The Theory of Contract in Islamic Finance

The Theory of Contract

• Humans are social beings, needing to trade, interact, and cooperate to fulfill their needs, as they are not self-sufficient.
• Mutual economic needs are fulfilled through trading and exchanges.
• A Muslim should not take another's property without consent or unlawfully, but by way of legal trade through mutual agreement.
• The only way ownership can be transferred is through mutual agreements and trading.
• Islamic economics and finance are based on contracts between two or more parties, including purchasing goods or loan contracts.

Definition of Contract ('aqd)

• In Arabic, 'aqd means tying tightly (like tying a rope).
• Arabs used 'aqd to signify firm belief or determination, for example, 'aqd al-yamin (giving an oath).
• 'Aqd al-nikah is a marriage contract.
• 'Aqd also stands for obligations, as shown by the first verse in Surah al-Maida.
• Islamic jurisprudence uses 'aqd to mean a legally binding obligation with consequences for its subject.

Islamic Law and Promises

• A promise, though recommended religiously, is not legally enforced under Islamic law.
• A breach of promise to marry does not provide legal recourse under Shari'ah.
• In specific circumstances, a promise can become legally binding, such as in Islamic banking transactions.
• Islamic banks use promises (e.g., in B.B.A. and murabahah transactions) to form legally binding obligations when the bank purchases property upon the customer's promise.

Pillars of Contract (Arkan)

• Consent ("Rukn") is essential for a contract to exist and is integral to its existence.
• The Prophet is recorded as saying that taking a Muslim's property without their consent is unlawful.
• Consent is a hidden phenomenon, only known when expressed.
• A contract only exists when all contract parties agree.

Components of a Contract

• Consent is confirmed through offer (ijab) and acceptance (qabul) by the parties.
• According to Hanafis, a contract rests on offer and acceptance.
• The contract's elements include anything that illustrates the meeting of two intentions, whether through conduct, action, or written communication.
• Other important elements exist for a contract, but they are not considered fundamental pillars. For example, there must be parties (individuals) and subject matter (property, services, etc.) to a contract. An example is that a valid contract requires offer and acceptance to exist.

The Majority of Fiqh Schools

• According to most Islamic legal schools (Fiqh), a contract has three fundamental elements:
  • Expression (sighah), encompassing offer and acceptance.
  • The parties (al-'aqidan).
  • The subject matter (mahal al-'aqd) or property concerning the contract.

Understanding Offer and Acceptance (Ijab and Qabul)

• Mutual consent of the parties is the basis for a valid contract.
• Consent, however, is intangible, so it must be manifested by words/conduct demonstrating a clear intention to contract.
• "Sighah" refers to the method of manifesting the intention to contract, achieved through "Ijab" (offer) and "Qabul" (acceptance).
• The contract is complete when the connection between the offer and acceptance occurs.

Different Perspectives on Offer (Ijab)

• Hanafi school: The first person expressing consent (offer) initiates the contractual obligation could be the buyer or the seller.
• The Majority view: The seller, as owner of the property, is the initiating party (making the offer).
• If a buyer makes the first statement (offer), it's considered the offer. The seller's following statement becomes the acceptance.

Examples of Ijab and Qabul

• A buyer offers to purchase a book for RM 100; the seller accepts.
• In the example described, the first person expressing intention to contract is considered the offer; the contract is initiated by the buyer, as understood by Hanafi school.

Forms of Expressing Consent

• The most common form is through spoken communication (words).
• Any words that demonstrate a clear intention in a contract are sufficient.
• Words must indicate the nature of what the contract is for. For example, a contract is for a sale, mortgage, or rent, etc.
• Tenses such as past and present are acceptable, but not future intentions unless confirmed in the present.

Contract Concluded by Writing/Email

• Contracts can be concluded via written forms of communication such as email.
• An e-mail stating specific object for sale at a specific price constitutes a valid offer, which can bind the buyer.

Contract Concluded by Action

• Contracts can be formed by actions, such as the seller physically delivering the commodity to the buyer without expressing consent by words.
• In Fiqh, this is known as “mu'âtah,” "ta'ati," or “murawadah".
• This action implies consent, for example, placing goods on display in a shop with a price tag attached.

Modern Communication Methods

• Modern communication methods, such as fax and internet, are considered "written" forms of communication for contract formation.
• An example of a modern form of communication is an automated teller machine (ATM) for food, drink, and coin dispensing.

Conditions of Offer and Acceptance

• Clarity: Words expressing consent must be clear and unambiguous.
• Conformity: Acceptance must match the offer precisely. For example, if an offer is for both items (computers), the buyer must be accepting both.
• Continuity: Acceptance must be made immediately. Offer cannot be withdrawn once acceptance takes place during the same session of contract.

Session of Contract (Majlis al'aqd)

• The contract's session is the period during which the offer is made, negotiated, and accepted.
• Acceptance must occur before contract sessions end or the parties separate.
• If acceptance takes place after the session is over or parties separate, the offer loses validity, and the originater of the offer can change it or withdraw it.
• The majority view states the offeror can withdraw the offer before acceptance during the contract session.
• Malikis, however, state the offer is not allowed to be withdrawn within the contract session until acceptance or rejection from the other side is obtained.

Explore the essential principles of the theory of contract within Islamic economics. This quiz delves into the definitions, obligations, and the significance of mutual agreements in trade and law. Understand how 'aqd plays a crucial role in facilitating lawful transactions and ensuring ethical trade practices.