TOPIC 5:

FORMATION OF CONTRACT
in Islamic Finace
By:
Hussein Azeemi Abdullah Thaidi
hussein.ath@gmail.com

Pillar (Rukn) in Islamic

Perspective
Majority of Mazhab: An elementary portion

which forms something and the existance

of that something is depending upon the
existence of it
Pillar: Basic must-have component is a
particular object.
Pillar is different from condition (Shart)
which it is not included as a basic
constituent of a particular object

3 Pillars to a Contract
According to majority of Islamic schools of

thought (mazhab), there are 3 pillars to a

contract:
1. Contracting parties
2. Sighah (offer and acceptence)
3. Subject metter

Pillar 1: Contracting
Parties
Several conditions need to be fulfilled:
a) Legally

competent:
competence
is
measured by 2 aspects: puberty and
prudence of financial management.

Important to void fraud and disputes

Contracting party must reach an age of

maturity, intellectually matured and not a

bankrupt.

Cont..
b) Consent:

A trade transaction becomes

invalid if either the seller or the buyer is
unjustly forced to conclude it.

Prophet said: Selling should be only by

mutual consent (Ibn Majah)

Pillar 2: Sigah (offer and

Acceptance)
Sighah is the statement formed through

offer and acceptance by the parties of the

contract.
Offer: what is stated by the one who
transfers the ownership
Acceptance: statenebt by the one to
whom the ownership is to be transferred
usually, offer is issued by the seller and
acceptance is from buyer

Implication of Sighah in
Financial Contract
1. Representing the mutual consent of the

contracting parties
2. The contracting parties will have an effect
on the subject matter i.e the ownership of
the subject matter will be transferred to
the buyer and the seller will be entitled
for the consideration (price).

Conditions of Sighah
1. Understandable by all contracting parties

2.
3.
4.
5.

Clear-cut use of words

Remain in full capacity
Contracted in a single session
Acceptance should be in accordance with
an offer

1. Understandble by all
contracting parties
Disputes frequently occur when customers

failed to examine cautiously the terms and

conditions.
Eg: Most of the terms and conditions are
written in high frequency words of English.
In many cases, some customers from rural
areas cannot comprehend it.
It is responsibility of the customers to
consult the bank in order to comprehend
terms in the contract

2. Clear-cut use of words

The contract is affected without delay
The words and language of sighah which are

used must be something like I have sold, I

sold, I sell, I am selling etc.
Sighah must be not something which
indicates future times as well as ambiguity
like I will sell or I will buy.
Sighah must not be in any form of persuasion.
Eg: please buy it
Must not in the form of enquiry. Eg: do you
want to buy it?

Clear-cut use of words

(cont..)
The majority of mazhab preferred to apply

clear and expressive in order to avoid any

confusion.
Some of them insist on the use of past-tense.

But mazhab malikis opinion approve all

types of customary words which are

understandable by contracting parties
(This is the stronger view and suits the
current needs)
What matters is the objective of the contract

i.e to obtain consent

Issue: Muatah sale (sale without

offer and acceptance)
Can a contract be executed without a clear

and stated offer/acceptance? Like when a

person buys a drink through vending
machine.
Majoriti of mazhabs opined that such
transaction is permissible and valid as long
as both seller and buyer consented to the
price and the subject matter.
But mazhab shafii viewed it as invalid

3. Remain in full capacity

This element is not fulfilled if one of the

parties becomes incompetent to conclude

the contract either by insanity, bankruptcy
or anything alike

4. Contracted in a single
session
The offer and the acceptance have to be

concluded in the same session of a

contract. But it depends on the following
circumstances:

1. Presence of the offeror and the offeree in

the one single session of contract. The one

single session is fulfilled when the
following elements are satisfied:
Time: offer/acceptance are connected in one single
session without any long gap
ii. Place: must be at specific place
iii. The situation of contracting arties when meeting:
both of them are not leaving each other with an intention
of not wanting to proceed with the contract
i.

. Mazhab shafii: an acceptance need to be done

immediately after an offer is made.

. Majority mazhab: a customer may delay his/her
acceptance as long as the 3 elements are fulfilled.
o.

The majoritys view is more appropriate especially in the

modern world

2. Session of contract when contracting

parties is separated.
. Jurists have agreed that financial transaction
such as sale, musharakah etc can be
contracted even when parties are separated
physically in term of their places.
. The contract still can be concluded by
representatives
or
any
modern
communications systems such as whatsApp,
email etc. but must be performed in one
single session.

Few

contracts exempted from one single

session:
a) Aqad wasiat (estate administration)
b) Aqad wakalah (agent)
c)

Aqad wisoyah (estate administrator)

5. Acceptance should be in
accordance with an offer
Scholars agreed that the acceptance have

to be in sequence with the offer made.

Eg: when a seller offers a laptop for
RM2000, the acceptance from buyer must
be on the same subject matter with the
same price.

Pillar 3: subject Matter

Unsuitable Subject matter:

If the subject matter is not considered a

property of value. Eg: flesh of dead animal
(not slaughtered)
b. If the subject matter is nit owned by any of
the parties. Eg: fish in the sea or a bird in
the air.
c. If the subject matter forbidden by Shariah.
Eg: liquor, wine, pork etc..
a.

Conditions of Subject
Matter
1. Legally Permissible
2. Islamically Valuable
3. Precise

determination on the essence

(quantity & Value)
4. Exist and Legally Owned by the vendor
5. Deliverability of the subject matter

1. Legally Permissible
The object must be lawful and to be traded

in the view of Islam.

Any transaction involving unlawful item will
render the transaction as void.
Even if there is a law allows such unlawful
object to be in trade, the transaction will
still considered to be null.

2. Islamically Valuable
Value of the object must be recognized by

Islam
Things like liquor, pork and drugs, interestbased investment are invaluable in Islam.
Any kind of spent from proceeds of sale
from illegal objects are also forbidden

3. Precise determination on the

essence (quantity & Value)
Specific

determination on the essence,

quantity of the goods and its value is
required in every contract of exchange.
It is important to avoid ambiguity and
disputes.

But there are several contracts exempted

from this condition with the consent of the

other party:
a. Gift (hibah): a gift can be given even
without the knowledge of the recipient.
b. Will (wasiyyah): it is a valid will if it comes
from his shares of properties without any
certain specification.

4. Exist and Legally Owned by

the vendor
Subject matter must be legally owned by

the vendor/seller and is in existence at the

time of contract
But in the modern instruments, there are
several contracts which are permissible by
conventional law even the subject matter is
not yet owned by the seller at the time of
selling. Eg: short selling
In Islamic law of contract, such transaction
is prohibited.

5. Deliverability of the subject

matter
All mazhab have agreed that anything

which cannot be delivered or anything

ehich its deliverability cannot be assured is
not subject to be traded

References
Zaharuddin Abd Rahman (2012). Contracts

& The Products of Islamic Banking. Kuala

Lumpur: CERT Publication
Zuhayli, Wahbah (2002). Al-Muamalat alMaliyyah al-Mu`asarah. Damascus: Dar alFikr
Zuhayli, Wahbah (1997). Al-Fiqh al-Islami
Wa Adillatuh. Damsyik: Dar al-Fikr.
Abbas Husni Muhammad (1993). al-Aqd fi
al-Fiqh al-Islami.