 Example. qard (loan), hibah (gift), sadaqah (charity),
waqf (endowment) and so on.

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 Cont…
3. Partnership based-contracts (‘Uqūd al-Ishtirak )
 Partnership contracts are contracts whereby parties entered
into the contract for the purpose of having a partnership in
work and profit.
 It is founded upon the spirit of cooperation and partnership
in the sense that profit are shared together by the partners
and losses are borne by both of them as well.
 E.g. Musharakah, mudarabah muzara’ah and musaqah
4. Security based-contracts (‘Uqūd Tauthiqat )
 These contracts are meant to secure debts for their owners
and guarantee creditors of debts owing to them. These are
guaranty, assignment of debt and mortgage
 E.g. Kafalah and Rahn
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 Cont…
5. Waiving or Releases contracts ( ‘Uqūd al-isqatāt )
 These are contracts whereby an individual waive an
established right to liabilities with or without a counter
value.
There are two types:
i.Purely waiving contract (isqat mahd)
It is a waive right without counter value such as rebate
(Ibra’) and the pre-emptive right (shuf’ah).
ii. Isqat al-mu’awadah
 This is a contract where an individual waive an
established right over a liability with counter value.
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 Reference.
• Mansuri, M.T. (2007). Islamic law of contract and
business transaction. New Delhi: Adam
Publishers.
• Hasan, A. (2011). Fundamentals of shari’ah in
Islamic finance. Kuala Lumpur: IBFIM
• Al-Zuhayli, W. (2007). Financial transactions in
Islamic jurisprudence. Trans. by El-Gamal M.A.
Damascus: Dar al-fikr.
• ISRA, (2012). Islamic financial system: Principles
& operations. Kuala Lumpur: ISRA.
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 Thanks to all.
May Almighty Allah bless everyone
of us and increase our
Knowledge.
Amin.

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 1 Quiz
st

1. Define the term ‘Aqd & Mithaq( 4 Marks).

2. Differentiate between Ahd ( promises) & ‘Aqd (
contract ) ( 5 Marks).
3. Explain classification of contracts based on the
purpose of the contracts ( 6 Marks).

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