Key Issues & Perspective on Islamic Aspects of Financial Transactions

1. Key Issues & Perspective on Islamic Aspects of Financial Transactions (Principles of Corporate Mu’amalat) Prof. Dr. Mohd. Ma’sum Billah www.drmasumbillah.blogspot.com Shangri-La- Hotel, Jakarta

2. Definition of Shari’ah and Fiqh(affecting Financial Mu’amalat) Shariah Defined as a Divine revealed law Defined as a detailed rulings of law which Muslim jurists understood and derived from the Shariah Fiqh

3. Categories Of Fiqh 4 Categories Fiqh Ibadat Fiqh Muamalat Fiqh Ahwal Shakhsiyyah Fiqh Jinayat

4. Categories Of Fiqh Fiqh Ibadat relating to worship Fiqh Muamalat relating to transactions Fiqh Ahwal Shakhsiyyah relating to family matters Fiqh Jinayat relating to crimes, offences & punishments

5. Corporate Muamalat Contract • Defined as an Offer and Acceptance • Could be verbal , in writing, through signs or any other forms of Offer and Acceptance.

6. Categories Of Muamalat Contracts 1) Acquiring Ownership Contracts (Uqud Tamlikat) 2) Profit Sharing Contracts ( Uqud Ishtirak) 7 Categories 3) Safe Custody Contracts ( Uqud Hifz) 4) Security Contracts (Uqud Tauthiqat) 5) Permissions Contracts ( Uqud Itlaqat) 6) Restriction Contracts ( (Uqud Taqyidat) 7) Releases Contracts ( Uqud Isqatat)

7. Categories Of Muamalat Contracts • 1) Acquiring Ownership Contracts (Uqud Tamlikat) • a) Contract of exchange ( Uqud Muawadhat) • Examples • Bai • Ijarah b) Contract of Donation ( Uqud Tabarru’at) Examples • Hibah • Sadaqah

8. Categories Of Muamalat Contracts • 2) Profit Sharing Contracts (Uqud Ishtirak) • Examples • Musyarakah • Mudharabah 3) Safe Custody Contracts (Uqud Hifz ) Example • Wadiah

9. Categories Of Muamalat Contracts • 4) Security Contracts ( Uqud Tauthiqat) • Examples • Kafalah • Rahnu 5) Permissions Contracts ( Uqud Itlaqat ) Example • Wakalah

10. Categories Of Muamalat Contracts • 6) Restrictions Contracts ( Uqud Taqyidat ) • Example • Taflis 7) Releases Contracts ( Uqud Isqatat) Example • Ibra’

11. Shariah Requirements in Corporate Muamalat Contract Islam permits trade and commerce . Rules to be Observed Observing that every contract possesses all its essential elements and that every essential element meets the necessary conditions Avoidance of prohibitions

12. Prohibitions In Corporate Muamalat Contract • 2 Types: • Prohibitions which make contracts invalid • Prohibitions which do not make contracts invalid

13. Prohibitions In Muamalat Contract 5 Prohibitions make contracts invalid Riba Gharar i/e : ambiguity or uncertainty Producing or selling impure goods Gambling i.e anything that involves betting Producing or selling goods, that are of no use therefore of no value

14. Riba Means : Extra Two kinds Riba in trading transactions ( RIBA BUYU’) Riba out of lending and borrowing ( RIBA DUYUN)

15. Riba • Riba out of lending and borrowing ( RIBA DUYUN) • - is the extra amount of money • Imposed by lender on the borrower in the contract; or • Promised by the borrower in the contract; or • Charged because of late payment

16. Riba Riba in trading transactions ( RIBA BUYU ’ ) - may arise out of an exchange between 2 ribawi materials in the same category if the rules are not observed.

17. Riba Categories of RIBAWI Materials • Medium of Exchange • with classifications • as follows: • gold in any form, • silver in any form, and • currencies [the currency of each country is considered as one type.] • All kinds of foodstuffs • with broad categories • as follows: • grains • meats • vegetables • fruits, and • salts which include sugars, candies and medicines

18. Riba • - Occurrence of Riba in Trading • Occurs when rules concerning the trading of RIBAWI materials are not observed. Rules : • Same classifications in the same category • Different classifications in the same category • Others .

19. Same Classifications in the Same Category Examples:916 gold exchange with 750 gold, or basmathi rice exchange with A1 rice. Conditions: • The weight or measurement or units of the materials must be the same, and • Their exchange must be immediate. Effect: • If the first rule is not observed Riba Fadhl occurs • If the second rule is not observed then Riba Nasiahoccurs.

20. Different Classifications in The Same Category • Examples: RM380 exchanged with USD100, • 2.5 tonnes of rice with 2 tonnes of wheat. • Conditions: • Their exchange must be immediate, at the one and the samemeeting. Effect • If the rule is not observed then Riba Nasiah occurs. NOTE : No rules are required to be observed for different categories, (Example: wheat or palm oil exchanged with money)

21. Gharar Gharar Fahish , i.e Major or Serious Gharar Gharar Yasir , i.e Minor or Slight Gharar Divided into 2:

22. Gharar • The Gharar that causes a contract to be NULLand VOID • is a major Gharar which arises out of one of the following: • Asset or Merchandise does not exist. • Asset or Merchandise cannot be delivered; or • Asset or Merchandise not according to specification.

23. Other Prohibitions Which Do Not Make Contracts Invalid • Deception/ Deceit (Taghrir / Tadlis) • Contract of Sale during the Friday Prayer • Unfair Loss due to deception/deceit (Ghubn Fahish wa Taghrir / Tadlis) • Others.

24. Permissible Muamalat Contracts After taking out the types of Muamalat ( transactions) that are prohibited those are permitted can be divided into three broad categories. 3 Broad Categories: Trading Contracts Profit Sharing Contracts Other Supporting Contracts

25. Trading Contracts The most widely used transactions are: 2 Broad Categories Cash Sales Deferred Payment Sales (Debt Financing)

26. Cash Sales • Normal Cash Sales ( Bai Naqdi) • Foreign Currency Exchange ( Bai Sarf) • Exchanges between Ribawi materials of different classifications within the same category (Gold with money or wheat with rice) • Bai Dayn • Bai Salam

27. Deferred Payment Sales (Debt Financing) Bai’ Bithaman Ajil ( Deferred Payment Sale) Bai’ Murabahah ( Cost Plus) Bai’ Inah Istijrar ( Supply or Wholesale Financing) Bai’ Istina’a ( Sale by Order)

28. Deferred Payment Sales (Debt Financing) Ijarah Wa-Iqtina’ (Leasing then Purchase) Qardh Hasan ( Benevolent Loan) Ijarah Thumma Bai ( Hire Purchase) Ijarah ( Leasing)

29. Contracts Of Profit Sharing(Equity Financing) They are: 1) Musharakah (Joint venture profit sharing) 2) Mudharabah (Trustee profit sharing) 3) Muzara’ah (Leasing of land for agriculture) 4) Musaqat (Watering of orchard)

30. Supporting Contracts The Shariah also permits contracts to support and facilitate trading and mobilisation of capital. They are: 1 ) Rahnu ( Mortgage) 4) Wadiah (Safe Custody) 5) Hiwalah (Transfer of Debt) 2) Kafalah ( Guarantee) 3) Wakalah ( Agency) 6) Ibra’ (Rebate)

31. Essential Elements and Necessary Conditions in Contract To make a permissible contract valid, it must have essential elements and each essential element must meet the necessary conditions.

32. Essential Elements and Necessary Conditions in Contract 1- Contract of Sale The essential elements and the necessary conditions in a contract of sale are: 1. Contract : Offer & Acceptance (i) In definite and decisive language and absolute. (The Majelle - Majallah Al-Ahkam Al-Adliyah - complete code of Islamic Civil Law, provides as follows: Art. 169: For the offer and acceptance the past tense is generally used. Art. 170: By aourist tense like “Alirim and Satarim” if the present tense is meant, the sale is concluded, and if the future is meant, the sale is not completed.

33. Essential Elements and Necessary Conditions in Contract (..continued) Art. 171: A sale is not concluded by words in the future tense, such as “I will take”,”I will sell” which mean merely a promise. Art. 172: A 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.) (ii) The acceptance must agree with the offer. (Mjl. Art. 177: If one of the contracting parties make an offer for something in any manner whatsoever, the other party must make the acceptance of it, so as exactly to correspond with the offer. He has no right to separate either the price or the subject matter of the sale.)

34. Essential Elements and Necessary Conditions in Contract (..continued) (iii) The contract must be made at the one and the same meeting. (Mjl. Art. 183: 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 an acceptance. Art. 185: On new offer being made before acceptance, the first offer becomes void, and consideration is paid to the second offer.)

35. Essential Elements and Necessary Conditions in Contract 2. The Thing Sold (i) It must exist (Mjl. Art. 177: The existence of the thing sold is necessary.) (ii) The thing sold must be capable of being delivered. (Mjl. Art. 198: It is necessary that the delivery of the thing sold be possible.) (iii) The thing sold must be of value, and

36. Essential Elements and Necessary Conditions in Contract (..continued) (iv) It must be of pure substance. (Mjl.Art.199:It is necessary that the thing sold should be “mal mutaqawwim”. Art. 126: Mal is a thing which naturally is desired by man, and can be stored for times of necessity. Art. 127: Mal mutaqawwim is a thing the benefit of which is permissible by law to enjoy.) (v) The thing sold must be known. (Mjl. Art. 200: It is necessary that the thing sold should be known to the buyer. Art. 201: The thing sold becomes known by a description of its qualities and state, which will distinguish it from other things.)

37. Essential Elements and Necessary Conditions in Contract (..continued) (vi) The thing sold must be owned by the seller. (Mjl. Art. 365: In order that a sale may be “nafiz”, it is a condition that the seller should be the owner of the property sold, or agent, or natural or appointed guardian of the owner of the property, and that there should be no right in any one else.)

38. Essential Elements and Necessary Conditions in Contract 3. The Price It must be known in currency and the absolute amount. (Mjl. Art. 237: It is necessary that the price should be named at the time of the sale. Art. 238: It is necessary that the price should be known. Art. 239: The knowledge of the price comes by a statement of its description and amount if it does not come by seeing it when it is shown.)

39. Essential Elements and Necessary Conditions in Contract 4. The Seller and 5. The Buyer (The Two Parties to the Contract) (i) The two parties to the contract must be capable of taking responsibility. (Mjl. Art. 361: In the making of the sale, there is a condition, that the essence of the contract, should emanate from intelligent persons, that is to say, from reasonable persons, who possess judgement, and that they should attach to a subject of sale, which admits of the consequences of a sale. Art. 957: Infants, madmen and people of unsound mind are of themselves prohibited from dealing with their property.)

40. Essential Elements and Necessary Conditions in Contract (ii) The two parties to the contract must not be prohibited from dealing with their property, i.e. they must not be bankrupts and prodigals (safih). (Mjl. Art. 958: A person who is prodigal can be prohibited by the judge. Art. 959: A debtor also, on the application of his creditors, can be prohibited from dealing with his property by the judge.) (iii) There is no coercion or compulsion exerted on either of the two parties to the contract. (Mjl. Art. 949: “Ikrah” is of two sorts. The first sort is “Ikrah mulgi”. It leads to destruction of life in loss of a limb or one of them. It is the compulsion, which is by a hard blow.

41. Essential Elements and Necessary Conditions in Contract (..continued) The second sort is “Ikrah ghair mulgi”. This causes only grief and pain. It is compulsion which is by things like a blow or imprisonment. Art. 1006: When they (transactions) take place in consequence of compulsion which is taken into consideration, an exchange of property, and a purchase, and a letting, and a conveyance, and a compromise about property, and an admission, and a postponement of a debt and causing of a right of preemption to cease, are not held good, whether the compulsion be “mulgi” or “ghair mulgi”. But if the person compelled give his consent after the compulsion has ceased, in that case they are held good.)

42. Essential Elements and Necessary Conditions in Contract 2 - Contract of Leasing The essential elements are: 1. Lessor (The necessary conditions are the same as those for buyer and seller in the contract of sale.) 2. Lessee (The necessary conditions are the same as those for buyer and seller.)

43. Essential Elements and Necessary Conditions in Contract 3. Contract The necessary conditions are: (i) In definite and decisive language. (Mjl. Art. 443 : Like sale, letting becomes a concluded contract by a proposal and acceptance. Art. 435 : Hiring like sale becomes a concluded contract by the past tense, it does not become a concluded contract by the future tense.)

44. Essential Elements and Necessary Conditions in Contract (ii) Acceptance must agree with offer. (iii) Offer and acceptance must be made at the same meeting. (Art.445 : As in sales, so also in making a contact of hire, the agreement of the proposal with the acceptance, and the unity of the meeting for making the contract is a condition.)

45. Essential Elements and Necessary Conditions in Contract 4. Asset The necessary conditions are: (i) Belongs to lessor. (Art. 446 : The letter who makes a contract of letting must be the absolute owner of the thing, or the agent of the owner, or his natural or legal guardian.)

46. Essential Elements and Necessary Conditions in Contract (ii) Specified and known (Art. 449 : The designation of the thing given for rent is necessary. Therefore, if a letter be made of one of two shops, without giving the choice or designating one of them, the letting is not valid.)

47. Essential Elements and Necessary Conditions in Contract (iii) Delivered to lessee. (Art. 474 : In case there is a condition for a deferred payment of the hire, it becomes necessary for the lessor to make delivery of the thing hired, …first. The payment of the hire is only necessary on the expiration of the time of payment agreed upon. Art. 475 : When there is a hiring without condition for payment in advance on afterwards, ….the delivery of the thing let by the letter …must be made first.

48. Essential Elements and Necessary Conditions in Contract (iii) (.. continued) Art. 582 : The delivery of the thing hired to the person who hires it, is the giving of leave and permission by the letter, in a way that the hirer can derive benefit from it without hindrance. Art. 583 : When a good contract of hiring has been made for a time or distance, it is necessary that delivery be made to the hirer, for the thing to remain constantly and continuously in his possession, until the completion of the distance on the end of the time.

49. Essential Elements and Necessary Conditions in Contract (iii) (.. continued) Art. 478 : If the benefit from the thing hired ceases to exist, than the rent becomes no longer payable.) Example : 1. The share of the hire for the time when a bath is under repair, remaining unused, is not payable. 2. The rent for an idle time of mill, consequent on the water of the mill being cut, is not payable from the time of the cutting of the water.

50. Essential Elements and Necessary Conditions in Contract 5. Benefit It must meet these necessary conditions: (i) It can be fixed in value. (ii) The lessor has the power and capability to use and lease the asset. (iii) It must be permissible.