1. Introduction to Sharia Principles in Commercial Transactions
Commercial Law

2. Introduction
Principles of valid contract under Sharia is also known as fiqh muamalat.
Historical background – Islamic law of starts with Quran verses, the traditions that supplement the quranic foundation and principles of contract developed by islamic jurists.

3. Examples of verses and hadith
Quran 5:1 which enjoins believers to “keep faith contracts” (awfu bi al-uqud) and the three verses with a common theme of “keeping promises”
The whole idea of having a contract is to satisfy the consent of both parties to a contract.
To this effect the Quran has already prescribed on the believers “not to devour your assets among yourself in vanity, except in trading by your consent”.
In addition, the Prophet is reported to have said that the property of a Muslim is not licit for others to enjoy unless by his consent”

4. Aqad Aqad or contract has a wide meaning
It comprises all contracts that lack consideration between parties
Example: Gift dealing is considered as part of the general system of contract

5. Elements of contract (Islamic)
Offeror and
offeree
Offer and
Acceptance
Subject matter
Consideration (if any)
Parties to the contract must be legally competent to enter into a contract. The competence to transact under islamic law is measured by prudence and puberty.
Is this different from the Common Law?

6. Offer and acceptance (Islamic)
The law recognizes both express and contract by conduct.
Offer can be made either orally, by writing or by conduct.
The same goes to acceptance, but some instances acceptance may also be implied from silence.

7. Subject Matter
Islamic law stresses on the following with regards to subject matter:
Lawfulness
Existence
Deliverability and precise determination
Lawfulness requires that the object is permissible to be traded.
Existence requires that the subject matter must already be in existence at the time of contract.
Deliverability requires that the object must be capable of delivery.

8. Consideration (Islamic)
Islamic law does not restrict consideration to a monetary price, it may be in the form of another commodity (barter).
The prohibition against uncertainty requires that the price must be in existence and determined at the time of the contract and cannot be fixed at a later date with reference to market price, nor can it be left subject to determination by a third party.

9. Islamic Banking
Legal authority for the establishment of Islamic banks in Malaysia – Islamic Banking Act (IBA) 1983.
IBA provides BNM the power to supervise and regulate Islamic banks.
First Islamic bank in Malaysia?
BNM introduced the ‘Skim Perbankan Islam’ in 1993
Try to find out the Islamic Banks operating in Malaysia!

10. Islamic Banking Products and Concepts
Wadiah Yad Dhamanah (Savings with Guarantee)
Refers to goods or deposits
Deposited to another person for safekeeping
Wadiah is a trust
Trustee guarantees repayment of deposits
Depositors are not entitled to share of profits but the bank may provide returns to the depositors as token of appreciation.
Examples – Saving accounts

11. Islamic Banking Products and Concepts
Mudharabah (Profit Sharing)
Agreement made between capital provider and entrepreneur.
It enables the entrepreneur to carry out business projects and profits are distributed based on a pre agreed profit sharing ratio.
In case of losses, it shall be borne by the fund provider.

12. Islamic Banking Products and Concepts
Musyarakah (Joint venture)
Refers to a partnership or JV for a specific business
Distribution of profits will be apportioned to the pre agreed ratio.
In event of losses, both parties will share the losses on the basis of their equity participation.

13. Islamic Banking Products and Concepts
Murabahah (cost plus)
Refers to sale of goods at a price.
Includes a profit margin as agreed by both parties.
Such sales contract is valid on the condition of that price
Other costs and profit margin of the seller are stated at the time of the agreement of sale.

14. Islamic Banking Products and Concepts
Bai Bithaman Ajil (deferred payment sale)
Refers to the sale of goods on a deferred payment basis at a price, which includes a profit margin agreed to by both parties.

15. Islamic Banking Products and Concepts
Bai al-Dayn (debt trading)
Refers to the buying and selling in the secondary markets of debt certificates, securities, trade documents and papers which are sharia compliant.
Only documents evidencing real debts arising from bona fide merchant transactions can be traded.

16. Islamic Banking Products and Concepts
Bai al-Inah (sell and buy back)
It refers to a contract which involves sell and buy back transactions of an asset by a seller to the customer.
The seller will sell the asset on cash basis
But the customer will buy back the asset on deferred payment at a higher price than the cash price.
Example – House loan

17. Islamic Banking Products and Concepts
Ijarah (leasing)
Refers to an arrangement under which the lessor leases equipment, building of facilities to a client
At an agreed rental fees or charges as agreed by both parties.

18. Islamic Banking Products and Concepts
Qard (Interest free loan)
A loan extended on a goodwill basis and the borrower is only required to repay the principal amount borrowed.
He may pay an extra amount at his absolute discretion as token of appreciation.

19. Islamic Banking Products and Concepts
Kafalah (guarantee)
Refers to a contract of guarantee by the contracting party or any third party
to guarantee the performance of the contract terms by contracting parties.

20. Islamic Banking Products and Concepts
Takaful (Islamic Insurance)
The operation of takaful can be seen as a profit sharing business venture between the takaful operator and the individual members of a group of participants.
Sharing of profit or surplus is made only after the obligation of assisting the fellow participants has been fulfilled.