Chapter 5

Understanding the Sharī`ah Requirements for Mitigating the Sharī`ah Non-Compliance Risk in Islamic Finance

5.0. INTRODUCTION

It is important to have a good understanding of Sharī`ah requirements in the financial transactions in order to appreciate the Sharī`ah non-compliance risk in the Islamic banking activities. The fundamental Sharī`ah requirements in formulating a financial contract are: the sigah/statement of the contract, the contracting parties, and the subject matter of the contract. These three pillars have to fulfill some specific requirements in order to be valid and accepted from Sharī`ah perspective. These conditions are discussed briefly next.1

5.1. THE FUNDAMENTAL ISLAMIC PRINCIPLES IN ISLAMIC CONTRACTS

5.1.1. The Formation of the Financial Deal through Offer and Acceptance/Sighah

Sighah of the contract (offer and acceptance), known also as the statement of the contract, is the appropriate way to form the contract in Islamic commercial law; each financial transaction needs a specific formula in order to conclude the transaction. In a sale, the offer and acceptance are the words used for concluding a sale by common usage and custom of the place.2 Therefore, sighah in contract reflects the consent of the parties in the contract and is considered as a primary condition of any contract. Obviously, the sighah is formulated through an offer (ijab) and acceptance (qabul). Sighah is an external proof of the contract that reflects the internal and intangible aspect of the consent. The ijab is the offer made by the first party (seller) who is giving the freedom of acceptance and confirmation to the second party, whereas qabul is the statement agreement made by the second party (buyer) to express his freedom by confirming the offer. By this confirmation, the contract is created.3Majalla states that with an offer and acceptance, the sale is complete.4 However, the offer and acceptance must fulfill some conditions.

5.1.1.1. The Tense of the Sighah

Obviously the jurists prefer the past-tense expression for forming an offer and an acceptance in contract, such as “I sold” and “I bought.” The reason behind that is to reduce the degree of uncertainty in the contract. On the one hand, according to linguistic use, this tense is utilised for instant offer and acceptance. However, other tenses such as present, future, or the command form of a verb, could be utilised for forming a contract depending on the intention of both parties. On the other hand, the Hanafi School of Law has a different point of view. According to them, if the past tense is not used in the sighah, the sale is not concluded using words in the future tense, such as “I will take,” “I will sell,” which mean merely a promise.5 The sale is also not concluded by words in the imperative tense, such as: “sell” “buy.” But a sale is concluded by an imperative, which, of necessity, indicates the present.6

5.1.1.2. Conformation of the Offer to the Acceptance

The acceptance and the offer must conform to each other. In case conformity does not exist, there will be no consent, and, therefore, no contract is concluded due to the absence of the conformation. However, the conformity is very flexible as long as it realizes its objectives; it could either be explicit or implicit.7

5.1.1.3. Clarity of the Offer and Acceptance

Both offer and acceptance must be firm and clear to avoid doubtfulness and ambiguity. The objective of this requirement is to materialize the full consent of both parties involved in the contract. However, to achieve that, both offer and acceptance must be clear in order for the other party to confirm what was issued by his counterpart. If the offer and acceptance are issued by word, they should be pronounced clearly; if it is issued in writing, it should be readable.

5.1.1.4. Connection of the Offer and Acceptance (Unity of the Contract Session)

This is known in Islamic law as the session of the contract (majlis al-`aqd). According to the jurists, an acceptance must be connected with an offer. In a typical traditional context, the contracting parties should be present in the same session (majlis) of contract in order to formulate the contract.8 However, due to the innovation and development of the business environment because of the advancement of the technology, Sharī`ah accommodates other ways and means of meeting, where the session of the contract can be converted from physical meeting in specific location to a time environment in case the contract is concluded through video conference, or phone call, or other means of communication.

According to Majalla if one of two contracting parties makes an offer for something in any manner whatsoever, the other party’s acceptance of the contract must exactly correspond with the offer. The second party has no right to separate or divide either the price or subject matter of the sale.9 However, at the meeting for bargaining, after the offer until the end of the meeting, both parties have an option: after the offer and before the acceptance, if one of the two parties gives an indication of dissent, whether by word or act, the offer becomes void, and there is no longer room for acceptance.10 When one or two contracting parties make an offer, but one withdraws from it before the acceptance of the other, the offer become void, after which the sale cannot be concluded by an acceptance.11 In order to make the transaction smooth and flexible, the Islamic law allows many ways of offer and acceptance, by words, writing, and by conducts.12

Regarding the separation of ijab and qabul, the Maliki ruled that the separation between the ijab and qabul does not affect the sale transaction with the condition that the other party is not disengaged from the transaction. On the other hand, Shafi and Hanbalis ruled that acceptance must immediately follow the offer. However, the contract would be harmed if the two parties engage with a discussion that is outside the scope of the transaction.13

5.1.2. The Two Contracting Parties (Seller and Buyer)

The parties who are formulating the contract must have legal capacity in order to enter into a financial contract. The capacity is the quality that makes a person qualified for acquiring rights and undertaking duties and responsibilities.14 Both parties must fulfill the following attributes:

5.1.2.1. Puberty of the Contracting Parties (Male or Female)

Both contracting parties—buyer and seller—must attain puberty, which is a sign that enables the parties to conclude the deal from Sharī`ah perspective. This requirement is for both parties, whether they are male or female. A male attains puberty when he experiences wet dreams (starts to ejaculate sperms in his night dreams), while a female attains it at the onset of menstruation.15

5.1.2.2. Sanity of the Contracting Parties (Male or Female)

Both parties, buyer and seller, whether male or female, must be sane and have the full mental capacity to conduct a business deal. If both or one of them is insane (majnun), the financial contract will be void and not valid from Sharī`ah perspective and the deal cannot take effect. However, there are some cases in which one of the contracting parties temporarily becomes insane, especially in hot weather, and later regains sanity when the weather get back to normal. This person will be allowed to conclude his business deal and finalize his financial contract agreement when he regains sanity, but he is not allowed to do so when he is insane. The effect of the contract will be subject to his status at the time of concluding the contract agreement.16

5.1.2.3. Maturity of the Contracting Parties (Male or Female)

The two contracting parties, buyer and seller, male or female, must also attain maturity (rushd). According to scholars, maturity is: “Good and proper dealings with wealth from a worldly viewpoint.”17 However, if someone is dealing with the property in a wrong manner from Sharī`ah point of view, such as misuse of the money, mismanagement of his wealth, improper spending of the wealth, wasting the property, the person will be considered as not mature from the Sharī`ah perspective. Therefore, the person as result of that will not be allowed to deal with his wealth independently.18

5.1.3. The Subject Matter of a Contract (Goods and Price)

The subject matter of a contract (mahall al-`aqd) can either be a tangible thing (such as money, wealth, goods, etc.), a utility, or a work. In all these cases, the subject matter must fulfill the following conditions.

5.1.3.1. Suitability and Legality of the Subject Matter for the Contract

The subject matter of the contract is very important in financial business transactions; the jurists have agreed that the subject matter in the contract must be suitable for concluding a contract. If the subject matter of the contract is not suitable, the contract will be void and invalid.

The following three conditions should be observed in the subject matter of the contract:

5.1.3.2. The Subject Matter Must Be Known to Both Parties

The subject matter of a contract must be known to both parties in order to engage in a particular contract; otherwise the contract will not be valid. According to Majalla it is necessary that the thing sold to be known to the buyer.20 The thing sold becomes known by a description of its quality, or quantity, which distinguishes it from other things.21 Sharī`ah imposes this requirement in order to avoid ambiguity and dispute.

5.1.3.3. Capability of the Subject Matter to Be Handed Over

It must be possible to hand over the subject matter of the contract at the conclusion of the contract; otherwise the contract will be invalid. Therefore, it is not allowed to sell fish in the water, birds in the air, and milk in the udders of an animal.

5.1.3.4. Presence of the Subject Matter at the Time of Contract

The subject matter of the contract must be present at the time of the contract if it is a tangible thing. The Prophet (peace be on him) forbade selling of a good that does not exist. The Majalla in Article: 205 states: The sale of a non-existing thing is invalid.22 However, there are some exceptions to this general rule such as salam, which is selling something that is not present during the time of the contract. The full price in salam to be paid on the spot during the session of the contract and the delivery of the goods will be in future date. The exception for this particular transaction is prescribed by the Prophet (peace be on him).23

As a conclusion, we can note points as follows:

• The contract in Islamic law consists of three elements: the contracting parties (seller and buyer), the statement of the contract or sighah (offer and acceptance), and the subject matter of the contract (goods and price).
• Each element of these pillars has some terms and conditions to fulfill in order to validate the contract and the transaction accordingly.
• The offer or ijab shows the willingness of a party to engage in a transaction; the offer also gives the option to the counterpart to express his consent toward the transaction whether by acceptance or rejection.
• The acceptance or qabul is confirmation of the offer and willingness to conclude the business transaction.
• By concluding the offer and acceptance, the contract is formulated.
• The statement can be conveyed by words or writing or even by indication and conduct. This shows the flexibility of the Sharī`ah in contract and illustrates the objective of Sharī`ah in facilitating the business transaction.
• There are some requirements in offer and acceptance to be fulfilled in order to have a valid contract.
• The session of contract is required to format a valid contract; however Sharī`ah accommodates the various means for the unity of offer and acceptance of the contract according to modern communications.
• The subject matter of the contract must be legal in Sharī`ah in order to validate the business transaction.
• The subject matter of the contract can be in actual existence during the time of the contract; however, Sharī`ah has allowed the subject matter of the contract to be non-existent in some special contracts.
• The subject matter of the contract must be possible of being handed over at the conclusion of the contract.
• The subject matter of the contract must be precisely determined at the time of the contract; the termination can be done by full description of quality and quantity.

The contract in Islamic law should realize the objective of maqasid al Sharī`ah in Islamic financial transaction.

5.2. THE FUNDAMENTAL ISLAMIC FINANCIAL TRANSACTIONS USED IN ISLAMIC FINANCE

There are some important principles in Islamic finance that should be understood to ensure a proper understanding regarding the norms of Islamic financial transactions carried out by Islamic financial institutions:24

• Profit-sharing-based transactions
• Sales- and trade-based transactions
• Lease-based transactions
• Fee-based transactions
• Free-interest-loan-based transactions
• Security-based transactions
• Support-based transactions
• Voluntary/charitable-based transactions

5.2.1. Profit-Sharing-Based Transactions

The principles for profit-sharing-based transactions are guided by musharakah, mudarabah, Muuzaraah, and Muzaqah.

5.2.1.1. Musharakah

Musharakah is derived from the word sharikah, which means “partnership.” Musharakah is defined as a partnership in which profits are shared as per an agreed ratio whereas the losses are shared in proportion to the capital or investment of each partner. All partners must provide capital and may participate in the management of business project. The capital as subject matter of Musharakah contract shall fulfil the following conditions:

• Capital contributed shall be in form of cash, gold, silver, or their equivalent in value.
• Capital may consist of trading assets such as goods, property, and equipment.
• Capital may also be in the form of intangible asset such as trademarks, patents, and similar rights, provided they are valued at their cash equivalent.

5.2.1.2. Mudarabah

Mudarabah is also known as qirad and muqaradah. It is defined as a contract between two parties whereby one party, the rabu al-mal (the provider of capital), entrusts the money to the other party called mudarib (managing trustee). The profits are distributed based on an agreed ratio, whereas the financial loss is borne by the provider of capital. There are some important rules that should be observed in mudarabah:

• The division of profit must be on a proportional basis and cannot be a lump sum or guaranteed return.
• The investor is not liable for losses beyond the capital he has contributed.
• The mudarib does not share in the losses except for the loss of his time and efforts.

5.2.1.3. Muuzara’ah (Crop Sharing)

Muzara`ah is a contract of partnership on crop sharing whereby one partner will provide the land and the other party provides labour, and they share the crop according to their predetermined agreement. According to the Majalla, it is a kind of partnership where the land comes from one partner and the work from the other partner to cultivate and divide the crop.

5.2.1.4. Musaqah

Musaqah is a contract of giving trees to another so that he undertakes to water them and perform all associated work for a known part of their produce. According to Majalla it is a kind of partnership on the terms that the trees are to be owned by one and cultivated by the other and that the fruit produced is to be shared between them.

5.2.2. Sales and Trade-Based Transactions

This type of principle includes the following contracts: Bai` BithamanAjil (deferred-payment sale), Bai` `inah, istisna` (manufacturing contract), murabahah (mark-up), salam (future delivery), tawarruq, and ijarah (leasing).

5.2.2.1. Bai’ BithamanAjil (BBA) (Deferred-Payment Sale)

BBA is a contract of sale whereby the commodity exchanged is delivered immediately and the deferred price is paid in installments. It is also called Bai` Mu`ajjal. In this contract, the price is higher than spot price due to the deferment in the payment. According to the majority of jurists, increasing the price in BBA due to the deferment in payment is allowed. The increment of price is allowed in case of deferment of price in a sale contract. Such an increase is permissible because it is against the commodity and not against money. An increase against deferred payment is only considered to be amounting to riba when the subject matter is money on both sides. Therefore, it is allowed for a seller to fix two prices of a commodity, that is, cash price and credit price, and give an option to the buyer to buy a commodity at either of the two prices.

5.2.2.2. Bai` `inah

Inah is a sale in which a commodity is sold for a deferred payment and then it is resold to the same seller on a cash basis. Normally the cash price is cheaper than the deferred payment price. For example: A sells asset X to B at a credit price, say 10,000 ringgit; then, immediately B sells it back to A for 9,000 ringgit on cash payment. It is called `inah since the seller of the objects (`ayn) takes it back again. There is a disagreement among Sharī`ah scholars on the validity of this contract. The majority of scholars prohibit it, whereas Shafis allow it.

5.2.2.3. Bai’ wafa’

It is also known in other terms such as bai` thanaya (Maliki Mazhab), bai` `uhdah (Syafi`iMazhab), bai` amanah (Hanbali Mazhab) or bai` to`ah or bai` jaiz. The Hanafi book named it bai` mu`amalah. Section 118 of Majallah al-Ahkam al-`Adliyyah defines it as a sale with a condition that, when the seller pays back the price of the goods sold, the buyer will return the goods to the seller. According to al-Zarqa`, it is `aqdtauthiqiy (security contract) in the form of a sale, based on the fact that both parties to the contract have the right to reclaim the exchanged goods. This means that when there is a wafa` sale, the seller has the right to reclaim the goods sold by paying the buyer the full price of the goods sold. It is called wafa` because of the obligation to fulfill the condition in the contract, that is, returning the goods sold when the seller decides to reclaim the goods by paying back the amount. There is a disagreement among Sharī`ah scholars on the validity of this contract; the majority of scholars don’t allow it whereas Hanafis allow it.

5.2.2.4. Bai’ Muzayadah

It is the offering of goods for sale in a market by a seller with a number of interested buyers who compete to offer the highest price. This process ends with the seller selling the goods to the highest bidder. In other words, it is similar to an auction. Other names for this principle used by past Islamic jurists are bai` fuqara`, bai` man kasadatbidha`atuhu, bai` mahawij, and bai` mafalis. Bai` muzayadah is a form of trading that has existed and been applied in the muamalat for a long time.

5.2.2.5. Bai’ al Istijrar

It is the practice of taking a certain amount of goods, such as bread, meat, and oil from the seller by the buyer every day and paying for them at market price at year-end or month-end without fixing the price at the inception of the `aqd. This practice will not give rise to any dispute between buyer and seller because they have agreed on the method of payment and price determination. It should be noted that there are different types of bai` al istijrar according to the different schools of law; the aforementioned is the Hanbali version, which is disputed. Bai` al istijrar, which is not disputed, is defined as a contract whereby the supplier agrees to supply a particular product on an ongoing basis, for example, monthly, at an agreed price and an agreed mode of payment.

5.2.2.6. Bai’ al-Dayn

Bai` al-Dayn is a sale of payable right either to the debtor himself, or to any third party. The issue of bai` al-dayn arises when Islamic bonds are traded in the secondary market at a discount, because, among the conditions, if the debt is money, its price should be equal in terms of amount. There are some conditions that should be observed when dealing with bai` al dayn.

5.2.2.7. Istisna’ (Manufacturing Contract)

Istisna` is derived from the root word sana`, which means “to manufacture or to construct something.” Istisna` is defined as a contract whereby a party undertakes to produce, construct, manufacture a specific thing according to certain agreed upon specifications at a determined price and for a fixed date of delivery. Istisna` is the second kind of sale, after salam, where a commodity is transacted before it comes into existence.

5.2.2.8. Murabahah (Mark-Up)

Murabahah is the sale of a commodity for the price at which the seller has purchased it, with the addition of a stated profit known to the buyer. The only feature distinguishing murabahah from other kinds of sale is that the seller expressly tells the purchaser how much cost he has incurred and how much profit he is going to charge in addition to the cost. If a person sells a commodity without stating the cost and profit, then it is called musawamah.

5.2.2.9. Salam (Future Delivery)

Salam is a sale whereby the seller undertakes to supply some specific goods to the buyer at a future date in exchange for an advanced price that is fully paid on the spot. The price is paid in cash, but the supply of the purchased goods is deferred. The subject matter of salam is normally agricultural products such as rice and natural resources such as gas.

5.2.2.10. Sarf (Currency Exchange)

Sarf is the exchange of one monetary form for another in the same or different genre such as gold for gold coin, silver for silver, gold for silver, silver for gold, whether it is in the jewelry form or minted coins. There are rules to be observed in the exchange of this type of monetary form. These rules are applicable for today’s bank notes, which mean that, when there is a currency exchange, for instance Malaysian ringgits with Algerian dinars, the rules of currency exchange will apply whereby a spot transaction is required without delay in the exchange.

5.2.2.11. Tawarruq

Tawarruq is the purchase of a commodity, which is in the ownership and possession of the seller, against a deferred price, and its subsequent sale by the purchaser to a party other than the seller on cash for the purpose of obtaining cash. It is defined also as purchasing a commodity on credit and selling it to a person other than the initial seller for a lower price in cash.

5.2.3. Lease-Based Transactions

Ijarah (Leasing): Ijarah is defined as a contract of proposed or known usufruct with a specified return or compensation for the effort or work that has been expended or for the benefit derived from the use of a leased object. It is also called sale of the usufruct. Ijarah is divided into two types: Corporeal property (ijarah or manfa`at al-`ayn), which includes immovable property (land) merchandise (machinery) and animals. Personal service (ijarah or manfa`at al- `amal) type of ijarah is the hiring of services or labour such as hiring an engineer or a tailor to undertake a specific task.

5.2.4. Fee-Based Transactions

This principle includes the following contracts: ju`alah (commissioned transaction) and wakalah (agency).

5.2.4.1. Ju’alah

Ju`alah is an open promise by one party to pay whoever performs a particular task. It is a unilateral contract that is binding on the initiator. In other words, ju`alah is a contract in which one of the parties (ja`il) offers specific compensation (the ju`l) to anyone (amil) who will achieve a determined result in a known or unknown period. The forms of activities that both parties in ju`alah agree upon may include: an activity that is intended through the agreement to produce a result such as the extraction of minerals; any information in which the offeror has an interest such as presenting a report or a study that realises a result but in which the extent of the work cannot be determined; and an activity that is intended through the agreement to return lost property to its seeker. The application of ju`alah is as follows:

• Exploration for minerals and extraction of water
• Collection of debts
• Securing permissible financing facilities
• Brokerage
• Discoveries, inventions, and designs

5.2.4.2. Wakalah

Wakalah is the delegation of one party (the principal) for another (the agent) to be the representative in a known and permissible dealing. Wakalah includes three main elements: the principal (al muwakkil), the agent (al wakil), and the subject matter (al muwakkalfih). There are some conditions that must be fulfilled in order to conclude valid wakalah contracts, which are:

• The contract agreement must be concluded based on the mutual consent of the contracting parties.
• The contracting parties must fulfill the requirements of the legal capacity to be able to conclude wakalah contract.
• The subject matter must be known to both parties.
• The disposition must be permissible; therefore, it is not allowed to appoint one agent to perform non-permissible action.
• The subject matter accommodates representation such as sale, purchase, and leasing.

5.2.5. Free-Interest-Loan-Based Transactions

5.2.5.1. Qard Hassan

Qard hassan (free interest loan) is the lending of money to a borrower without imposing interest on his loan. The borrower is required to return the principal upon demand or according to the mutual agreement of the parties. Qard is the transfer of ownership in fungible wealth to a person on whom it is binding to return wealth similar to it. It is stipulated for the subject matter of the contract that it be known fungible (mithli) marketable wealth. The borrower comes to own the subject matter of qard (the wealth loaned) through possession, and he becomes liable for (the repayment of) a similar subject matter.

The applicable rule is the return of an amount similar to the loan amount at the place where it was delivered. The stipulation of an excess for the lender in loan is prohibited and it amounts to riba.

• Whether the excess is in terms of quality or quantity.
• Whether the excess is a tangible thing or a benefit.
• Whether the excess is stipulated at the time of the contract or while determining the period of delay for satisfaction or during the period of delay.
• Whether the stipulation is in writing or is part of customary practice.

It is permitted to stipulate the satisfaction (repayment) of qard at a place other than that where the loan was made.

5.2.6. Security-Based Transactions

This principle includes the following contracts: Kafalah (suretyship) and rahn (pledges).

5.2.6.1. Kafalah

Kafalah is adding obligation (of the guarantor) to the obligation of the principal debtor with respect to the demand for something (debt; compensation). For example, if someone has a debt, another person is willing to give guarantee of the debt; the first person is called asil (the principal debtor) and the second person is called kafil (guarantor). Jurists agree that in the surety-ship, the debt of guarantor is established, whereas the debt of the principal debtor remains as it is.

The types of the financial guarantee are as follows:

• Kafalah bi al-dayn (guarantee for debt). It means to guarantee the payment of debt to the creditor owed by the principal debtor.
• Kafalah bi al-Taslim (guarantee for delivery). It is a guarantee to deliver property to its owner to be sure, on behalf of a lessee, to transfer the possession of a leased property to the lessor or his agent at the expiration of the lease period.
• Kafalah bi al-dark. It is a kind of guarantee given by a seller that he will return the price of the object if it is taken over by someone else in the exercise of his better right.

The majority of Muslim jurists view that it is non-permissible to take a fee for giving guarantee. Some contemporary scholars allow the taking of a fee in a kafalah contract by giving a different concept of kafalah within the modern business and finance.

5.2.6.2. Rahn

Rahn is possession offered as security for a debt so that the debt will be paid from the security given, in case the debtor failed to pay back the debt. Other names of rahn are pledge, mortgage, pawn, collateral, but with Sharī`ah values and rulings. The mortgage does not automatically belong to the mortgagee if the mortgagor fails to pay the debt. There must be consent from the mortgagor to sell the mortgage, or by order of the court. The contract of rahn is a voluntary charitable contract (tabarru`) because the pawned object is given without financial compensation. It is a contract of a non-fungible property, which is not considered totally binding until the object of contract is delivered.

5.2.7. Support-Based Transactions

This principle includes the following contracts: hawalah (transfer of debt) and muqassah (set-off), suftajah, and ibra`.

5.2.7.1. Hawalah

Hawalah means transferring a debt from one debtor (transferor) to another party (transferee). Once the transferee has accepted the transfer of debt, the transferor would be released from any obligation.

5.2.7.2. Ibra

Ibra` refers to the act of surrendering one’s claims and rights, such as a creditor writing off the debts of a debtor. Ibra` falls under uqudtabarru`at. Alternatively, it is an act by a person to withdraw his rights to collect payment from a person who has the obligation to repay the amount borrowed from him.

5.2.7.3. Muqasah

Muqasah or set-off is a device used to discharge the obligations or debts of a person in business and financial transactions. It is a form of a clearance of obligation and setting off debts of the debtor and creditor when the debts are identical in all aspects or when the debt is of different value, the smaller debt is reduced from the larger debt. Muqasah means discharge of debt receivable against debt payable. It is defined as the setting off of a debt that is due on the debtor by a creditor who is at the same time indebted to the debtor with certain specific conditions. Both debtor and creditor are indebted toward each other whereby the debts are of the same amount and value, and both parties have agreed to set off their debts and terminate their obligations accordingly. Muqasah means that the debtor and creditor have the rights (debt) that are of the same nature toward each other, and both parties have agreed to discharge their rights.

5.2.7.4. Suftajah

The word suftajah originated from the Persian language and has been adopted by the Arabs. It means a document written by a person to his representative or debtor instructing him to pay a certain sum of money to his creditor. There is little difference between its meaning in Arabic and its Islamic jurisprudence terminology, which is a credit instrument in the form of financial notes given to someone to enable the creditor to use it at another predetermined venue. The benefits given by the debtor using this method are from a risk-management aspect. A creditor does not run the risk of losing money during his journey as he is only carrying suftajah notes. Among the applications of suftajah in the modern financial world is the process of money transfer, that is, telegraphic transfer, traveller’s cheque, and money order. In the context of the capital market, it is related to financial notes.

5.2.8. Voluntary/Charitable-Based Transactions

5.2.8.1. Ariayh

Ariayh means borrowing. It involves allowing a person to enjoy the benefit of an asset and have its beneficiary ownership without a consideration for a particular time to be returned to its owner. It is a kind of gratituous loan. In ariayh contract, the asset remains, whereas its benefit is used, such as a house, car, machine, and so forth. Ariayh does not involve lending of money or object to be used and consumed such as food. Ariayh is different than qard hasan, whereby qard hasan is related to money to be used and consumed and the borrower will have ownership of it and is required to provide a similar amount when it is returned, whereas in ariayh the borrower is not getting money but will benefit from an asset that belongs to the owner. Therefore, ariayh is a borrowing for use, whereas qard hasan is a borrowing for consumption. Ariayh can be against guarantee, and it will be ariayh with guarantee.

5.2.8.2. Hibah

Hibah means a gift; it is awarding a person something without a consideration. The gift can be a kind of tangible asset or benefit; however, the concept of awarding the benefit is confined to ariayh. The Maliki define hibah as “giving ownership by those who are entitled for donating things that are approved by Sharī`ah without counter value to those who are entitled to receive with the language or any that shows it.” Al-Dasuqi has defined hibah as “Giving ownership without counter value.” One of the most important conditions of the object in hibah is:

• The object exists at the time of hibah (Maliki accommodate the hibah of non-existent object).
• The object must be a permissible asset/item according to Sharī`ah.
• The object belongs to the donor through a valid ownership.
• The object can be delivered to the recipient.

5.2.8.3. Wadi`ah

Wadi`ah is derived from the verb wada`a, which means “to leave.” The literal meaning of wadi`ah is leaving something in someone’s custody. Hanafis defined it as empowering someone to keep the owner’s wealth explicitly or implicitly. According to Shafi`is and Malikis, it represents keeping possession of respectable private good in a specific way. Majallah al-Ahkan al-Adliyyah defines it as an asset given to someone for safekeeping without any return.

5.2.8.4. Waqf

Waqf means to stop, contain, or to preserve. According to Sharī`ah, waqf is a voluntary, permanent, irrevocable dedication of a portion of one’s wealth in the form of cash or kind to Allah (s.w.t). Section 2 of the Enactment of Wakaf of Selangor 1999 defines wakaf as the dedication of any property from which its usufruct or benefit may be used for any charitable purposes whether as wakaf am or wakaf khas, but it does not include a trust, which is defined under the Trustee Act 1949. Waqf cannot be given as a gift, inherited, or sold. It belongs to Allah (s.a.w.) and the corpus of the waqf always remains intact. The benefit of waqf may be utilised for a particular objective if it is stipulated by the waqif, or in different charitable objectives if there is no specific stipulation by the waqif.

5.2.8.5. Wasiyyah

The word wasiyyah comes from the root word of wasa which means “to attach” or “to join.” Wasiyyah in its technical definition is “a transfer of ownership for no consideration to take effect after death.” It is a kind of tabarru`, which can be an asset, or benefit. It is recommended by Sharī`ah to be a channel for the needy people.

5.2.8.6. Tabarru

There are two main categories in Islamic law of contract, namely, uqud tabarru` (voluntary contract) and uqud muawadat (exchange contract). Tabarru` is not a specific contract but it is category or class in Islamic law of contracts. It is the opposite of an exchange contract. Tabarru` is a word derived from the Arabic word (tabarra`), which means to give something voluntarily to others. If a person gives something (asset or benefit) to others (individual or group) in the present or in the future without consideration, we say that the person is making a tabarru`. It is regarded also as a kind of gift given to a person or an organization as a charitable deed for assistance purpose; the donation may take a different form such as cash, tangible asset, commodity, and the like. The donation does not generate profit or benefit but is driven by love and care. It is categorized under voluntary transactions and not considered as an exchange contract. For instance, in the case of emergency cases, the donation will be in the form of medical care and provision such as blood donation and free food supplies.

NOTES

1. The fundamentals of the contract are discussed very briefly.

2. Majalla el-Ahkam-I-Adliyah, Article 168 (Kuala Lumpur, Malaysia: The Other Press, 2003), 21; Ali Al Kafif, Ahkam Al Muamalat Al Sharī`ah (Cairo, Egypt: Dar Al Fikr Al Arabi, 1996), 203.

3. See: Ala’ EddinKharofa, Transactions in Islamic Law (Kuala Lumpur, Malaysia: A.S. Noordeen, 1997), 11.

4. Majalla, Article 167, 21.

5. Ibid., Article 171, 21.

6. Ibid., Article 172, 21; Al Kafif, Ahkam Al Muamalat Al Sharī`ah, 204.

7. AhceneLahsasna, Islamic Contract in Financial Services (Kuala Lumpur, Malaysia: CERT, 2003), 26.

8. See: Wahbah Al-Zuhayli, Financial Transactions in Islamic Jurisprudence, vol. 1 (Damascus, Syria: Dar al-Fikr al-Mouaser, 2003 [English ed.]), 19.

9. Majalla, Article 177, 23.

10. Ibid., Article 183, 25.

11. Ibid., Article 184, 25.

12. See: Al-Zuhayli, Financial Transactions in Islamic Jurisprudence, 18.

13. Ahmad Ibrahim Biq, The Sharī`ah Financial Transactions (Dar al Ansar, Cairo, 1936), 111.

14. Kharofa, Transaction in Islamic Law, 12; Al Kafif, Ahkam Al Muamalat Al Sharī`ah, 208.

15. Al Kafif, Ahkam Al Muamalat Al Sharī`ah, 236.

16. Ibid., 236.

17. Subhi Mahmasani, TheGeneral Theory of Obligation and Contract in Islamic Law (Beirut, Dar ulIlm lil Malayin, 1983), vol. 2, 366.

18. Al Kafif, Ahkam Al Muamalat Al Sharī`ah, 269.

19. See: M. Tahir Mansuri, Islamic Law of Contract and Business Transactions (International Islamic University, Islamabad, Pakistan, 2011), 35; Biq, The Sharī`ah Financial Transactions, 84.

20. Majalla, Article 200, 27.

21. Ibid., Article 201, 27.

22. Ibid., Article 205, 28.

23. Biq, The Sharī`ah Financial Transactions, 145; Mohamad Sulaiman Al Ashqar, Murabahah, Salam and Istisna’, 92; Nazih Hamad, The Contract of Salam in Islamic Law (Beirut, Dar al Qalam, 1993), 7.

24. For more details see Lahsasna, Islamic Contract in Financial Services, 67.