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Contract in Islam (4 necessary elements (Contracting parties,…
Contract in Islam
4 necessary elements
Contracting parties
Medium/channel of communication
Subject matter
Primary objective
Leasing-Based Arrangements
Al-Ijarah is a contract for the usufruct of an asset, while its ownership still remains with original owner (lessor)
Four fundamental conditions
Asset remains the property of the lessor
Period of contract is specified
Rental and its payment schedule are precisely stated
Asset remains in working condition during the period of the
contract (lessor’s responsibility)
Operating Leasing
Bank can adopt the course of operating lease with its client
The obligation to arrange the asset can also be delegated to the client through wakalah (contract of agency)
Al-Ijarah al-Muntahiyyah Bi al-Tamleek(Financing lease)
al-Ijara wa al-Iqtina
Leasing ends with ownership transfer of asset to lessee
Differences of opinions among Muslim scholars regarding validity of this type of leasing, majority goes in favor
Equity-Based Arrangements
Mudarabah
where one partner (rabbul mal) provides capital, while the other (mudarib) provide his effort or expertise
Musharakah
when both parties contribute to capital
the quantum of effort put in by either partner is not critical in this regard
Critical points & conditions
All the arrangements represent a situation in which
Ownership of capital is shared, albeit for the duration of the contract
Rewards are addressed through a share in the outcome of the activity
Material losses are shared in proportion to ownership stakes of the various partners along with labor going totally unrewarded
Nature and scope of partnership must be defined
Nature of role of mudarib/entrepreneurs must be explicitly stated
Ratios must be precise and set before the contract goes into effect.
Major issues in IBF
Contentions regarding shari'ah-compliancy of some trading & leasing products
Some Muslim scholars believe that these products operate on the basis of time value of money
Trading-Based Arrangement
Murabahah
Re-sale above the cost price (cost-plus)
Shari’ah condition
Goods be clearly specified; quantity, kind/type, attributes
Price to be paid including the profit must be agreed upon
Complete/total possession must be given to buyer
There must be two separate contract between the bank and supplier, and between the bank and customer
Differences with BBA
Used for short-term financing
(less than one year)
Payment is made in lump sum
Used to finance working capital
BBA
Deferred payment sale
murabahah payment is being deferred
to a future date
Differences with Murabahah
Used for medium and long term
financing
Payment is made by installment
used to finance the
acquisition of assets