This document discusses the importance of legal documentation in Islamic banking and finance. It notes that while oral contracts were traditionally valid in Islamic law, written contracts are now necessary given the complexity of modern Islamic financial products. Legal documentation ensures compliance with Shariah principles, prevents disputes between parties, and makes agreements enforceable in court. The document emphasizes that terms must be structured according to Shariah and avoid elements like interest to ensure validity. Overall, legal documentation is crucial for Islamic financial transactions to be valid, binding, and avoid injustice.
BY ZALEHA ZAIN.
ISLAMIC FINANCIAL SERVICE ACT 2013 (IFSA 2013)
CRITICISM AND ITS IMPACTS.
The IFSA 2013 or Islamic Financial Service Act 2013 came into effect on 31 June 2013 after it was approved by a Parliament. Basically The it repeals the Islamic Banking Act 1983 (BAFIA) and the Takaful Act 1984 (TA) and combines the Islamic financial and takaful services under the aforementioned acts in a similar fashion. Means that those two Acts are no longer use nowadays.
FEATURES OF IFSA 2013:
to focus on Shari’ah compliance and governance in the Islamic financial sector.
To provides for a comprehensive legal framework that is fully consistent with Shari’ah in all aspects of regulation and supervision, from licensing to the winding up of an institution.
Promoting financial stability and protect the rights and interests of consumers of financial services and products based on Shari’ah compliance.
Pacta Sunt ServandaIslamic PerceptionMd Anowar Zahid& .docxgerardkortney
Pacta Sunt Servanda:
Islamic Perception
Md Anowar Zahid�& Rohimi Shapiee��
Pacta sunt servanda - agreements must be obeyed - is a peremptory principle of
modern international law of treaty. What are the origin and nature of this doctrine?
Some say, its Latin wording indicates that it is of Roman origin. And this doctrine is
a must for the social good; without it the society will be a chaos. But how does Islam
perceive the notion? This paper finds that this doctrine came into being with the very
beginning of the creation of human souls by Allaah Whom they accepted as their Sole
Lord and made a commitment to follow His commands. And it is a principal tenet for
Muslims to adhere to because it is an inseparable part of their faith (Iman), a
command from their Lord and a practice (Sunnah) of their Prophet Muhammad
(peace be upon him). It is, therefore, obligatory not merely because it is good for the
society, but is also rooted in the teachings of Islamic doctrine and a Muslim’s
accountability in the life hereafter.
Keywords
Pacta Sunt Servanda, Shari’ah, Siyar, Treaty Obligation, Hudaibiyah
1. Prologue
The principle of reciprocity is the very backbone of both Siyar and international law. It
posits that unilateral acts by any State cannot create a law for another State unless the
other State willingly agrees to it either explicitly or implicitly. The reason behind this is
that States are sovereign entities which are not subject to any mundane superstate
authority.1 International treaties are an example of express agreement between States
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* Senior Lecturer, Faculty of Law at Universiti Kebangsaan Malaysia (National university of Malaysia). LL.B.(Hon.
Dhaka), LL.M.(Dalhousie), Ph.D.(Manchester). The author may be contacted at: [email protected]
/Address: Faculty of Law, National University of Malaysia, UKM Bangi 43600, Selangor Darul Ehsan, Malaysia.
** Professor, Faculty of Law at Universiti Kebangsaan Malaysia (National university of Malaysia). LL.B (Hon. Malaya),
LL.M (Monash), Ph.D. (Manchester). The author may be contacted at: [email protected] / Address: Faculty of
Law, National University of Malaysia, UKM Bangi 43600, Selangor Darul Ehsan, Malaysia.
1 L. OPPENHEIM, I INTERNATIONAL LAW 119 (H. LAUTERPACHT ED. 1955).
and international customs are typically an example of their implicit agreement. Both
treaties and customs are two important sources of Siyar and international law with one
fundamental difference that for Siyar these two sources must be friendly with Shari’ah
fountain sources such as the Qur’an and Sunnah. International law is, however, not
bound by this qualification because of its secular character. However, it is an interesting
question to ask: why should the States obey laws made by treaty or custom? The answer
is - because States have agreed to make them. In other words, agreements must be
obeyed, which is well-known in Latin terms as pacta sunt servanda. (Popularly known .
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Legal Documentation for Islamic Banking and Finance
1. Mahyuddin Khalid
emkay@salam.uitm.edu.my
ISLAMIC FINANCIAL
LEGAL FRAMEWORK
LEGAL DOCUMENTATION FOR ISLAMIC
BANKING AND FINANCE
2. CONTENT
2
INTRODUCTION
BASIS OF DOCUMENTING AN
AGREEMENT
RULINGS IN DOCUMENTING AN
AGREEMENT
THE IMPORTANCE OF LEGAL
DOCUMENTATION
CONCLUSION
3. INTRODUCTION
3
The Islamic banking and finance industry has
become more advanced and complex, the main
basic safeguard is to transact all products in
written form with all parties concerned.
The Islamic fiqh also recognize written contract
as valid although not as strong as its proponent
to oral contracts.
It is importance of have legal documentation or
written contract drawn up, agreed a executed by
all parties concerned to avoid conflicts and
injustice not just to aggrieved party but to the
industry, the people and Islam as a whole.
4. BASIS OF DOCUMENTING AN
AGREEMENT
4
In practice and by law, all agreements whether given in
writing or by word of mouth, are within certain exceptions of
equal.
For the sake of evidence, however, it goes without saying
that it is appropriate to have agreements drawn up in
writing.
Islam is also equal to the same principle and this type of
document is called al-sakk.
Al-sakk refers to documents involving the written
documentation of a transaction involving the terms
conditions of an agreement or the action of transferring a
property by an individual.
Documenting agreement is one of the principle in Islamic
contract law.
It derived its basis in having written contract in any
transaction from Al-Quran
5. RULINGS IN DOCUMENTING AN
AGREEMENT
5
Allah SWT has commanded that all transactions
involving future payment or future consideration must
be reduced to writing.
The Muslim jurists differed whether the word has the
effect of obligatory (wajib) or voluntary option for
parties in such transaction to put in writing on
whatever agreed between them.
It can observe the importance placed by Shariah in
clearly expressing the intention of any party or
parties to enter a contract and putting all that has
been agreed in a written form of documentation
which in return:
Binding and has legal effect
Enforceable in law
Able to be referred back in the event of variation or
determination of the transaction
6. RULINGS IN DOCUMENTING AN
AGREEMENT
6
Majority of Muslim jurists have placed the status of
recommendation as to the writing of contracts in
transaction of fixed future obligation.
Later Muslim jurists have emplaced importance to
documenting such transactions
It is based from the observation that there's need to
document those transaction due to the complex and
sophisticated nature of the contract.
This is line with the principle- as Islamic law or
Shariah which has been upheld and proven as
universal, appropriate and be fitting with any
generation.
Documentation is important to safeguard the IFI from
being labelled injustice or equivalent to the
conventional banking and financial practice.
7. THE IMPORTANCE OF LEGAL
DOCUMENTATION
7
The importance of documenting all transactions
in Islamic and Finance is so crucial at this period
of time.
Opinion by the earlier majority Muslim jurists can
only be employed only to those normal day to
day transaction.
With regard to Islamic Banking and Finance
products, legal documentation is crucially
required and it can be seen from the following
reason:
To Comply with Shariah Principle and Junction Laid
Down in the Surah Al-Baqarah verse 282
To prevent doubt among parties
Requisites of Being Shariah Compliant and the
Malaysian Law
8. TO COMPLY WITH SHARIAH PRINCIPLE AND
JUNCTION
8
This injunction is interpreted as a
recommendation by majority Muslim jurists.
Later Muslim jurists have placed documenting
future transactions as crucial and obligatory to
parties involved.
Islamic Banking and Finance has tremendously
changed and become as complex and advanced.
Muslim jurists has differed their views from the
majority and placed importance in documenting
the transaction.
This current view should be followed and
adhered to by all parties.
9. TO PREVENT DOUBT AMONG PARTIES
9
Allah SWT’s verdict clearly stress on having a
documentation as proof and evidence of an agreement to
transact on certain terms and conditions which binds parties
or their/successors in the future.
When there is a written contract:
Doubts as to the scope and limit of parties’ duties, obligations
and liabilities may be dispelled.
May be used and tendered by the parties in the court or
arbitration proceeding, provided that it is valid according to the
law,
Any risk in a transaction can be minimized to the lowest extend
as parties may wish and agreed to.
Without legal documentation, aggrieved party may find
themselves left in a lurch without getting back any redress,
remedy or damages as they have nothing as proof to the
existence of the contract.
10. REQUISITES OF BEING VALID AND
ENFORCEABLE
10
Key elements for validity and enforceability of the legal
documentation are:
Compliance with the Shariah principle
to ensure that all the terms and conditions of the transaction has all
the characteristics of being in line with the Shariah so that it ensures
acceptance, validity and enforceability from the Islamic law.
Compliance with the existing laws of the country
The documentation must adhere to the laws of the country to
determined the status of the document in the eyes of the law.
Such document must get its validity to enable it to be tendered as
evidence in any courts.
Must be structured in manner to be enforceable in the courts
The documentation should also comply with the Shariah principles
In drafting Islamic contracts should avoid using terminologies which
is conflicting with the Shariah principle
The structure of the document must adhere to Shariah principles to
avoid conflict as to the terms and conditions in the contract.
11. FUNDAMENTAL DIFFERENCES
11
Islam has prohibited interest and permitted trade - no
loan term in Shariah documents
The Islamic finance legal documentation must
emphasize the spirit of the transaction
The lawyer must ensure:
The contract free from any elements forbidden by Islam
Exercise the ethics and integrity of and not to simplify
things or try to cheat
Must rank his obligation to Allah SWT above his
obligation to his clients
That legal documentation should reflect the contract
as intended by the contracting parties
This would give rise to evidence of the contractual intent
and content by the parties involved and the agreed terms
and conditions set forth.
12. FUNDAMENTAL DIFFERENCES
12
The terms and conditions in the document must use past
tense
Muslim jurisprudents (fuqaha’) have agreed that the contract
should be expressed in the past tense by both parties.
There is no agreement on the use of other tenses, like the
present indicative or the imperative.
The importance in the language also signify whether it is a
mere promise or a contract.
The Mejelle provided that the use of future tense indicates mere
promise is not binding on the party making it even if it is
breached, the party cannot enforce it while the use of past or
present tense leads to binding contracts.
That there should be no jumbling together of multiple
contracts
This should be the way in drafting Islamic contracts to avoid
dubiousness or uncertainty of the Shariah principles applicable
in an Islamic Banking and Finance transaction.
13. RATIONALE
13
Rationale of having legal documentation to bind
parties in an Islamic Banking and Financial
transaction is:
To enable us to meet the religious requirements of
Muslims.
The documents evidencing the transaction of Islamic
nature would be different in its principles and
objectives and to enable all Islamic principles of
justice and fairness is duly documented.
To differentiate and make clear the principles of
Shariah in Islamic banking and finance.
All parties would focus on accuracy & integrity in the
terms and conditions in the documentation process.
14. CONCLUSION
14
It is important in documenting transaction of
future debts or obligation.
No matter the majority muslim jurists are in
favour of placing the Quranic injunction as
only an option to parties involved, in current
Islamic banking and Financial practice, it is
crucial that transaction be put in writing.
It is wise and well prepared if parties reduce
whatever terms and conditions they have
agreed to writing.