Islamic Commercial Law
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Islamic Commercial Law Muhammad Yusuf Saleem John Wiley & Sons Singapore Pte. Ltd.
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In the Name of God, the Merciful, the Compassionate Praise be to God, Lord of the Universes, The Gracious, the Merciful, Master of the Day of Judgement. You alone we worship; You alone we implore for help. Guide us unto the straight path The path of those whom You have blessed, Those who have not incurred Your displeasure, Those who have not gone astray. Amen Qur an, 1: 1 7
Contents Preface List of Abbreviations Acknowledgments xi xiii xv Introduction: An Overview of Prohibited Elements 1 Usury (Riba) 2 Ambiguities in a Contract (Gharar) 3 Gambling (Maysir) 4 Prohibited (Haram) Properties 5 1 The Contract of Sale (Bay ) 7 Introduction 8 The Pillars of a Sale Contract 9 Prohibited Sales and Practices 14 Contentious Sales 19 Chapter Questions 29 Notes 30
viii / CONTENTS 2 Types and Classifications of Sales 33 Introduction 34 Trust Sales (Buyu al-amanah) 35 Def erred Payment Sale (Bay Bi-thaman Aajil) 36 Islamic Banks and a Sale Contract 37 Future Commodity Sale (Bay al-salam) 39 Manufacturing Sale (Bay al-istisna ) 43 Currency Exchange (Bay al-sarf) 47 Chapter Questions 49 Notes 50 3 The Contracts of Employment and Lease (Ijarah), Borrowing (I arah), and Reward (Ja alah) 51 Introduction 52 The Pillars of the Ijarah Contract 53 The Contract of Borrowing Things (al-i arah) 60 The Contract of Reward for Service (al-ja alah) 61 Chapter Questions 64 Notes 65 4 The Contract of Agency (Wakalah) 67 Introduction 68 The Pillars of an Agency (Wakalah) Contract 69 The Types of Agency 70 Agency in Sale 71 Agency in Purchase 73 The Effects and the Rights and Liabilities of the Contracting Parties 74 An Agent Appointing Another Agent 75 Unauthorised Agency (al-fadhalah) 76 Termination of an Agency 76 Chapter Questions 77 Notes 78 5 The Contract of Loan (al-qard ) 79 Introduction 80 Loan (Qard), Debt (Dayn), and Borrowing Things (I arah) 81 A Loan That Provides Conditional Benefit to the Lender 82 Waiting or Giving Time to a Borrower Is a Commendable Act 84 Chapter Questions 84 Notes 86 6 The Contract of Safekeeping (al-wadi ah) 87 Introduction 88 The Pillars of Wadi ah Contracts 89 Relationship Between the Parties 89 When Is the Depository Held Liable? 90
CHAPTER 1: Contents / ix Using Deposited Money for Investment 91 Wadi ah and Islamic Banks 92 Termination of Wadi ah 92 The Differences Between the Contracts of Wadi ah and Qard 93 Chapter Questions 93 Notes 94 7 Partnership (al-sharikat) 95 Introduction 96 Division of al-sharikat 96 Capital Partnerships (Sharikat al-amwal) 98 Management of Partnership (Sharikat al- Inan) 101 Partnership of Services (Sharikat al-a mal) 101 Partnership of Reputation or Creditworthiness (Sharikat al-wujuh) 102 Partnership (Sharikat al- Inan/Musharakah) and Islamic Banks 104 Dissolution of Partnership 106 Chapter Questions 107 Notes 109 8 Silent Partnership (Mudarabah/Qirad ) 111 Introduction 112 Pillars of Mudarabah Contract 113 The Status of Sahib al-mal and Mudarib 114 Distribution of Profit and Treatment of Losses 114 Types of Mudarabah 115 Personal Expenses of the Mudarib 116 What the Mudarib Cannot Do 117 Void Mudarabah 117 Termination of Mudarabah 118 The Differences Between Musharakah and Mudarabah 119 Chapter Questions 119 Notes 121 9 Pledge, Mortgage, or Pawn (al-rahn) 123 Introduction 124 The Pillars of Pledge (Rahn) 125 The Use of the Pledge by the Pledgee 126 Forfeiture of the Pledged Property 127 Chapter Questions 128 Notes 128 10 Guarantee (al-kafalah) 129 Introduction 130 Pillars of Kafalah 131 The Effects of Kafalah 132 Immediate, Conditional, and Suspended Kafalah 132
x / CONTENTS Types of Kafalah 132 Charging a Fee for the Service of Guarantee 133 Letter of Guarantee 134 Termination of Kafalah 134 Chapter Questions 135 Notes 136 11 Transfer of Debt (al-hawalah) 137 Introduction 138 Pillars of Hawalah 140 Types of Hawalah 140 Transfer of Right (Hawalat al-haqq) 141 Bill of Exchange (Suftaja) 141 Termination of Hawalah 142 The Differences Between Hawalah and Kafalah 142 The Difference Between Hawalah and the Sale of Debt (Bay al-dayn) 143 Chapter Questions 143 Notes 144 12 The Contracts of Absolution (al-ibra) and Set-Off (al-muqassah) 145 Introduction 146 The Subject-Matter of Ibra 146 The Pillars of Ibra 147 Types of Ibra 149 The Effect of an Ibra 149 The Differences Between Absolution (Ibra) and Gift (Hibah) 150 The Contract of Set-Off (al-muqassah) 150 Classification of Muqassah 150 Chapter Questions 152 Notes 153 Answers to True/False Questions 155 Bibliography 161 About the Author 165 Index 167
Preface Islamic commercial law is an important component of al-fiqhal-mu amalat. Its fundamental principles are provided by the Qur an and the Sunnah. In the light of these principles, Muslim jurists have provided in great detail scholarly works on each individual contract. Islamic contracts are seen as a means that provide various options in order to obtain permissible ( halal ) earnings. Earning in a permissible way is considered an act of worship ( ibadah) in Islam. Muslim jurists in their voluminous books on Islamic Fiqh have discussed together the rules pertaining to worship ( fiqh al- ibadat ) and the rules pertaining to commerce and business ( fiqh al-mu amalat ) and give them equal treatment and significance. A chapter would discuss the pillars ( arkan ) and conditions ( shurut ) for prayer ( salat ), while the next chapter would discuss the pillars and conditions of sale ( bay ) or partnership ( musharakah ) contracts. Any discussion on a certain contract would take into account the prohibitions of usury ( riba ), ambiguity ( gharar ), gambling ( maysir ), and other unlawful practises. The holistic approach adopted by Muslim jurists would also relate discussions on an individual contract to the objectives of Shari ah, which further supplemented the already existing body of literature on Islamic commercial and financial laws. Islamic banking and finance is contract-based banking and finance. An Islamic bank has to establish Shari ah -compliant contractual relationship with its customers both on deposit and financing sides. Various Islamic contracts are also used in different sukuk structures for raising funds and their subsequent use. The knowledge of Islamic contracts is therefore central to any commercial, business, and banking activity. Thus, there is a renewed and growing interest in the study of Islamic contracts. However, there is also an increasing tendency among both students and practitioners of Islamic banking and finance to study individual contracts and transactions without referring to their philosophical foundations and the objectives of Shari ah. There is a danger
xii / PREFACE that there would be a greater emphasis on procedural and legal formalities of contracts while their substance and the purposes for which they are intended may largely be ignored. This would be a departure from the holistic approach that characterised Islamic law of transactions for centuries. Each individual contract has its own pillars and conditions. Pillars ( rukun, plural arkan ) refer to the main constituent element of a contract without which a contract is not complete. Generally, pillars of a contract include the parties to a contract, the subject matter of a contract, and the offer and acceptance (which show the mutual consent of the parties). There are also conditions for each pillar of a contract for instance, conditions related to the parties to have the requisite legal capacity ( ahliyyah ), conditions related to the object of the contract to be well defined and known, or conditions related to the language of an offer and acceptance to be clear. Conditions in a contract are meant to avoid ambiguities ( gharar ), usury ( riba ), gambling ( maysir ), and other prohibited elements. One of the important functions of conditions is to protect both parties and to manage possible risk that may arise from the contract. We have discussed the pillars for each individual contract and its important conditions. Since conditions related to the legal capacity of the contracting parties are universally applicable to all contracts, in this book unless necessary I have not repeated them for each individual contract. The assumption is that the parties to a contract have the requisite legal capacity. Instead the focus is on other conditions that are unique to that individual contract. This book developed during my years of teaching at the Kulliyyah of Economics and Management Sciences, International Islamic University Malaysia. I was motivated to write this book primarily by the shortage of English books on Islamic commercial and financial transactions that would combine the theory with the practise. There was a need for a textbook that would discuss Islamic contracts with a view to practise them and to avoid discussions on detailed issues that fill volumes in the available works of Fiqh. At the same time, the book should not only discuss the form of individual transactions but also their substance and purposes. This book begins with an introductory discussion on the prohibited practises. The first two chapters discuss the contract of sale and its various types. In the succeeding chapters other contracts are discussed. A chapter is devoted to a discussion on an individual contract. However, in certain chapters two or three contracts are combined due to their similarities. The book also uses diagrams to explain contractual relationships between the parties and where necessary discusses their applications. At the end of each chapter, true/false and short answer questions are provided to enable readers to evaluate their understanding of the various contracts. Answers to the true/false questions can be found at the end of the book. For the sake of accuracy and convenience I have provided both the Arabic origin and the English translations of the Qur anic verses and ahadith (singular hadith ). I take this opportunity to express my gratefulness to Allah (swt) for granting me the ability, health, and patience to complete this work. Muhammad Yusuf Saleem International Islamic University Malaysia Kuala Lumpur Ramadhan 1433 July, 2012
List of Abbreviations Abbreviations swt pbabuh mabpwh mabpwt Subhanahuwata ala Peace and blessing of Allah be upon him. May Allah be pleased with him/her. May Allah be pleased with them.
Acknowledgments I take this opportunity to thank the IIUM Institute of Islamic Banking and Finance (II ibf), who asked me to produce a textbook on Islamic commercial law. In particular, I acknowledge the support I have received from Prof. Datuk Dr. Mohd Azmi Omar, the former Dean of II ibf and the current Director General of Islamic Research and Training Institute (IRTI), Jeddah, Saudi Arabia. Thanks are also due to Prof. Dr. Khaliq Ahmad, Dean Kulliyyah of Economics and Management Sciences and my colleagues at the Department of Economics and the Kulliyyah of Economics and Management Sciences, International Islamic University Malaysia for their encouragement and support. I would also like to thank Emilie Herman, Senior Editorial Manager, and Stefan Skeen, Senior Production Editor at John Wiley & Sons, and the rest of the editorial staff for their helpful suggestions that added clarity to the book. This book benefitted a great deal from the classroom discussions that I have had with my students at both the graduate and undergraduate levels over the years. Without their contributions and invaluable suggestions this book would have been incomplete. A work of this nature involves references to the primary sources of Fiqh, which are the Qur an and the Sunnah, and the secondary sources, which are the voluminous Fiqh books written by jurists of different Fiqh schools. These references are necessary in order to ensure that an opinion or a ruling is accurately attributed to a particular jurist or Fiqh school. I would like to acknowledge that I have benefitted from Dr. Wahbah al-zuhaili s Financial Transactions in Islamic Jurisprudence as translated by Mahmoud A. El-Gamal and Sayyid Saabiq s Fiqh al-sunnah. Th e author, however, is solely responsible for any errors which may be found in the book or for the views expressed.
Introduction An Overview of Prohibited Elements The Qur an and the Sunnah are the two main sources of Islamic commercial laws. It was revealed at a time when both Makkah and Medina were blooming commercial centers of Arabia. The Qur an and the Sunnah did not totally abolish the pre-islamic commercial practices. They approved all those transactions that did not conflict with the principles of Shari ah ; corrected and modified some other transactions by eliminating unjust and prohibited elements from them; and prohibited some other business practices that had usurious elements, or suffered from gharar, and fraud. This approach towards commercial and business practices is characterised by its focus on the prohibition of specific practices rather than on the enumeration of permissible transactions. The approach led the Muslim jurists to conclude that in commercial transactions ( mu amalat ) the principle is permissibility, whereas prohibition is an exception. Hence, every commercial transaction that is not specifically prohibited or does not contain prohibited elements is permissible. This has facilitated the adoption of commercial transactions that are customarily practised by the people and that do not go against the Shari ah prohibitions. It also encourages innovation and creativity when new Shari ah -compliant products could be engineered. This is in stark contrast to matters of worship ( ibadat ), in which any innovation is considered heresy ( bid ah ). The main practices that are prohibited are usury, ambiguity in contracts ( gharar ), gambling and games of chance ( maysir ), fraud, bribery, the use of false weights and measures, taking others property unlawfully, and transactions on prohibited ( haram ) things.
2 / ISLAMIC COMMERCIAL LAW Usury (Riba) The Qur an and the ahadith have forbidden usury ( riba ) in the strongest terms. The Qur an has warned that those who practise usury are at war with God and His Apostle. The word riba denotes increase, addition, or excess. Riba refers to a stipulated increase over and above the loan amount that a debtor agrees to pay to his creditor in relation to a specific period of time. Charging an extra amount for the time, irrespective of the outcome of the enterprise, is considered injustice. The borrowed money would have to be invested and combined with efforts, and there could be the possibilities of profit and loss. The shares of fund owner and fund user should be tied and connected to the underlying economic activities. They are entitled to receive a certain predetermined percentage of the actual profit made by the investments. A fund provider cannot claim a certain fixed rate of interest irrespective of the performance of the investment. Islamic law, therefore, recommends profit-and-loss-sharing contracts. In contrast, in usury the return to the usurer is fixed in advance. The usurer is guaranteed a certain cost for his fund irrespective of the actual outcome from the investment. This predetermination of return to the usurer ignores the economic realities on the ground and, therefore, introduces distortion into the market, particularly when we consider that the predetermined interest is added to the cost of production and the prices of goods. Moreover, it is one of the objectives of Shari ah that wealth should benefit not only its owner, but also the other contracting party and the society as a whole. This is best achieved when the risks and rewards of investment are shared between the fund owner and its user. In contrast, usury only guarantees a certain predetermined rate of return to the fund owner and ignores its user. A needy person who borrows money for consumption purposes is required to pay back more than what he has borrowed, and a person who borrows capital for trade and business has to take the risk of loss in case the business fails. The capital provider is guaranteed his capital plus interest and protected from losses. The risks of investments are entirely shifted to the borrowers. Some writers have differentiated between usury and interest on the ground that the former involves loans for consumption, whereas the latter involves loans for production. Interest, they argue, is an extra charge imposed on a debtor who borrows money for productive purposes such as investment, industry, and trade, whereas usury is an extra charge imposed on a debtor who borrows money for consumption such as his own personal day-to-day needs. They argue that interest is a reasonable charge for the use of money employed in productive purposes, whereas usury is unjust and forbidden. This view, however, could not be maintained. A debtor who borrows money for investment, trade, and business may face one of four possible situations: He may make enough profit to pay the capital and interest and keep the balance. Second, it is also possible that he may make profit enough to pay for the interest, whereas he may not get any share of the profit. Third, there is the possibility that he may not earn any profit, in which case he has to return the principal and pay the interest. Fourth, he may suffer losses. In these three out of four possible scenarios, the transaction is not fair to the borrower. Even in the first example, the transaction is not fair to the lender, as it is possible that the borrower may keep a larger share