Application of Shari`ah to financial products or FIQH MU`ÃMALAH

In a Muslim’s life, every aspect of living is bounded by hukm syari’ to obtain both world and
after life (akhira`) gain. This includes trades and transaction (mu’āmalah) and thus Fiqh
mu`āmalah can be translated as business and agreements in law of islam[Dr Aznan
Hasan,2011]. Business has been evolving through years of practice through theory and
practical in terms of economics, finance and accounting as they play a role in determining a
country’s growth and wealth. Therefore in accordance to Islam also, the growth of this
business challenge Muslim as for us, there are condition and rules need to be follow in which
mu’āmalah comes in.
To start, a few significant role of mu’āmalah is worth mentioning for readers to understand
the importance of it. Firstly, is to shape personality of a being with respect to faith and
discipline to elevate their position through mu’āmalah. For instance in Islam, most
transactions requires trust among parties which requires honesty and faith in which
mu’āmalah emphasize in. Secondly is to promote participation and activeness in doing
business . Thirdly is to avoid confusion in doing business among parties for which in
principle of mu’āmalah, fundamental guidelines are provided for doing business in
accordance to Islam. Fourth is to ascend and enforce the rights and duties of the parties
involves in mu’āmalah and final role is to establish the spirit of brotherhood as a primary
objective of transacting parties. The final role mentioned means that both parties doing
transaction should develop a bond like of brother like for which defines that each parties
should help each other, share their profits and views and raise level of tolerance appropriately
towards each other.
As define above Islamic transactions are regulated within Islamic laws obtain from Al-Qur`an
and Sunnah which concludes that principles of transaction must be in accordance to Islamic
law. In Islamic transactions (mu’āmalah) there are basics principles that needs to be referred
in order for transaction to be valid (sahih). Basic principles includes permissibility as a rule,
conclusion of contract by mutual consent, conformity of contract with objective of shari’ah,
the principle of wide circulation of wealth, transparency in commercial dealings and lastly
justice and fair dealings. Thus, with these principles , Muslims are able to make transaction
between each other not just between firms or banks but these applies in daily basis in buying
and selling between people. Inclining transaction with shari’ah does not just benefit Muslims
in the temporary current world we are living but also the world after as promised to us and
with permissibility, there should be prohibition in transactions.
The difference between the current convention transaction formal or informal practiced and
nurtured even to our country is existence of interest (Ribā) in transaction. In Islamic
transaction, taking interest is a prohibition which mean impermissible in any amount of
interest taken and difference in quality or value of items exchange are also considered ribā;
therefore prohibited. The two types of ribā are divided into loan contract( ribā al-duyun) and
exchange contract( ribā al-buyu) . Another prohibition in transactions is gharar or
uncertainty or some may refer it to risk in doing transactions. Other prohibition includes
qimār& maysir(gambling) , fraud and trickery and lastly selling items that are prohibited in
Islam.As cited in the Holy Qur’an “O you who have believed, indeed, intoxicants, gambling,
[sacrificing on] stone alers [to no other than Allah], and divining arrows are but defilement
from the work of Satan, so avoid it that you may be successful. 1 In the case or issue of
interest(Riba) being prohibited are backed up from a hadith that says “The Messenger Of
Allah ( Prophet Muhammad S.A.W) cursed the one who accepts Ar-Riba(Usury) and the ones
who pays it”2.
In Islamic business, contracts are the most fundamental step which determines the validity or
sahih of the transaction as in contract; parties will view and listen before agreeing to
continue. There are 3 main condition that comprises of parties, subject matter and
sighah(ijab&qabul) where sighah is simply define to be verbal exchanges of offer and
agreement between contractor. As to relate to Islamic Finance and Banking, there are many
contract in relation to transaction as such; sale-base contract, partnership based contract and
other contracts such as wadi’ah and Qard(loan-based contract) but here the highlight will be
on sale-based contract specifically on bayˁ al-Salam and bayˁal-istiṣnāˁ as in such contract
there are issues, condition and critique made by Islamic school of law specifically Ḥanafī
school.
In sales based contract, there are made up of different product segregated in term of
conditions, types and result. Sales or bayˁ is defined as barter between properties in an
honourable detailed manner by the Ḥanafī School. They are sometime classified in different
view such as type of exchange, views in mode of payment and exposure of capital and profit.
Product such as bayˁ al-Salam can be located in view of mode of payment. The term bayˁ al-
Salam means advance payment of deferred goods. This concept are practice until today, for
instance ordering an item overseas in which customers pays much earlier even before the
item arrive or present.
In Islamic law of Business, many jurist and scholar have different ways of interpreting the
definition of bayˁ al-Salam as for instance in Iraq, bayˁ al-Salam is known as Forward Sales
Transaction but all school of laws, jurist and scholar accept this concept as it was revealed in
the Qur’an, “O you who believe! When you deal with each other in transaction involving
future obligation in a fixed period of time, put them in writing” 3 and added with saying form
Prophet Muhammad(S.A.W) “Whoever pays money in advance(for fruit)(to be delivered
later) should pay for it for a known quality, specific measure and weight (for dates or fruit) of
course along with the price and time of delivery” 4.As a result, forward sales are practiced
from medieval times and over time it is learn and protected with condition (shart) and term
which differs among Islamic School of Law, jurist and scholar in Islam.
However majority of the schools agree on determining salam to be valid with these six
condition. Firstly is that the item are known for its group, secondly the characteristic of the
item, thirdly the amount of item that is ordered, fourth is the specification of delivery time in
salam’s case delayed time or when will it arrive, next condition is that the appraise must be in
transparent to both and lastly the location of delivery must be notified during the transaction.
In regards. In addition of this validity, Ḥanafī School added a condition in the existence of
goods or assets, such that the goods and assets that are bound to the contract of salam or
forward contract must exist from establishing the contract until the time of delivery. It means

1
Al-Maidah(4 );90
2
Sahih Muslim:1615
3
Al Baqarah(2):282
4
Shahih Bukhari 2240
that the item that is ordered must already be manufactured in meaning with the word exist as
if it is in process contract may fall on different category. Plus Ḥanafī School asserted that the
delivery delayed time is at least 30 days or equivalent to one month prior to the date of
contract being made.
In appraisal of asset in forward contract, Ḥanafī School raise another six terms; firstly is that
the appraisal of type of asset must be determine in currency . Secondly the appraisal must be
account to the quality of the asset, thirdly is the distinct in type of pricing, and fourth is the
appraisal with respect to metric index which means the price must take account of the weight,
length and others of the asset or item. They emphasize that the without the declaration of
price with respect to the weight of the object, the contract is defined to be invalid whereas in
length of object, Ḥanafī school are tolerable if price are not declare in respect to length and
sufficient if its price by type of object. Fifth and the sixth condition is that the material of
currency must be inspected as a defective of money may lower the value and lastly, the
payment and the evidence of payment being made must exist before parties split up and if the
adverse situation arises, Ḥanafī School consider the contract to be broken or invalid.
Bayˁal-istiṣnāˁ is another kind of sales based contract in Islamic banking world. As a contrast
to bayˁ al-Salam (forward contract), Bayˁal-istiṣnāˁ also involves agreement in transactions
but unlike forward contract, Bayˁal-istiṣnāˁ involve an asset requires to be constructed and
completed requested by a buyer to a producer or manufacturer. For example, a client
requesting a construction company to build masjid, customer asks a carpenter to make a chair
that can fit three people.
While school under Imām Abū Ḥanīfah define Bayˁal-istiṣnāˁ as an order financed by another
that requires payment in the future or in other words loan. Ḥanafis also practice involving the
term istiṣnāˁ in making the treansaction. Ḥanafis raise 3 requirements to make a transaction
by Bayˁal-istiṣnāˁ valid; first is the istiṣnāˁ or the asset ordered to be manufactured require
precise information such as type of goods to be produce, the quality and quantity of asset.
Secondly is involvement of task and accomplishment for the commodity and thirdly unlike
forward contract, Imām Abū Ḥanīfah does not fixed the date of completion and delivery in
which his pupil argues that there should be fixed date and time as to when the finished
product will be completed and delivered.
In case of termination of the contract in Bayˁal-istiṣnāˁ , Ḥanafis schools allow termination
both before start of production and after the completion of the product. In termination of after
completion of the product, buyer has the option to thoroughly examine the finished product
before deciding whether to continue with the contract or terminate is up to the buyer. While
other school argues in this in which some say, requester is subject to honour the contract
which means they are cannot terminate after completion of product.
The concept of Bayˁal-istiṣnāˁ are vastly argued among jurist, scholar and schools in term of
condition, requirements and others but regardless majority accept this concept through
analogy(Qiyas) bringing up the permissibility of bayˁ al-Salam through verses in the holy
Qur’an and saying by our Prophet himself.
Ḥanafis schools argue that through reasoning, the contract is invalid as it is prohibited due to
the existence of uncertainty (gharar) that may affect the completion of the transaction even
through but they accepted this concept by Istisḥān as it is a “need”, which is reasonable as
one cannot just create object from nothing in short amount of time as in reality production is
time consuming.
In Islamic Banking, there are so called parallel istiṣnāˁ in which there are a total of 3 parties
but one party usually act as a middle man in this concept which is usually the bank. As an
example, a client signed an istiṣnāˁ contract with a bank requesting for a building to be
manufactured, complete with the price and details. The bank later signs another istiṣnāˁ
contract with a manufacturer, for which the manufacturer are briefed with requested price by
the client and the detail. If the manufacturer agrees on the quotation therefore the parallel
contract can be made.
As above there are exactly two istiṣnāˁ contract being made in which the first agreement is
between client and bank. In this first agreement, quotation is being made by the client in full
specification of item to be manufactured or buildings to be constructed. This includes all the
necessary material that is required in completing it, the specific design and quality. Expected
cost may be provided by the client or the bank can obtain quotation from manufacturer or
producer and either way the bank can add a profit margin which must be notified and agreed
by the client. In the second agreement is done simultaneously between the bank and the
manufacturer or producer. Here, the first agreement will be brought up and will be notified to
the manufacturer so that they are briefed with the specification, date and pricing that they
need to met. After completion of the finished product, manufacturer will deliver the finished
product to the bank in which the bank will make payment to honour the contract and later the
finished product will then be finally delivered to the client at which, the client will be paying
the bank with the agreed added margin.
Subsequently with the sales based contract and other contract as well, conventional product
should be thoroughly study not only subject to banking but also daily basis transaction. As for
us Muslim, it is imperative that the income or asset we obtain and trade are in line with
Shari’ah rulings.

References

1. Dr Aznan Hasan,(2011), Fundamental of Shari’ah in Islamic Finance,Kuala

Lumpur,Malaysia,IBFIM
2. Dr Wahbah Al-Zuhayli,(2003),Financial Transactions in Islamic Jurisprudence
volume 1&2(Mahmoud A. El-gamal,Trans,), Dar al-Fikr Damascus,Syria
3. Zaharuddin Abdul Rahman,(2012),Contract& The Product of Islamic Banking, Kuala
Lumpur, Malaysia