Grade 11 - Financial Contracts in Islam 1

Financial
Contracts in
Islam
Year 12
Learning Objectives
1. Define the meaning of Contracts

2. Explore the importance attached to the regulation of financial
contracts
3. Determine the elements and conditions of a financial contract
4. Clarify the classification of financial contracts in terms of
legitimacy and purpose
5. Illustrate the features of financial contracts in Islam
Warm Up Time
Longest Ayah of the Qur’an?
●Which is it?
●What is it about? DEBT/LOAN
●What message does it convey?
DOCUMENTATION
‫ عقود‬/ ‫عقد‬
Aqd / Contract definition
 Linguistic definition:
Uniting various sides/parties and joining them
together.
 Technical definition:
The legal binding of two parties’ intent in a
transaction in a manner that is sanctioned
and permissible by Islam.
Discuss and deduce
WAFA
ۚ ‫ َيا َأُّيَها اَّلِذ يَن آَم ُنوا َأْو ُفوا ِباْلُعُقوِد‬
 “O you who have believed, fulfill [all] contracts.”
 The command in the Quranic verse

is directed to the believers to fulfill all contracts
 Synonyms of contract:
Promise – transaction – agreement – commitment
Contracts and Commitments
according to their subjects.
 Religious Contracts – Giving a word / Promise
 Social Contracts – Marriage
 International Contracts – Treaty between countries
 Scientific contracts – Patent, Copyright act
 Educational Contracts – Scholarship with the agreement to pay

back.
 Financial Contracts – Lease, Loan, Mortgage etc.

Vow - Oath
Marriage
Peace Treaty (Truce)
Sale - Lease
Scholarship
How do we regulate and *notarize
contracts? LEGAL
 First:by documentation.
 Second: by witnesses / Guarantor / Surety
 Third: by other suitable means.
 Allah SWT said in the longest ayah of the Qur’an:
ۚ ‫َواَل َتْس َٔـُم ٓو ْا َأن َتْك ُتُبوُه َص ِغيًرا َأْو َك ِبيًرا ِإَلٰٓى َأَج ِلِهۦ‬
* Definition of notarize
to acknowledge or attest as a notary*.
* Definition of notary
a public officer who attests or certifies writings (such as a deed)
to make them authentic and takes affidavits, depositions, and
protests of negotiable paper
Significance of Regulating and
Notarizing Contracts
 The arrangement of financial contracts has a great
importance in preventing conflicts.
 Guaranteed by determining duties and rights of each party of

the contract based on documentation and witnesses
 Allah mentions in the verse of debt:

(Surat Al Baqarah: 282) “Don’t be averse to writing down (the contract) whether
it be small or great, with (the record of) the term thereof”
Conflict- Harm – loss of trade– loss of trust
Avoiding conflict by determining the duties

of every party in the contract
Guaranteeing the rights of both the parties
Read the following Ayah and try to extract
the significant element of contract
‫َبْيَنُك ْم ِباْلَباِط ِل ِإاَّل َأْن َتُك وَن ِتَج اَر ًة َع ْن‬ ‫ َيا َأُّيَها اَّلِذ يَن آَم ُنوا اَل َتْأُك ُلوا َأْم َو اَلُك ْم‬
‫َهَّللا َك اَن ِبُك ْم َرِح يًم ا‬ ‫َتَر اٍض ِم ْنُك ْم ۚ َو اَل َتْقُتُلوا َأْنُفَس ُك ْم ۚ ِإَّن‬
O you who believe! Squander not your wealth among
yourselves in vanity, except it be a trade by mutual
consent, and kill not one another. Lo! Allah is ever
Merciful unto you.
Elements of Financial Contracts 1)
Form of Contract
Formulation of offer and acceptance
 1. Either by word, writing, gesture, or act.
 2. Can be expressed in any clear, understood, customary
way such as modern communication means in concluding
contracts.
1-Form of Contract
 It
is formed by Offer and Acceptance by either a
word, writing, gesture, act.
Every saying or action or gesture that signals

willingness.
writing
Action (by deed)
Saying (by word)

Elements of Financial Contracts
2) The Two Contracting Parties
 1. Sanity/Maturity: Both parties must be mature.
 Insanity and childhood are NOT considered!
 2. Adulthood is where a person can handle financial

matters independently and make the best use of
properties.
 Mutual Consent: To indulge in a contract, willingly

and voluntarily.
Compulsion/coersion SHOULD NOT EXIST!!
Elements of Financial Contracts 3)
Subject of Contract
What is concluDED within the contract
 1. Goods/Kind: such as a sales contract

 2. Usufruct: such as leasing
 3. Service/Action: such as power of
attorney
Write the subject of the matter of the contracts below
1. Mortgage contract = _________

2. Lending contract = _________
3. Security contract = __________
Elements of Financial Contracts - 3)
Subject of Contract (Continued)
1. 1. Possessed by the contractor - The Messenger of Allah said
“do not sell what you do not have”.
2. 2. Lawful - wine, pork, and harmful goods are not allowed to be
sold
3. 3. Known and defined - Not allowed to sell unknown or falsey or
insufficiently described things lest any defect might be covered
or hidden!!
Types of financial contracts
 According to Shari’ah
A. Legal contracts: They are accredited by
Shariah, with entailed juristic effects.
B. Illegal contracts: They are the ones which
Islamic shariah prohibited and did not entail
any legal effects. This happens because of a
forbidden condition or description in relation to
a contract, making it illegal. Such as contracts
that have usury, gambling, cheat or fraud.
Features of financial contracts in Islam:
1. Flexible and compatible with the spirit of our age:
The original state of financial contracts and their conditions is that everything
is permissible except when there is clear Shariah evidence of prohibition as
Allah says: "Allah has permitted trade and has forbidden interest”.
Shariah is valid for all times, and cannot become outdated. Scholars have to
exert their thinking and do research especially the field of economics is
constantly evolving.
2. Regulated by ethical and faithful values:

a. A Muslim is supposed to be honest and sincere, and should not wrong an
employee or cheat anyone whether young or old, should be fair with all
people.
b. Cannot accept any unlawful contract or condition or perjure to attain any
gain in his contracts or dealings
c. All earnings must be legitimate
Features of financial contracts in Islam:
3. Fulfilling the needs of society:
a. To read the paragraph – page 61
4. These must be enforced:

b. Islam attaches a great respect to contracts and enjoins
adherence to the conditions and fulfilment them.
c. Allah said. “And fulfil every commitment. Indeed the
commitment is ever to be questioned!”
d. The reward of honoring the promises of these contracts
is not confined mundane or material gains but it is also
extended to the Hereafter whether good or evil
EXTENSION ACTIVITY
What are the ruling of
Bitcoin & Crytocurrency

in Islam
sequestration
Complete the following xercises
Lender -Borrower
sequestration mortgagee - mortgagor
Lessor - Lessee
Debtor - Creditor
Concrete
Object
Concrete Object
Proxy action
usufruct
Not permissible because he doesn’t own it
Not permissible because the subject of the contract is unlawful for its harm
Not permissible . He cannot rent it out without the owners permission

Legal contract
Illegal contract for it contains Usury

Types of financial contracts
Based on exchange of items like buying and selling

Voluntary based like a gift or donation
based on getting ones right back. Like a security cheque .

Forward sale – Sale –
Mudharabah
Endowment – grant - Lending
Sequestration - guarantee
Legal contracts: Flexible and
to fasten by drawing Form of Contract. they are contracts Exchange contracts: compatible with the
together the parts or accredited by sharia e.g. Sale . Leasing spirit of our age
sides and knotting Illegal contracts: Regulated by
with strings or laces. two contracting they are the ones ethical and
parties which Islamic faithful values
Sharia prohibited Donations contracts
Fulfilling the
the legal binding such as usury, e.g. Endowment –
fraud, …….etc
needs of society:
of two parties’ Grant
The subject mater
wills of the contract
Security contracts: They must be
e.g. guarantee – enforced
sequestration

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Financial

1. Define the meaning of Contracts

 The command in the Quranic verse

 Social Contracts – Marriage

 International Contracts – Treaty between countries

 Scientific contracts – Patent, Copyright act

 Educational Contracts – Scholarship with the agreement to pay

 Financial Contracts – Lease, Loan, Mortgage etc.

Peace Treaty (Truce)

 Guaranteed by determining duties and rights of each party of

 Allah mentions in the verse of debt:

Avoiding conflict by determining the duties

Every saying or action or gesture that signals

Action (by deed)

Saying (by word)

 2. Adulthood is where a person can handle financial

 Mutual Consent: To indulge in a contract, willingly

 1. Goods/Kind: such as a sales contract

1. Mortgage contract = _________

2. Regulated by ethical and faithful values:

4. These must be enforced:

What are the ruling of

Bitcoin & Crytocurrency

Complete the following xercises

sequestration mortgagee - mortgagor

Not permissible because he doesn’t own it

Not permissible . He cannot rent it out without the owners permission

Illegal contract for it contains Usury

Based on exchange of items like buying and selling

based on getting ones right back. Like a security cheque .

Endowment – grant - Lending

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