Contracts recognised in Islam
By Sidrah Unis



BUSINESS enterprise and market mechanism are more often than not governed by a set of rules and regulations which not only entail a system of profit and loss sharing but also lay down a clear cut mode of accountability, sureties, guarantees and the works.

So, a complex system evolves whereby business, be it in the form of trade and commerce, industry, agriculture or banking for that matter can be carried out smoothly and efficiently. At the core of every such structure, regardless of its size, so put up, lies a contract or innumerable contracts which define the work relationship between associates.

Islam recognises a contract and enjoins fulfilment of promises entered into through it, “O you who believe! When you contract a debt for a fixed period, write it down. Let a scribe write it down in justice between you…” (2282; “O you who believe! Fulfil (your) obligations.” (501); “… fulfil (every) covenant. Verily, the covenant will be questioned about.” (1734).

In order for a contract to be valid in Islam, certain conditions have to be satisfied. First and foremost, the contracting parties should be legally competent to enter into a contract. A person is legally competent if he or she is an adult and sane. A contract essentially involves an offer and an acceptance. Further, the subject matter of the contract must be lawful. Keeping in view public good and for the purpose of discouraging unethical investments, Islam has forbidden dealing in commodities declared haram i.e. commodities like pork, wine, drugs, etc., whose use and consumption has been forbidden to Muslims.

The agreement should not involve gharar or risk referring to transactions wherein the characteristics of the subject matter itself are not certain or clearly laid down be it with regard to form or quantity so such a deal involves an element of risk similar to gambling.

The Prophet (pbuh) has forbidden the purchase of the unborn animal in its mother`s womb, the sale of milk in the udder without measurement, the purchase of spoils of war prior to their distribution, the purchase of charities prior to their receipt, and the purchase of the catch of a diver. The last prohibition pertains to payment for whatever a diver may catch on his next dive. This has been prohibited because the payer does not know what he is paying for. Also, any contract wherein the element of riba, be it express or implied, is present has been strictly forbidden.

Riba literally means `increase.` In Shariah, it is an addition over and above the principal amount i.e. paying money for the use of money. The Holy Quran and the Sunnah of the Holy Prophet expressly prohibit riba. “And that which you give in gift (to others), in order that it may increase (your wealth by expecting to get a better one in return) from other people`s property has no increase with Allah…” (3039).

The contract should have clarity and the contracting parties should be honest and avoid any form of concealment; “And mix not truth with falsehood, nor conceal the truth…” (242). Islam has also forbidden entering into a transaction when it would prove detrimental to the interests of another person already entering the same. The Holy Prophet once said “A person should not enter into a transaction when his brother is already making a transaction and should not make a proposal of marriage when his brother has already made a proposal except when he gives permission.”

On the whole, any condition or term of contract which does not conform to Islamic laws makes the contract invalid. It has been reported that Burairah came to Aisha and said, “My people (masters) have written the contract for my emancipation for nine ounces of gold to be paid in yearly instalments, one ounce per year; so help me.” Aisha replied “if your masters agree, I will pay them the whole sum provided the allegiance will be for me.” Burairah`s masters refused the offer.

When the Holy Prophet came to know of this he told Aisha, “Buy Burairah and stipulate that her allegiance will be for them, as the allegiance is for the slave-freer.” Aisha did so. Later, the Holy Prophet addressed the people and said, “What is wrong with some people who stipulate things which are not in Allah`s laws? Any condition which is not in Allah`s laws is invalid even if there were a hundred such conditions. Allah`s rules are the most valid and Allah`s conditions are the most solid. The allegiance is for the slave-freer.”

Broadly categorised, the following are some forms of contract recognised in Islam.

Shirkah In this form of contract, the contracting parties enter into a joint investment in a business enterprise and share profits and losses. The former is shared equitably in accordance with the agreement whereas the latter is shared in proportion to the capital invested.

Wadiah This is a contract whereby any object or deposit is kept for safe keeping with a person who is not its owner. The depository in this case becomes the guarantor and guarantees return of the object or deposit to the depositor when he so demands it.

Bay This is an agreement between two parties i.e. the buyer and the seller whereby ownership of property is transferred from one person to another at a price. This includes a contract of exchange whereby ownership of a commodity is transferred from one party to another in exchange of another commodity as agreed to between the parties, the same being trade by barter system.

Ijarah It literally means `to give something on rent.` This is of two kinds. Firstly, it refers to hiring of services of another person where wage serves as a consideration. Simply put, it covers the contractual relationship of an employer and an employee. The employer is referred to as `musta`jir` whereas the employee is called `ajir`. The second case, which is analogous to leasing, refers to transferring the usufruct of a certain property to another on payment of rent. The lessor is called `mu`jir` whereas the lessee is called `musta`jir`.

Ariyah This is a gratuitous loan of an object to another for a specific period of time after passing of which the item so loaned is returned to the lender.

Rahn Also called collateralised borrowing, a debtor in this case places a valuable asset in the custody of the creditor as collateral for debt incurred. In case of default in payment by the debtor, the creditor can dispose of the collateral.