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Chapter 5:
Contract/ Principle
In Islamic Business

BPMS 1013 Theory & Practices of
Islamic Business

1
• Definition if Contract/ Principle??
• Why we do need Contract/ Principle in Islamic Business?
• The different between Is...
INTRODUCTION
Freedom, where there is no compulsion imposed on the
sale and they were given time to choose to continue or
c...
Sources of the Shariah
•

Primary Sources
 The Holy Quran
 Sunnah (the sayings, deeds and endorsements of Prophet Muhamm...
ACCAD TRANSACTION
• Islam is very concerned
about the contract or the
contract.
• Without a contract, the
contract or a le...
KHIYAR
 Khiyar is one of the contracting parties can continue the contract or not to
proceed.
 Is typical of the rules r...
• as performed by the seller and the buyer before parted.
Khiyar Majlis

• it happened during the sale aqad conducted wher...
CONTRACT OF DEALING
contracts
mandate
(without)

Contract
Muawadah (pay)

musawamah
contract
(bargain)

Contract
tabaruat
...
Almudarabahah
Contract

Al-ishrak
Contract

METHOD
BASED ON A
TRUST
CONTRACT

Tauliyyah
Contract

Al-wadziah
Contract

BPM...
Gift/Present

Wakaf

Ji’alah

METHOD
BASED ON A
TABARURUAT
CONTRACT
Donations
Or Charity

Hibah
Alqardhul
Hassan

BPMS 101...
METHOD BASED ON A ACCAD
MUSAWAMAH
Cash Method
Of Trading

Bai’bathaman
Ajil

Sell Shares

Musyarakah

Mudharabah

Bai’ Al-...
KEY ISLAMIC COMMERCIAL CONTRACTS

Gratuitous
Contracts

Gift

Trading
Contracts

Sale

Waqf
Loan
Ibra’

Operational
Lease
...
Islamic Banking

SOURCES OF
FUND

BPMS 1013 Theory & Practices of
Islamic Business

APPLICATIONS
OF FUND

13
EQUITY
FINANCING

Mudharabah
Musharakah

DEBT FINANCING

Sale based financing
BBA / Murabahah
‘Inah/Tawaruq/dayn
Salam
Ist...
ISLAMIC CAPITAL MARKET

Equity
Market

Bond
Market

Musyarakah
Mudarabah

-Debt Based
-ABS
-Equity Based

Mutual Fund / Is...
What to do and what to avoid






Conclusion of contract by mutual consent
The avoidance of riba’
The avoidance of g...
WHAT TO BE AVOIDED
 Riba – prohibited in many Quranic verses and
sayings of the Prophet s.a.w.
 Meaning: riba is every e...
PROHIBITION OF RIBA IN THE
QURAN
4 STAGES

First Stage
(30:39)
• Compare riba
with zakat &
charity
• Praising zakat &
char...
 “and that which you give in gift (to others), in order that it
may increase (your wealth by expecting to get a better on...
•

•

•
•

•

“those who eat riba will not stand (on the Day of Resurrection) except like the standing
of a person beaten ...
• And if the debtor is in a hard time (has no money), then grant him
time till it is easy for him to repay; but if you rem...
• Under Islamic law, riba can occur in two main
situations, i.e.:
o riba al duyun (loan): the riba or excess which occurs ...
PROHIBITION OF RIBA (Loan)
Surah al-Baqarah, ayat 275
“ … But Allah hath permitted trade and forbidden usury

Interpretati...
PROHIBITION OF RIBA (Exchange)
Sunnah of the Prophet:
Gold for gold, silver for silver, wheat for wheat, barley for barley...
SUMMARY OF RULES UNDER THE
HADITH
2 conditions:

• money1 + money1

=

– Equality
– Hand-to-hand

2 conditions:

• food1 +...
DIVISION OF RIBA
Riba’ al-Duyun
(RIba’ in Loan
Contract)

BPMS 1013 Theory & Practices of
Islamic Business

Riba’ al-buyu’...
Riba’ al-duyun
 The debtor borrowed money to be paid in certain time, and the
amount is more than the amount borrowed
 A...
Riba al-Buyu’
• Mainly based on the saying of the Prophet: “Gold for gold, silver for
silver, wheat for wheat, barley for ...
CONCLUSION
• Islam is not limited to specific acts of worship alone but all
that is done solely for Allah is considered as...
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Chapter 5 : Contract and Principal in Islamic Business

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Chapter 5 : Contract and Principal in Islamic Business

  1. 1. Chapter 5: Contract/ Principle In Islamic Business BPMS 1013 Theory & Practices of Islamic Business 1
  2. 2. • Definition if Contract/ Principle?? • Why we do need Contract/ Principle in Islamic Business? • The different between Islamic Business and Conventional? BPMS 1013 Theory & Practices of Islamic Business 2
  3. 3. INTRODUCTION Freedom, where there is no compulsion imposed on the sale and they were given time to choose to continue or cancel a transaction. While the freedom to make money purely temporal strictly forbidden in Islam and has been described in Surah Ali-Imran verse 196 which says: "Never you be fooled by the unbelievers freedom to move and build their smooth development of trade and industry in the state of the world. All of that only temporary pleasure. Then (in the Hereafter) their abode in Hell. " BPMS 1013 Theory & Practices of Islamic Business 3
  4. 4. Sources of the Shariah • Primary Sources  The Holy Quran  Sunnah (the sayings, deeds and endorsements of Prophet Muhammad PBUH) • Secondary Sources (mostly by the exercise of Ijtihad (reasoning by the learned))  Ijma (Unanimous decision of the Ulama)  Qiyas (analogy)  Istishan/ Istihab (equity in Islamic law)  Maslahah (necessity of the people)  Surdul Dara’ih (Blocking the means)  U’ruf (custom) BPMS 1013 Theory & Practices of Islamic Business 4
  5. 5. ACCAD TRANSACTION • Islam is very concerned about the contract or the contract. • Without a contract, the contract or a legal bond between both parties will be considered invalid. • When a contract is the case then both parties have rights and responsibilities. BPMS 1013 Theory & Practices of Islamic Business PILLARS OF CONTRACT TRANSACTION CONDITIONS OF TRANSACTION • Pillars are things fundamental to the existence of a practice or act. • Conditions are the properties that determine the validity of a practice or act. • Pillars of the sale are: • seller • buyer • Goods sold • price • Sighah (ijad and qabul) • Terms of sellers and buyers • Provided goods • Terms of price • Terms sighah • Sample contracts in government housing loan scheme. 5
  6. 6. KHIYAR  Khiyar is one of the contracting parties can continue the contract or not to proceed.  Is typical of the rules regarding the selection of the forward purchase contract or otherwise  Intended to give a right to the parties' buy and sell is not a loss or regret after the agreement was made due to certain things, arising from the purchase or sale consented either in terms of price, article, etc. BPMS 1013 Theory & Practices of Islamic Business 6
  7. 7. • as performed by the seller and the buyer before parted. Khiyar Majlis • it happened during the sale aqad conducted where both parties agreed to unconditionally to pursue the sale or otherwise Khiyar Syarat Khiyar Aib Khiyar Ta’yin Khiyar Rukyah • where there are defects on the goods and the buyer does not know it during the purchase process • There are c0ndition on Khiyar Aib: • defects occur before or after akaq or goods not been submitted yet, if there has been handing it can not Khiyar anymore. • if the buyer is aware of the defect but still buy the goods can not be Khiyar. • allow the buyer to choose the option purchase one of the three items he wanted to buy. • The goods must be different in terms of price, and the nature • unauthorized purchases if buyers do not see what would be purchased in advance as a condition for Khiyar is see what to buy. • To prevent fraud • Imam Hanafi opinion Khiyar Naqdi is a branch of the Khiyar conditions. • requires that the buyer does not submit all the total price within a specified time. The set time is three days, if more than three days then Khiyar Naqdi purchase canceled BPMS 1013 Theory & Practices of Islamic Business 7
  8. 8. CONTRACT OF DEALING contracts mandate (without) Contract Muawadah (pay) musawamah contract (bargain) Contract tabaruat (without) BPMS 1013 Theory & Practices of Islamic Business 8
  9. 9. Almudarabahah Contract Al-ishrak Contract METHOD BASED ON A TRUST CONTRACT Tauliyyah Contract Al-wadziah Contract BPMS 1013 Theory & Practices of Islamic Business 9
  10. 10. Gift/Present Wakaf Ji’alah METHOD BASED ON A TABARURUAT CONTRACT Donations Or Charity Hibah Alqardhul Hassan BPMS 1013 Theory & Practices of Islamic Business 10
  11. 11. METHOD BASED ON A ACCAD MUSAWAMAH Cash Method Of Trading Bai’bathaman Ajil Sell Shares Musyarakah Mudharabah Bai’ Al-i’nah Bai’ Al-wafa’ Al-wadiah Al-rahnu (Mortgage) Istisna’ Contract Bai’ Al-istijrar Ijarah Al-sarf BPMS 1013 Theory & Practices of Islamic Business 11
  12. 12. KEY ISLAMIC COMMERCIAL CONTRACTS Gratuitous Contracts Gift Trading Contracts Sale Waqf Loan Ibra’ Operational Lease Financial Lease Bay` Bithaman Ajil (BBA) Mudarabah Kafalah Rahn Hiwalah Wadiah Murabahah Wakalah Salam BPMS 1013 Theory & Practices of Islamic Business Supporting Contracts Musharakah Leasing Investment Contracts Istisna’ etc. Jualah Muqasah 12
  13. 13. Islamic Banking SOURCES OF FUND BPMS 1013 Theory & Practices of Islamic Business APPLICATIONS OF FUND 13
  14. 14. EQUITY FINANCING Mudharabah Musharakah DEBT FINANCING Sale based financing BBA / Murabahah ‘Inah/Tawaruq/dayn Salam Istisna Comsumer Banking BPMS 1013 Theory & Practices of Islamic Business Lease Based Financing Fee Based Services -Ijarah Wakalah -AITAB Kafalah Corporate Banking 14
  15. 15. ISLAMIC CAPITAL MARKET Equity Market Bond Market Musyarakah Mudarabah -Debt Based -ABS -Equity Based Mutual Fund / Islamic REITs Wakalah / mudarabah / musharakah BPMS 1013 Theory & Practices of Islamic Business Derivatives Market? -Future Contract -Options -Swap Islamic Hedge Fund 15
  16. 16. What to do and what to avoid      Conclusion of contract by mutual consent The avoidance of riba’ The avoidance of gharar The avoidance of transactions involving maysir (gambling) The avoidance of transactions involving prohibited commodities BPMS 1013 Theory & Practices of Islamic Business 16
  17. 17. WHAT TO BE AVOIDED  Riba – prohibited in many Quranic verses and sayings of the Prophet s.a.w.  Meaning: riba is every excess in return of which no reward or equivalent counter value is paid, in short, every unjust enrichment is riba  Literally: excess, expand, increase, growth  Any unjustified excess above and over the capital, whether in loans (between creditor and debtor) or in trade (with similar commodities) BPMS 1013 Theory & Practices of Islamic Business 17
  18. 18. PROHIBITION OF RIBA IN THE QURAN 4 STAGES First Stage (30:39) • Compare riba with zakat & charity • Praising zakat & charity, not riba Second Stage (4:160-161) • Attaching the practice of riba with the Jews • Consider the practice as an iniquity (zulm) BPMS 1013 Theory & Practices of Islamic Business Third Stage (3:130) • Prohibiting the practice of charging double and multiple riba Fourth Stage (2:275-281) • Conclusively prohibiting all forms of riba • Any excess over the capital is disallowed 18
  19. 19.  “and that which you give in gift (to others), in order that it may increase (your wealth by expecting to get a better one in return) from other people’s property, has no increase with Allah…” (Surah Ar Rum 30: 39)  “… and their taking of Riba though they were forbidden from taking it and their devouring of men’s substance wrongfully…. and we have prepared... a painful torment.” (Surah An-Nisa’4:160 – 161)  “O you who believe, Eat not Riba doubled or multiplied, but fear Allah that you may be successful.” (Surah al-Imran 3:130) BPMS 1013 Theory & Practices of Islamic Business 19
  20. 20. • • • • • “those who eat riba will not stand (on the Day of Resurrection) except like the standing of a person beaten by Shaitan leading him to insanity. That is because they say: trading is only like Riba,” whereas Allah has permitted trading and forbidden Riba. So whosoever receives an admonition from his Lord and stops eating Riba, shall not be punished for the passt; his case is for Allah (to judge); but whoever returns (to riba), such are the dwellers of the Fire – they will abide therein forever. ( Surah al- Baqarah 2: 275 ) Allah will destroy riba and will give increase for sadaqat (deeds of charity, alms) ( Surah al- Baqarah 2: 276 ) O you who believe, be afraid of Allah and give up what remains (due to you) from Riba (from now onward), if you are really believers ( Surah al- Baqarah 2: 278 ) And if you do not do it, then take a notice of war from Allah and hiss Messenger but if you repent, you shall have your capital sums. Deal not unjustly (by asking more than our capital sums), and you shall not be dealt with unjustly (by receiving less than your capital sums). ( Surah al- Baqarah 2: 279 ) BPMS 1013 Theory & Practices of Islamic Business 20
  21. 21. • And if the debtor is in a hard time (has no money), then grant him time till it is easy for him to repay; but if you remit it by way of charity, that is better for you if you did but know. • And be afraid of the Day when you shall be brought back to Allah. Then every person shall be paid what he earned, and they shall not be dealt with unjustly. (Surah al- Baqarah 2:280 – 281) • There are also a number of narrations from the Sunnah on the prohibition of riba • Some of the narrations give general prohibitions of riba, e.g.: “The Prophet of Allah s.a.w. cursed the receiver and the payer of riba, the one who records it and the two witnesses to the transaction and said: they are alike (in guilt)”. BPMS 1013 Theory & Practices of Islamic Business 21
  22. 22. • Under Islamic law, riba can occur in two main situations, i.e.: o riba al duyun (loan): the riba or excess which occurs in debt and loan transactions because of extension/delay in repayment o riba al buyu` (exchange): the riba or excess which occurs in trading transactions involving the exchange of ribabearing commodities without observing the required rules BPMS 1013 Theory & Practices of Islamic Business 22
  23. 23. PROHIBITION OF RIBA (Loan) Surah al-Baqarah, ayat 275 “ … But Allah hath permitted trade and forbidden usury Interpretative Efforts What amounts to Trade Criteria ■ Fair exchange of goods or value ■ Fair distribution of risk & return BPMS 1013 Theory & Practices of Islamic Business Usury Criteria ■ Oppressive / unfair distribution of risk & return ■ Unjustified enrichment at expense of others 23
  24. 24. PROHIBITION OF RIBA (Exchange) Sunnah of the Prophet: Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, salt for salt - like for like, equal for equal, and hand-to-hand (spot); if the commodities differ, then you may sell as you wish, provided that the exchange is hand-to-hand or spot transaction.” Interpretative Efforts Application Currency Rules ■ Same denomination ■ At Par ■ Spot ■ Different denomination BPMS 1013 Theory & Practices of ■ Spo Islamic Business Staple Food Rules ■ Same Type ■ At Par ■ Spot ■ Different Type ■ Spot 24
  25. 25. SUMMARY OF RULES UNDER THE HADITH 2 conditions: • money1 + money1 = – Equality – Hand-to-hand 2 conditions: • food1 + food1 = • money1 + money2 = • food1 + food2 = • money + food = No condition – free trading • others + others = No condition – free trading BPMS 1013 Theory & Practices of Islamic Business – Equality – Hand-to-hand 1 condition: – Hand-to-hand 1 condition: – Hand-to-hand 25
  26. 26. DIVISION OF RIBA Riba’ al-Duyun (RIba’ in Loan Contract) BPMS 1013 Theory & Practices of Islamic Business Riba’ al-buyu’ (Riba in exchange contracts ) 26
  27. 27. Riba’ al-duyun  The debtor borrowed money to be paid in certain time, and the amount is more than the amount borrowed  A creditor gives a periodic loan and takes monthly interest. The capital sum lasts until the expiration of the period. Upon expiry, if the debtor cannot pay, the period to pay back the capital will be extended and interest will be charged  Arising out of exchange contract, a buyer must pay a consideration. If he failed to settle on time, the period will be extended by increasing the amount (principle + interest). BPMS 1013 Theory & Practices of Islamic Business 27
  28. 28. Riba al-Buyu’ • Mainly based on the saying of the Prophet: “Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt; like for like, hand to hand, in equal amounts; and any increase is riba’”. RIBA IN MODERN FINANCIAL TRANSACTIONS: • Riba’ al-duyun in loans and certain (bay’ al-’inah, bay’ al-dayn, etc) controversial contracts • Riba’ al-buyu’ mainly in bay’ al-sarf (exchange of currencies) BPMS 1013 Theory & Practices of Islamic Business 28
  29. 29. CONCLUSION • Islam is not limited to specific acts of worship alone but all that is done solely for Allah is considered as worship, including business. • Muslims can seek the pleasure of Allah through business. • That takes business must be to comply with god's commands and prohibitions leave. • Businesses need to be ethical. BPMS 1013 Theory & Practices of Islamic Business 29

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