Kuliah 1 ESSENTIAL SHARIAH & FIQH RULINGS IN COMMERCIAL CONTRACTS

Universiti Kebangsaan Malaysia Faculty of Law Pursuing PHD Program in Law P58462
Musbri Mohamed DIL; ADIL ( ITM ) MBL ( UKM ) 1

Nota Penulis

Syukur Alhamdulillah kerana Allah s.w.t membuka kesedaran tentang keperluan serta kepentingan berkaitan kewangan dan ekonomi Islam yang mulai bercambah dengan baik di lingkungan umat Islam di peringkat nasional, serantau dan global menjelang Abad ke 21 kini. Penulis bukan seorang pakar di dalam perundangan Islam namun merasa bertanggungjawab untuk bersama-sama rakan Islam yang lain untuk berdakwah tentang muamalat Islam khususnya sistem kewangan dan perbankan Islam. Pandangan penulis di lembaran ini agak ringkas dan pembaca perlulah merujuk kepada lain-lain bahan yang lebih terperinci bagi memperolehi kebaikannya secara optima dan semuga ianya menjadi amalan di dunia yang membawa kebaikan di akhirat buat kita semua. Insyallah.

Musbri Mohamed September 2011

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Firman Allah s.w.t melalui Surah Al-Baqarah Ayat 278 :"Wahai orang-orang yang beriman, bertaqwalah kamu kepada Allah dan tinggalkanlah saki baki riba sekiranya kamu benarbenar beriman, sekiranya kamu tidal meninggalkannya, istisharkanlah perang dengan Allah dan RasulNya"

Salah satu dari Tujuh Dosa Terbesar Berdasarkan hadis Nabi Muhammad s.a.w :

Ertinya : "Jauhilah tujuh dosa besar yakni syirik, sihir, membunuh tanpa hak, makan harta anak yatim, makan riba, lari dari medan peperangan (kerana takut) dan menuduh perempuan yang suci dengan zina ( tanpa saksi adil) "
Riwayat al-Bukhari dan Muslim

GENERAL RULE IN COMMERCIAL CONTRACT Initial legal ruling in commercial contract is permissibility. Contrary to act of devotion (ibadah). No legal injunctions is needed in sanctioning new contract. Every contract is considered lawful and acceptable if no principle of Sharah is violated. Open a very wide door for further innovations.

THE PROHIBITION OF RIBA IN ISLAMIC LAW Riba was prohibited by the Quran in four stages. 1st in al-Rum : 39 2nd in al-Nisa : 160-161; 3rd in Ali Imran ; and 4th in al-Baqarah : 275-285 In the 4th stage, the final prohibition of riba is made conclusively and decisively in al-Baqarah (2: 275): ...they say: trade is like riba, but Allah has permitted trading and forbidden (haram) riba (usury)...

Sunnah There are also a number of narrations from the Sunnah on the prohibition of riba Some of the narrations give general prohibition of riba, e.g.: The Prophet of Allah s.a.w cursed the receiver and the payer of riba, the one who records it and the two witnesses to the transaction and said: they are alike (in guilt).

OBSERVATION From the provision in the Quran and Sunnah, all the jurists deduced that riba is prohibited (haram). However, there are lengthy discussion among jurists on the meaning, scope and types of the prohibited riba. SOME DEFINITIONS OF RIBA Riba literally means: excess, increase, expansion, growth. Definition 1: Riba is every excess in return of which no reward or equivalent counter value is paid. Definition 2 : Riba is predetermined excess or surplus over and above the loan received by the creditor conditionally in relation to a specified period.

RIBA AL-DUYUN (LOAN) The basis for the prohibition of riba in loan transactions as a result of delay in time is the Quranic verses, e.g 2:275.

In loan transactions, riba will occur if the three conditions below are fulfilled: (1) There is excess or surplus over and above the loan capital;Determination of this surplus in relation to time;Stipulation of this surplus in the loan agreement. (2) The debtor borrowed money to be paid in certain time, and the amount is more that the amount borrowed. (3) A creditor gives a periodic loan and takes monthly interest. The capital sum lasts until the expiration of the period. Upon expiry, if the debtor cannot pay, the period to pay back the capital will be extended and interest will charged.Arising out of exchange contract, a buyer must pay a consideration. If he failed to settle on time, the period will be extended by increasing the amount (principle + interest).

Riba al-Buyu (exchange) The basis for the prohibition of riba in the exchange of ribawi commodities is the famous hadith of the Prophet on six commodities: Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, salt for salt like for like, equal for equal, and hand-to-hand (spot); if the commodities differ, then you may sell as you wish, provided that the exchange is hand-to-hand or spot transaction. These commodities can be classified under two main categories which make the illah (ratio decidendi) for their prohibition: Medium of exchange (currency) : gold and silver Staple foods : wheat, barley, dates and salt * Any other items, even though not mentioned in the hadith but serve the same purpose will be considered as having the same illah by way of qiyas (analogy)

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OBSERVATIONS In modern banking, riba may occur as a result of many factor, such as : delay in time and excess in quantity Example 1 : interest charges for bank loans are riba al-nasiah (due to delay in time) because they were charged in relation to the time given to repay the loans: Example 2 : the delay in the exchange of currencies may amount to riba al-nasiah currently exchange must be cash /spot because currencies are riba-bearing (ribawi) items Riba in certain controversial contract (bay al-inah, bay aldayn, etc)

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The issue of Riba has long been a problem for Muslims. Even what constituted Riba itself has been a subject under serious discussion. The existence of Riba has been argued to be a major factor for the low participation of the Malays in the economic activities of Malaysia. The establishment of BIMB is a major step towards an interest-free financial system in Malaysia. This marked the establishment of more Islamic commercial institutions under the new mode of the Islamization Policy of Dr. Mahathir Muhammad.

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THE PROHIBITION OF GHARAR IN ISLAMIC LAW All jurists agree that gharar should be avoided in commercial exchanges contracts. This is because gharar is one of the elements prohibited in Islamic law.

MEANING OF GHARAR
Literally : gharar in the arabic languanges covers a number of negative elements, e.g., deceit/fraud , uncertainty, danger/risk, and peril/hazard (khatar) that might lead to destruction and loss. Technically: gharar is often used to refer to uncertainty and ignorance of one/both of the parties in a contract over the substance or attribute s of the object of sale, or of doubt over its existence and availability at the time of contract. Thus, gharar exists when its substances or consequences are hidden and unknown to the contracting parties.

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GHARAR IN THE QURAN The word gharar and its derivatives appear in the Quran in 27 instances. But, in all these instances, the word gharar has been used to refer to theological and religious themes, i.e., the need for the believers to be aware and vary of the deceptive character of the worldly pleasures of this profane life, and not to be deceived by such temptations Thus, the jurists did not use these 27 references to gharar in the Quran to justify the prohibition of gharar in contracts they were meant exclusively for religious themes.

However, through the observations of the jurists, and guided by the many ahadith on gharar, it has been concluded that gharar is an element that comes under the meaning of other terms that are expressly prohibited in the Quran, e.g.: al-batil (falsehood/deception), al-maysir (gambling) and riba (usury)

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The prohibition of al-batil is made, for example, in Surah al-Nisa (4:29) O you who believe! Eat not up your property among yourselves unjustly (bil batil i.e., by falsehood and deception) except it be a trade amongst you, by mutual consent... The jurists agree that the word al-batil in the above verse includes all categories of illegal and defective elements in commercial contract, including that of gharar

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GHARAR IN THE SUNNAH

The sunnah uses the word gharar and its derivatives much more extensively that the Quran in the sense that several new meanings are added. In relation to commercial transactions, the Prophet s.a.w in many of his sayings directly prohibited the sale involving gharar (uncertainty) and jahalah (ignorance). Thus, the prohibition of gharar is made conclusive by the sunnah/hadith of the Prophet s.a.w

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EXAMPLES OF THIS KIND OF SALE IN HADITH

Sale of fish in the sea, birds in the sky. Sale of unborn calf in its mothers womb. Sale of runaway animal, slave involve item which may or may not exist However, the Prophet did not lay down the principles (qawaid) for the prohibition of gharar. Examples given in the hadith were some of the manifestations of the doctrine, but not principles. This has led to the dispute among jurists on the area and coverage of gharar.

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PURPOSE OF THE PROHIBITION OF GHARAR To ensure full consent and satisfaction of the parties in a contract. Without full consent, a contract may not be valid. Full consent can only be achieved through certainty, full knowledge, full disclosure and transparency, and zero deceit/fraud. Gharar also results in the risk between the parties being built into the contract at its inception and which must result in a profit for one party and a corresponding loss for the other (zero-sum gamesimilar to gambling).

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Application of Gharar Brodly speaking, gharar will effect the validity of contract if it occurs in these areas: Gharar in kind/type/attribute/quantity of the object; Gharar due to delivery time; Gharar due to the price /mode of payment; and Gharar over the ability to deliver.

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'Gharar' is a broad concept and has been given a variety of definitions, which will not be reviewed here. Suffice it for our purposes to highlight an aspect of 'gharar' which coincides with 'maysir' and 'qimar', and that is the uncertainty over gain and loss which is in common between 'gharar' and gambling. Although many jurists in the Maliki and Shafie schools have defined 'gharar' by this description, it is not an accurate definition as this would also apply to many contracts such as partnership and 'mudaraba'. It is evidently difficult to draw a clear distinction between 'gharar' and 'maysir'. One thing that merits attention though is that 'maysir' is played for its own sake often as a game whereas 'gharar' proceeds over sales and contracts. 'Gharar' is usually not the purpose of a contract but incidental to it whereas 'maysir' is the purpose of the game which has no other subject matter or purpose then winning and beating one's opponent in order to take his property.

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Maysir The avoidance of transactions involving maysir (gambling). Involves the creation of risk for the sake of risk. A combative relationship between two contracting parties, each of whom undertakes the risk of loss and the loss of one means gain for the other. Apply to all game of pure chance. No economic activities are gained in the practice. The gambler will simply seek to amass wealth without efforts. Gambling is gharar in its worst scenario Prohibited by al-Quran in Surah al-Maidah (5:90)

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Speculation And Gambling Many observers regard speculation and gambling as synonymous terms. One hears of "investing in securities" and "gambling in futures". Others regard them as distinctly different activities. The main difference between them relates to the nature of risk and potential contribution to the social good. Gambling involves creation of risk for the sake of risk. Horse racing and poker, for example, create risks that would not be present otherwise. The gambler chooses to seek out risks that were not there before. Even if they had been there before, they had not concerned him personally and no social good is accomplished by gambling. Investing, on the other hand, consists of committing capital to an enterprise in the hope of earning a profit. The difference between investment and speculation is largely semantic, but most would agree that commitments with time horizons longer than several months qualify as investment regardless of whether the commitment is in securities, real estate, or commodities.

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Defining speculation or identifying the speculator is always difficult. Many have stated that no clear definition can be given, for the distinguishing lines between investment, speculation, and gambling are not always clear, and the gray area between them tends to persist regardless of particular definitions. Speculation consists of risks that are necessarily present in the process of marketing goods and services in a free-market economy. For example, as a wheat crop grows and is harvested, concentrated, and dispersed, the obvious risks of price changes must be taken by those who own the wheat or have a commitment to buy it. These risks would be present whether futures markets existed or not. If speculators were unwilling to take them, someone else would have to do. The issue here is whether the winners and losers would be the producers and consumers, or whether the price risks would be shifted to speculators, the government, or diffused through market mechanisms.

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The motivation of many individual speculators could well be identical with that of gamblers, with the main difference being that futures speculation reallocates risk from those who do not want it to those who do. Futures speculation, in other words, directs the appetite for risk into an economically productive channel. Futures markets are basically risk-transfer mechanisms that redistribute price risk, and speculators are those who assume it. Without them, there would be no one to whom hedgers could shift their risks. Speculation in the positive sense consists of intelligent and rational forecasting of future price trends on the basis of evidence and knowledge of past and present conditions. Speculators in commodities are not simply gamblers, for the risks are real commercial risks, quite a different matter than the activity of a gambler, who assumes no risk other than that created by the rules of the game.

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A common criticism of futures speculation is that it causes volatile price moves that cause considerable hardship to those engaged in more productive pursuits. Wide publicity is given to the relatively rare, but highly dramatic, manipulations that cause many to conclude that speculation is synonymous with gambling. Speculators can point to equally scandalous events throughout history. Some early instances of manipulation by Americans come to mind: Hutchinson, Leiter, and Patten in the late nineteenth century and, in 1980, Bunker Hunt's foray into the silver market, all of which resulted in price distortions. Since then, however, balance has returned to the market and this, aided by the introduction of regulatory and punitive legislation, has diminished the prospects for such manipulation.

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Moreover, existing data do not confirm the suspicion that futures trading is dominated by large speculators. Data may vary from market to market, but, regardless of market, the total holdings of large speculators' long and short positions are less than 20 percent of the total holdings of small traders. Large speculators probably constitute less than 2 percent of the total futures trading population. Major price movements are usually caused by basic changes in the supply or demand for a given item and only rarely by a group of speculators creating a self-fulfilling prophecy. Evidence obtained from considerable research suggests that "speculation probably does more to smooth price fluctuation than to increase it. Research on the behavior pattern of such goods as onions and live beef cattle before and after the institution of futures markets have supported, on the whole, the conclusion that futures trading has not increased price fluctuation in the cash market. Statistical analysis shows that the volatility of futures prices is approximately the same as that of equity prices.What makes futures trading more prone to speculative risk taking is the high degree of leverage that results from low margin requirements. This low margin facility is not available in the stock market and is the main factor that is accountable for the high volume of speculative trading in futures.

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TRANSACTION INVOLVING PROHIBITED COMMODITIES It is also not allowed to conclude contract on illegal commodities such as pork, liquor etc. Illegality of certain commodities has been spelt out clearly in texts of al-Quran and the Sunnah of the Prophet. E.g : Surah al-Maidah 5:5 Surah al-Maidah 5:90

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ENCOURAGEMENT OF TRADE BY MUTUAL CONSENT The Quran encourages work and trade. The Prophet s.a.w himself was a trader. The encouragement of trade is evidenced by the many instruments of trade available during the Prophets lifetime and in Islamic history thereafter.

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BUSINESS CONTRACTS RECOGNISED IN ISLAM

Contract of sale and purchase (bay) including all its subdivisions, like: Normal or spot sale. Mark-up sale (murabahah). Deferred payment sale (BBA). Sale with advance payment but deferred delivery (bay alsalam). Sale for future delivery of goods with flexible payment of the price or manufacturing contract (bay al-istisna). Sale of currency (sarf)., etc

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Some controversial sales : Sell and buy back (bay al-inah). Sale of debt (bay al-dayn). Islam recognises partnership contract which are mainly based on profit and loss sharing (PLS), e.g. : Mudharabah Musharakah A relatively new invention in this regard is : Musharakah mutanaqisah

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Islam recognises public and private project financing, e.g.:

Leasing (ijarah) private; Endowment (waqf) private/public; State treasury (bay al-mal) public. Modern form of private project financing : Operational lease Financial lease AITAB (hybrid contract)

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Islam recognises other additional contracts to provide security to the parties in a contract, i.e., the contract of security (uqud al-tawthiqat), e.g surety ship/guarantee (kafalah) involves three parties. Mortgage (rahn) : involves two parties. These security contracts are normally combined with other types of contract, e.g.The contract of BBA may be secured by a contract of security involving collateral (rahn). Other contracts recognised in Islamic law: Contracts of trusts (al-amanat), e.g : safe-keeping (wadiah). Contract to do a specified task, e.g.: commision (jualah); agency (wakalah).

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CONCLUSION Islamic law is dynamic due to the continuous interaction between fiqh and Shariah. The general rule in Islamic finance and commerce is permissibility, except when the activity involves prohibited acts, i.e., riba , gharar , maysir and prohibited commodities. The variety of contract expressly and impliedly allowed by Islam are potential instruments to meet current and contemporary financial needs. The range of Islamic financial products is open to further expansion and reinterpretation by the scholar (fiqh), as long as they are guided by the Shariah Musbri Mohamed October 2011 Continue to Kuliah 2

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