Islamic Financial Contracts

A Research Companion

Hussain Mohi-ud-Din Qadri, Nasir Iqbal

• Publisher: Routledge
• Year: 2021
• ISBN:
  9781000406368
• Edition: 1
• Topic: Business
• Subtopic: Sistemi bancari e finanziari nei paesi islamici
• Index: Business

Islam encourages business and financial transactions as a way of securing the basic needs for all human beings, but these need to be conducted in accordance with the principles contained in the Qur'?n and Sunnah. However, these legal concepts are not classified subject-wise, and the verses on commercial law, like all other topics, are scattered throughout the Qur'?n, making it difficult for readers to gain a full understanding of the topic. This, therefore, is the first comprehensive book to demystify Islamic contract law and specifically Islamic financial contracts, and to examine its roots and history.

The book is written in a clear style to allow for a greater understanding of the more challenging and misunderstood areas pertaining to Islamic business and financial contracts. It also contributes a series of chapters which address the market niche and need, concerning Shariah compliance for Islamic financial products and services. The book is divided into 16 chapters in order to provide a holistic and thorough overview of Islamic law of contract. It covers the objections and misconceptions surrounding Islamic business and financial contracts. It also includes the key features and guiding principles of Islamic law of contract and offers technical know-how, illustrating the concept of formation of a contract, as well as the essential elements of a valid contract. The authors also offer a discussion on the system of options under Islamic business and financial contracts and potential solutions to breach of contracts.

The book will serve as a handy reference for scholars and students of Islamic business and finance and Islamic commercial law and will also be beneficial for practitioners as well as legal and judicial officers. It will open new doors for further research in the field of Islamic financial contracts.

1 Some basic legal terminologies and concepts

1.1 Concept of Islamic law

The expression “Islamic law” is commonly used in legal literature written in the English language to refer to four different Arabic terms, namely fiqh, Shariah, qanun and urf.¹ Fiqh has been loosely translated into English as “Islamic law” and so has Shariah, but these terms are not synonymous either in the Arabic language or to Muslim scholars.² Some authors refer it as “Islamic jurisprudence” and others confuse it with “ethics” of Islam by equating it with Shariah. “The general precept of the Islamic Shariah is conveniently referred to as a guide to moral conduct”³ rather than a law that is enforceable in a court of justice. In our view, it is a misconception. The term Islamic law is a generic term, which may be applied to the whole set of laws connected to Islam. So it is necessary to understand some Arabic terms in their legal perspective as used in Islamic academic literature. As this book is not on the topic of Islamic law or Islamic jurisprudence, we will describe the terminologies very briefly but to the extent that the meanings of the terms are clarified. We begin with the term Shariah.

1.2 Shariah

Literally, the term Shariah means “the way”, or “the clear path”, which Muslims should follow to be guided rightly.⁴ Shariah is an Arabic word meaning the path to be followed. Literally it means “the way to a watering place.” It is the path not only leading to Allah, the Most High, but the path believed by all Muslims to be the path shown by Allah, the Creator Himself through His Messenger, Prophet Muhammad a.⁵ “Shariat,” says Sir Abdur Rahim, “which may be translated as the Islamic Code, means matters which would not have been known but for the communication made to us by the law-giver.”⁶ The Shariah itself is a vast network of injunctions and regulations which relate the world of multiplicity inwardly to a single centre which conversely is reflected in the multiplicity of the circumference.⁷ In the theological discussion, the word Shariah is referred to as divine revelation in toto. It provides all humanity, of all nations, a multidimensional body (compendium) of faith and belief, and laws and regulations. So, in this way, it is viewed; Shariah as the embodiment of the “Divine Will”, and God is seen as the “supreme legislator” whose laws sanctify human life.⁸ In Islam, Allah alone is the sovereign, and it is He who has the right to ordain a path for the guidance of mankind.⁹

1.3 Qur’ānic basis of Shariah

In the Qur’ān it is mentioned, “He (Allah) has ordained (Shariah) for you the same religion (Islam) which He ordained for Noah, and that which We have inspired in you (O Muhammad) and that which We ordained for Abraham, Moses, and Jesus.”¹⁰ “To each among you We have prescribed a law (Shariah) and a clear way.”¹¹ “Then We set you on the open path of Shariah in your affairs. So follow it persistently. And do not yield to the desires of those who are simply unaware (of the glory, dignity, and trueness of your Din [Religion]).”¹²

Shariah is broadly classified into two strands: Ibadah (worship and devotional practices) and mu‘amalat (civil transactions).¹³ It is composed of abstract rules that are laid down in both the Qur’ān and the Sunnah of the Prophet Muhammad a. God has revealed these abstract rules to Prophet Muhammad a. The Prophet (PBUH) received and practised them in his own life, educating his companions, and also guiding the whole of humanity for the future. “Islamically, however it refers to the sum total of Islamic laws which were revealed to the Prophet Muhammad a, and which are recorded in the Qur’ān as well as deducible from the Prophet’s divinely guided lifestyle (called the Sunnah).”¹⁴ The Shariah, being a complete system of life and an all-embracing social order, prescribes directives for the regulation of all spheres of life, be it the individual or the collective life, religious, political, social or moral aspects of life. It encompasses the economic, administrative, judicial and criminal aspects of life, as well as the national and international life, including the questions of war and peace. It is an organic whole not to be isolated from its universal elements.¹⁵ Islam signifies the entire scheme of life and not an isolated part or parts thereof.¹⁶

Hence the concept of Shariah is broader than the concept of law in its counterpart. The closest Islamic term to the modern concept of law is, however, the fiqh which includes legal interpretations that can be found in various academic books, fatwa, and court decisions.¹⁷ The concept of Shariah in the Islamic legal system is unique as no such concept exists in any other legal system of the world. Since the Shariah is dynamic and evolving with the progressing society and culture, it has the power of adaptation, assimilation and modification, provided they are not in conflict with the spirit of the Qur’ān and Sunnah.¹⁸

1.4 Fiqh

The dictionary meaning of the term fiqh is understanding or knowledge. The word fiqh has been typically defined as “knowledge of practical revealed rulings extracted from detailed evidence” (al-ilmu bi al-ahkam al-shariah al-amaliyyah min adillatiha al-tafsiliyyah).¹⁹ Thus, fiqh is related only to “practical” (amaliyyah) and not to the tents of faith, i.e. theological (itiqadiyyah) issues. Hence, fiqh is the knowledge of the Shariah ahkam (legal rules) pertaining to conduct, that has been derived from their specific evidence. The author of “Touzih” defines fiqh as

the knowledge of laws (Ahkam) of the Shariah which are intended to be acted upon, and have been divulged to us by revelation of determined by concurrent decisions of the learned jurists, such knowledge being derived from the sources of law with the power of making current deductions therefrom.

Fiqh means a true understanding of what is intended. Jurists generally define fiqh as the outcome of human “understanding” (fahm)²⁰, “perception” (tasawwur),²¹ and “cognition” (idrak)²² in the form of derivations from defined sources of law, i.e. Qur’ān and Sunnah. Technically, however, fiqh refers to the science of deducing Islamic laws from evidence found in the sources of Islamic law. By extension, it also means the body of Islamic laws so deduced. Hence fiqh refers to the result of the human activity of exploration, interpretation, analysis and presentation of the textual sources of Shariah (detailed evidence).

In cases where there is no clear injunction or directives in the Qur’ān and Sunnah, jurists are allowed to legislate and use their faculties of juristic knowledge (ijtihad) to frame laws.²³ The fiqh is the further extension of Shariah (revealed in primary and secondary sources) which consists of legal research of jurists and the Islamic schools of law’s wealth of heritage. The vast collection of laws in books of fiqh is based on juridical reasoning that was given by scholars and jurists from...