Introduction to Shari'ah principles governing commercial transaction.

1. INTRODUCTION TO SHARI’AH PRINCIPLES GOVERNING COMMERCIAL
TRANSACTION
ISLAMIC CONTRACT
‘Aqd literally – tying/knot binding 2 parties together.
Legally – covenant & fulfillment. The agreement of two or more wills to initiate,
transfer, modify/end a commitment.
Elements of ‘Aqd – 1) offeror/ Proposer
2) Offeree/Acceptor
3) Offer/ Proposal
4) Acceptance
5) Consideration
6) Subject matter

2. OFFEROR AND OFFEREE(Parties to contract)
- Capability – essential for validity of contract.
- Attained physical (baligh) and intellectual maturity (sound judgment/prudence (rushd).
OFFER & ACCEPTANCE (Ijab & Qabul)
- Express (orally/writing) or implied (conduct).
- Silence implied contract.
- Insist on session of contract (majlis al-’aqd)
- Both jointly connected in one single session .
- Unity time + place essential for dual declarations (pronouncement of aqad to determine
intention & consent)
- any natural place (where parties meet to form agreement)
- Gap in time/place not allowed. Therefore interruptions not allowed.
- Acceptance immediate.
- Inter presenters (parties hear). Inter absentees (representatives) valid if in 1 single session.

3. CONSIDERATION
-Monetary price/other commodity.
-To avoid uncertainty: exist & determine at the time of contract.
SUBJECT MATTER
(Item & consideration)
-Lawfulness. Object permissible to trade. Have legal value, ownership, authorisation.
-Existence. At the time of contract.
-Deliverability state.
-Precise determination. Certainty (value, amount, location etc.)
* Parties must satisfied with contents (to determine consent /mutual agreement)

4. Categories of Islamic Contract
1) Unilateral – gratuitous (gift,will, waqf, qard).
2)Bilateral – contract of exchange (uqud al-mu’awadat))
- contract of security (uqud al-tawthiqat)
- contract of partnership (shirkah).
- contract of safe custody (wadiah).
- contract utilization of usufruct (uqud al-manfa’ah).
- contract pertaining to do a work (eg. Wakalah).
Types of Islamic Contract
a)Definitive Contract : Terms of Offer & Acceptance clearly define.
b)Binding Contract: once concluded cannot revoke except through mutual consent.
c)Facultative Contract: Can be revoke by either party (e.g: item defective).
d)Correct Contract: valid according to syariah,
e)Contract of Exchange: interchange money & goods/service simultaneously.
f)Contract of Gratuities: Contract of donation/benevolence lending.
g)Specific contract: pre designed contracts (e.g: standard contract for scholarship
agreement).

5. Differences Between Islamic Bank & Conventional
Bank
Principles of Islamic Bank
1)The absence of interest-based (riba) transactions;
2)The avoidance of economic activities involving oppression(zulm);
3)The avoidance of economic activities involving speculation (gharar);
4)The introduction of an Islamic tax, zakat;
5)The discouragement of the production of goods and services which contradict the Islamic
value (haram)
Conventional Banks Islamic Banks
1 The functions & operating modes of conventional
banks are based on fully manmade principles.
The functions and operating modes of Islamic
banks are based on the principles of Islamic
Shariah.
2 The investor is assured of a predetermined
rate of interest.
In contrast, it promotes risk sharing between
provider of capital (investor) and the user of

6. Conventional Banks Islamic Banks
3 It aims at maximizing profit without any
restriction.
It also aims at maximizing profit but subject to Shariah
restrictions.
4 It does not deal with Zakat. In the modern Islamic banking system, it has
become one of the service-oriented functions of
the Islamic banks to be a Zakat Collection Centre
and they also pay out their Zakat.
5 Lending money & getting it back with
compounding interest is the fundamental
function of the conventional banks.
Participation in partnership business is the
fundamental function of the Islamic banks. So we have
to understand our customer’s business very well.
6 It can charge additional money (penalty
and compounded interest) in case of
defaulters.
The Islamic banks have no provision to charge any
extra money from the defaulters. Only small
amount of compensation and these proceeds is
given to charity. Rebates are given for early
settlement at the Bank’s discretion.
7 Very often it results in the bank’s own interest
becoming prominent. It makes no effort to
ensure growth with equity.
It gives due importance to the public interest. Its
ultimate aim is to ensure growth with equity.

7. Conventional Banks Islamic Banks
8 For interest-based commercial banks,
borrowing from the money market is
relatively easier.
For the Islamic banks, it must be based on a Shariah
approved underlying transaction.
9 Since income from the advance is fixed, it
gives little importance to developing
expertise in project appraisal and
evaluations.
Since it shares profit and loss, the Islamic
banks pay greater attention to developing
project appraisal and evaluations.
10 The conventional banks give greater emphasis
on credit-worthiness of the clients.
The Islamic banks. On the other hand, give greater
emphasis on the viability of the projects.
11 The status of a conventional bank, in
relation to its clients, is that of creditor
and debtors.
The status of Islamic bank in relation to its
clients is that of partners, investors and
trader, buyer and seller.
12 A conventional bank has to guarantee all its
deposits.
Islamic bank can only guarantee deposits for deposit
account, which is based on the principle of al-
wadiah, thus the depositors are guaranteed
repayment of their funds, however if the account is
based on other concept or product, client have to
share in loss and profit.

8. ISLAMIC BANKING CONCEPTS/ ISLAMIC BANKING PRODUCT
1 Wadiah Yad Dhamanah (Savings with guarantee)
Refers to goods or deposits, which have been deposited with another person, who is not the owner, for
safekeeping. As wadiah is a trust, the depository becomes the guarantor and, therefore guarantees repayment
of the whole amount of the deposits, or any part thereof, outstanding in the account of depositors, when
demanded. The depositors are not entitled to any share of the profits but the depository may provide return to
the depositors as a token of appreciation.
2 Mudharabah (profit-sharing)
Refers to an agreement made between a capital provider and another party who acts as the entrepreneur. This
arrangement will enable the entrepreneur to carry out business projects and profits are distributed based on a
pre-agreed profit sharing ratio. In the case of losses, the losses are borne by the provider of the funds.
3 Musyarakah(joint venture)
Refers to a partnership or joint venture for a specific business, whereby the distribution of profits will be
apportioned according to an agreed ratio. In the event of losses, both parties will share the losses on the basis
of their equity participation.
4 Bai’ Bithaman Ajil (deferred payment sale)
Refers to the sale of goods on a deferred payment basis at a price, which includes a profit margin agreed to by
both parties.
5 Wakalah (nominating another person to act)
Refers to a situation, where a person nominates another person to act on his behalf.

9. 6 Bai’ al-Inah (sell and buy back)
Refers to a contract which involves sell and buy back transactions of an asset by a seller to the customer. The
seller will sell the asset on cash basis but the customer will buy back the asset on deferred payment at a price
higher than the cash price.
7 Ai’Ijarah Thumma al-Bai’ (leasing and subsequently purchase)
Refers to an Ijarah (leasing/renting) contract to be followed by Bai (purchase) contract. Under the first
contract, the hirer leases the goods from the owner at an agreed rental over a specified period of time. Upon
expiry of the leasing period, the hirer enters into a second contract to purchase the goods from the owner at
an agreed price. It involve two aqad.
8 Qard (Interest-free loan)
A loan extended on a goodwill basis and the borrower is only required to repay the principal amount borrowed.
However, he may pay an extra amount at his absolute discretion, as a token of appreciation.
9 Bai’ salam (future delivery)
Refers to an agreement whereby payment is made in advance for delivery of specified goods in future.
However for goods whereby the market price is not stable such as gold, silver and currency is not allowed to
use this concept. It can only be use for goods which is certain in quality, quantity and workmanship.
10 Bai’ al-Istisna (Sale on Order)
A contract where a party orders another to manufacture or provide a commodity, the description of which,
delivery date, price and payment date are all set in the contract. In al-Salam, payment must be made 100% in
advance while in al-istisna may pay partially in advance or according to progress reports/inspections. Eg:
Purchasing a house from the housing developer or construction contract

10. 6 Bai’ al-Inah (sell and buy back)
Refers to a contract which involves sell and buy back transactions of an asset by a seller to the customer. The
seller will sell the asset on cash basis but the customer will buy back the asset on deferred payment at a price
higher than the cash price.
7 Ai’Ijarah Thumma al-Bai’ (leasing and subsequently purchase)
Refers to an Ijarah (leasing/renting) contract to be followed by Bai (purchase) contract. Under the first
contract, the hirer leases the goods from the owner at an agreed rental over a specified period of time. Upon
expiry of the leasing period, the hirer enters into a second contract to purchase the goods from the owner at
an agreed price. It involve two aqad.
8 Qard (Interest-free loan)
A loan extended on a goodwill basis and the borrower is only required to repay the principal amount borrowed.
However, he may pay an extra amount at his absolute discretion, as a token of appreciation.
9 Bai’ salam (future delivery)
Refers to an agreement whereby payment is made in advance for delivery of specified goods in future.
However for goods whereby the market price is not stable such as gold, silver and currency is not allowed to
use this concept. It can only be use for goods which is certain in quality, quantity and workmanship.
10 Bai’ al-Istisna (Sale on Order)
A contract where a party orders another to manufacture or provide a commodity, the description of which,
delivery date, price and payment date are all set in the contract. In al-Salam, payment must be made 100% in
advance while in al-istisna may pay partially in advance or according to progress reports/inspections. Eg:
Purchasing a house from the housing developer or construction contract