ELEMENT OF CONTRACT : ELEMENT OF CONTRACT : CONTRACTING PARTIES CONTRACTING PARTIES AND SUBJECT MATTERAND SUBJECT MATTER

POLITEKNIK SEBERANG PERAI

CHAPTER 07

Contracting in contract with emphasis on the capacity of execution, the

acquisition of rights, deficient capacity for execution and the natural causes of impediments, the conditions of subject

matter, legality and the existence of subject matter, certainty of delivery and the legality of objects as well as

the underlying causes.

7.1 EXPLAIN CONTRACTING PARTIES 7.1.1 Define the capacity of execution (ahliyah) 7.1.2 Describe the capacity for acquisition of

rights (ahliyyah al-wujub) and deficient capacity for execution (ahliyyah al-ada al-Naqisah)

7.1.3 Identify the natural causes of Impediments

a. Sighar (Minority) b. Junun (Insanity) c. Atah (Partial insanity) d. Forgetfulness e. Safah (Folly) f. Murad al Maut (Death-illness) g. Intoxication h. Ikrah (Duress)

7.2 DESCRIBE THE SUBJECT MATTER IN A CONTRACT 7.2.1 Describe the conditions of subject matter 7.2.2 Relate legality to the existence of subject matter 7.2.3 Explain deferred contract (Salam) and contract of

manufacturing (Istisna)

AHLIYYAH• DEFINITION OF AHLIYYAH

Literally means capacity or competence.Technically, it has been defined by Muslim jurists as

“The eligibility of a person to establish right for and obligation upon himself”.

• A person may not have the requisite legal capacity to conclude transactions but he may still receive rights and obligations. A child or a lunatic person, for instance, cannot conclude contracts but are entitled to receive their share of inheritance and are obliged to pay for the necessities bought for them through their guardians.

• Muslim jurists have therefore recognized two types of capacities:

1- Ahliyyah al-wujub or Receptive (passive)capacity

2- Ahliyyah al-ada’or Active Capacity

• Ahliyyah al-wujub: “it refers to the capacity of a person to receive rights and obligations”.

It is possessed by all living human beings (Humanity or life)• Active (legal) Capacity (Ahliyyah al-ada)

It refers to: “The ability of a person to manage his wealth and exercise his rights and undertake obligations in a manner recognized by the Shari’ah”.- the principal elements for the capacity of performance (ahliyyah al-ada)

are:- The puberty and - The intellectual standard that a person has attained. This enables him to

distinguish between useful and harmful, profitable and unprofitable things or transactions.

Ahliyyah al-Wujub (capacity for acquisition of rights)

Ahliyyah al-Wujub al-Kamilah, or complete capacity for

acquisition, is found in a human being AFTER HIS BIRTH AND

BEFORE THE AGE OF PUBERTY. This makes one eligible for

the acquisition of all kinds of rights and obligations. In other

words, a child possess complete capacity for acquisition of rights

and obligation but until a child attains the age of legal puberty,

he lacks the capacity for execution. Though he cannot meet

them personally due to the absence of the capacity for

execution, the lawgiver allows his guardian (Wali) to stand in his

place and represent him. The child is also liable for any damage

caused to other’s property.

Ahliyyah al-Wujub al-Kamilah

• The example of this is Children:They receive rights and obligations as the guardians are acting

on their behalf. They can enter into the contracts of sale, or gift through their guardians.

They are also under obligations to pay zakat, zakat fitr or to pay for the damage which they inflicted on others properties.

• A child who has obtained a complete capacity to receive rights and obligation still cannot undertake contractual obligations except through his guardian. And if he does the ‘aqd is void.

• He is not also obliged to pray , fast or go to haj.

It is established for a fetus (Janin). Deficient capacity

implies that only some rights are established FOR THE

FETUS and no obligations are imposed on it. The reason

is that fetus is considered part of the mother in some

respect.

By virtue of this deficient capacity, the fetus

acquires certain rights; freedom from slavery, inheritance,

bequest and parentage. On the other hand, the fetus

cannot be held liable for the satisfaction of rights owed to

others. Thus, obligations and duties are not established

against fetus, because there is no question of its

performance.

Ahliyyah al-Wujub al-Naqisah

• Fetus is part of the mother as it does not have an independent personality.

• Fetus: is entitled to certain essential, beneficial rights: There are 4 rights granted:

1- A fetus has the right to be attributed to his parents.2- He is also entitled to receive his share of

inheritance .3- He is also entitled to receive his share in a will

(wasiyyah) .4- He is also entitled to receive his share in waqf.

• But a fetus is entitled to these rights only when it is born alive.

Ahliyyah al-Ada’ (capacity for execution of rights)

Complete capacity is established for a human being when he/she attains full mental

development and acquires the ability to judge. This state is associated with the

EXTERNAL STANDARD OF PUBERTY. The physical signs indicating the

attainment of puberty are the commencement of wet-dreams in a male, and

menstruation in a female. In the absence of this sign, puberty is presumed at the

age of fifteen in both male and female according to Abu Hanifah.

In addition to puberty, the possession of Rushd (discretion, maturity of

action) is stipulated as well. The Qur’anic sanction, to this effect, is as follows:

“Make trial of orphans until they reach the age of marriage; if then you

find sound judgment in them, release their property to them; but consume it not

wastefully.” (4:6)

Ahliyyah al-Ada’ al-Kamilah

• The principal elements for the complete active capacity are the puberty and the intellectual standard that a person has attained. This enables him to distinguish between useful and harmful, profitable and unprofitable things or transactions.

• Signs of puberty and prudence: -Puberty and Prudence is a hidden phenomena.-The scholars, therefore, rely on age as a determining,factor, which could establish them:

:According to the Hanafis, the age of majority is 18 for males and 17 for females.:Other scholars , it is 15 for both male and female.

Every person who has reached the age of majority may enter into contracts of sale and purchase, rent, wakalah,

partnership....

Ahliyyah al-Ada al-Naqisah is assigned to a child who

possess some discretion or to a Ma’tuh who has attained

puberty, but yet LACKS COMPLETE MENTAL

DEVELOPMENT. The person who possesses deficient

capacity cannot be held criminally liable.

Ahliyyah al-Ada’ al-Naqisah

1.Purely beneficial transactions•The transactions falling under this category are the acceptance of a gift of Sadaqah (charity). These are allowed for a person who has attained puberty but who can discriminate and has been permitted by his guardian (Wali) to exercise such acceptance.2.Purely harmful transactions•The granting of divorce, manummising (‘Itq), charity (Sadaqah), loan (Qard) and gift (Hibah) as well as making a trust (Waqf) and bequest (Wasiyyah) are considered transactions resulting in pure financial loss. 3.Transaction vacillating between profit and loss•Sale, hire partnership and other such commercial transactions are considered valid provided that the transactions are ratified by the guardian and also produce a significant result for the parties concerned.

HANAFI SCHOOL OF LAW CATEGORIES DEFICIENT

CAPACITY FOR EXECUTION INTO THREE CATEGORIES;

• Incomplete active capacity: a child between the age of eight and the age of puberty (age of puberty is 15 according to majority) - He has a incomplete capacity to attain rights and responsibility.- A child in this age group is called sabi al-mumaiyz or a child who

could distinguish between good and bad.• According to the Shafie and Hanbali a distinguishing child

does not have the requisite capacity and therefore, he cannot enter into any contract with or without the permission of his guardian. His guardian instead may conclude contracts on his behalf.

a. Sighar (Minority) b. Junun (Insanity) c. Atah (Partial insanity) d. Forgetfulness e. Safah (Folly) f. Murad al Maut (Death-illness) g. Intoxication h. Ikrah (Duress)

Samawiyyah (Natural causes of impediments)

Obstacles to Capacity:

• There are some factors that may prevent a person from dealing with his own property.• These factors disqualify a person from concluding a

contract, it could be beyond his power, or within his power.• Obstacles to capacity refer to “a situation where a

person is restrained from dealing with his property”.

Minority (Sighar)•It is the stage of a human being after the birth and before the age of puberty. A minor follows his parents or one of them in the matters of Islam. Islamic jurists maintain that a minor is liable for compensation for property destroyed by him, for goods and services bought, for maintenance of relatives and also for zakat according to some.•Hanafi School of Thought makes an exception in the case of a Sabi Mumayyiz and it is a matter of controversy whether the Khitab of Targhih or recommendations is addressed to him. He is not liable for punishments, but financial transactions undertaken by him are valid in certain cases.

A

Insanity (Junun)•Junun has no effect on Ahliyyah al Wujub, because rights and obligation are established for and against an insane person, who is deemed liable for Itlaf (destruction of property), payment of Diyyah and the like.•The rationale (Manat) for attribution of such capacity is humanity (Insaniyyah) and the insane is a human being.•Insanity, however, completely negates the Ahliyyah al-Ada because of lack of reason and intellect. An insane person, therefore, has no liability for worship, or punishment, and all his transactions are void.

B

Idiocy (‘Atah)•It is a condition in which a person at times speaks like a sane and normal person while at others he is like a mad man. It is also described as a state in which a grown-up has the mind of a child. The capacity of an idiot is deemed equivalent to that of a Sabi Mumayyiz who can be permitted by his guardian to undertake some transactions.•Where a person is inconsistent in his decisions and behaviours, which may change from time to time.•His status is the status of a child who could distinguish between good and bad. •He may perform contracts, which are in his interest, without seeking permission from his guardian. •He could not enter into contracts that are harmful. He may enter into contracts that fall between these two extremes with the permission of his guardian.

C

Forgetfulness•A person is not very careful about things though he has full knowledge of them, as distinguished from sleep and fainting fits in which such knowledge is lacking. Forgetfulness does not affect Ahliyyah al-Wujub nor does it affect the capacity for execution.•The legal communication (Khitab), however, becomes operative as soon as the person remembers. Transactions undertaken by such a person are valid and enforceable against him.

D

Safah (Folly)•Safah refers to a situation where a person’s financial decisions or activities run contrary to the guidelines of Shariah and reason.•A safeh is a person who is wasting or spending his wealth improperly. The opposite of safah is rushd which refers to the maturity of mind. Rushd is a person who has the ability to manage his wealth properly and is not involved in extravagance. •Only a court has the power to ascertain that a certain person is a safeh , and once a person is declared a safeh by a court the judge would become his guardian. The father or grandfather of a spendthrift person has no right of guardianship over him. •Any commercial transaction made by a safeh could not be executed unless the judge is satisfied that the transaction is in his favour and approves it.

E

• THERE ARE TWO TYPES OF SAFAH;Those who have become adult but are still safeh. He is not allowed

to interfere with his property. He would be under the supervision of a guardian.

:-According to Imam Abu Hanifah, after a safeh reaches the age of 25 years his property should be returned to him.

:-Reason: because when a person reaches this age he would attain maturity of mind.

:-According to The majority of the Fiqh Schools the prevention may continue until such an age at which a person may attain maturity of mind.Those who after attaining maturity of mind becomes safeh.

:-Imam Abu Hanifa :no prevention could be imposed on such persons.

:-The majority of the Fiqh Schools and Abu Hanifah’s own disciples Imam Abu Yusuf and Imam Muhammad Al-Shaibani: he may still be declared sefih even if he has attained maturity of mind; if it is proven that he misappropriates his property or spends it in ways that are unlawful or improper.

Death Illness (Marad al-Maut)•Maradul Maut has no effect on the capacity for acquisition or on the capacity for execution and it is, in fact, a condition of Taklif, because it is the capacity to perform and act that is affected here and not the capacity to understand it.•Refers to an illness which will lead a person to strong probability of death. This usually happens when the disease gets worse from day to day until death ensues.•Also includes situations in which people fear death, although they may not be sick, as when a person is sentenced to death. •A person who suffers from Marad al-Maut may make certain contracts: waqf , charity, or make gift of his property to some of his heirs or non-heirs.

F

• Some of his dispositions may cause injustice to his legal heirs and the creditors.

• In order to protect the interests of his legal heirs and creditors Islamic law, applying the rule of wasiyyah, has limited his dispositions to one-third of his wealth.

• For example, a person who suffers from mortal sickness may give a part of his wealth as a gift to one of his heirs. After his death if the other heirs do not agree, the gift is not valid. A gift to a non-heir is valid and does not need the approval of the heirs provided the gift should not exceed one-third of the asset.

Intoxication •Intoxication prevents a person from distinguishing what is good and bad or beneficial and harmful.•Intoxication could either be caused voluntarily (person choice and within his control) or involuntarily (beyond one’s control).Voluntary intoxication could be caused by wilfully taking intoxicants. Involuntary intoxication, could be caused by consuming certain medicines or taking anaesthetic or when a person is forced to take intoxicants.

G

• There are two views on the validity of a contract entered into by a person who intentionally takes intoxicants: 1- The Malikis and Ibn Taymiyyah and Ibn Qayyim argue that all contracts entered into by such a person are not valid.

Reason: intoxication whether voluntarily or involuntarily takes away a person’s rational power to make a proper decision. 2- The majority of the Fiqh Schools argues that contracts entered into by a person intoxicated involuntarily are not valid. But if intoxication is caused wilfully, the contracts entered into are valid.

Reason: this could serve as a sort of punishment to a person who voluntarily weakened his rational power.

Duress•It refers to a situation where a person is forced against his consent to enter into a contract which if left alone, he would not have entered into.•For example: when a person is threatened with death, or the deprivation of his limbs, or severe beating, which may result in his death. •This type of coercion destroys consent and invalidates a person’s choice. Duress does not destroy the capacity of a person but destroys his consent.•Conditions:

1-The one who uses force is capable of implementing his threats.

2-The person forced is certain that the one who uses force would implement his threat.

3-The nature of threat is such that it really endangers life.4-The threat is immediate.5-The force is used for an unlawful purpose.

•To the majority the contract is void

H

7.2 DESCRIBE THE SUBJECT 7.2 DESCRIBE THE SUBJECT MATTER IN A CONTRACT MATTER IN A CONTRACT

7.2.1 Describe the conditions of subject matter 7.2.2 Relate legality to the existence of subject matter 7.2.3 Explain deferred contract (Salam) and contract of manufacturing (Istisna)

Hanafi ijab qabul

Sighah ijabMajority qabul

Contracting Parties

Subject Matter

Pillars of contract

Pillars of contract

Subject matter known as mahal al aqad or al-mabi’.

According to Islamic Jurisprudence, the subject matter of a contract could be corporeal property, as in granting, sale and mortgage, privilege or benefit, as in rent or a human being as in the marriage contract which has as its subject the woman herself.

MAAQUDALAIH (AL-MABI’)-SUBJECT

MATTER

THE CONDITIONS FOR THE SUBJECT

MATTER

RELATE LEGALITY TO THE EXISTENCE OF SUBJECT MATTER

1.The subject matter must exist Islamic law requires that subject matter must

be in existence at the time when an ‘aqd is concluded. Otherwise an ‘aqd is void, even if the subject matter would exist in the future.

The wisdom behind this prohibition is the possibility of gharar or risk that is associated with the sale of the subject, which is not in existence.

Therefore the sale of the animal fetus yet to be born while it is still in the mother’s womb is void if the mother is not part of the sale.

Exception is given to bay al-salam (forwarding contract) , bay al-istisna (contract of manufacture), ijarah (contract of hire) based on necessity and customs.

2. The subject matter can be delivered. Islamic law requires that subject matter must

be able to be delivered to the contracting parties. Otherwise an ‘aqd is void.

Hence, it is void to sell a bird on the sky, fish in the sea or runaway horse.

3. The subject matter should be precisely determined

Islamic law requires that subject matter must be precisely determined and known to contracting parties. Sufficient knowledge about the subject matter is necessary to avoid future disputes.For instance: The genus, species, quality, and quantity should be clearly described.

If the seller describes goods to be sold as being of a certain quality, and the goods upon inspection proves to be of inferior quality or value, the law allows the purchaser an option whether to cancel the sale under the “option of misrepresentation” or to accept the goods.

4. The subject matter must be legal. Islamic law requires that subject matter must

be of commercial value, otherwise an ‘aqd is void.

Therefore the sale of the wine, blood, pork is void even if these articles are of value to others or according to civil law.

Similarly, the sale of items that can not be secured or possessed, such as fish in the sea, bird in the air, etc, But once possessed, it can become the subject matter of transaction.

SHORT SUMMARY OF RELATED LEGALITY TO SUBJECT MATTER1)The subject matter of sale must exist at the time of the

transaction.2)The Subject matter should be in the ownership of the

seller at the time of the transaction.3)The subject matter must be in the actual or constructive

possession of the seller at the time of the transaction. Constructive possession is where the risk and reward is transferred to the seller.

4)The subject matter should be a property having value.5)The subject of sale should not be a thing used for an un-

Islamic purpose.6)The subject of sale must be specifically known and

identified by the buyer.7) The delivery of the subject matter to the buyer must be

certain.8)The certainty of price is a necessary condition for the

validity of the sale.9)The sale must be unconditional.

Exception is given to bay al-salam (forwarding contract), bay al-istisna (contract of

manufacture) for the legality of subject matter.

What is Al-Salam and Al-Istisna’?

• Literally: ‘giving (`ita`), advance (taslif) and leaving.• Technically: ‘It is a sale contract whereby the seller

undertakes to sell some specific commodities to the buyer at an agreed future date in exchange for a price fully paid in advance on spot basis’.

• Meaning to say: The selling of goods which normally does not exist with the buyer during the time of contract such as wheat, cotton or bean with the condition that the delivery must be completed at the time of yield which the harvesting season.

Al-Salam

Legal Evidence• Ibn Abbas commented that: ‘I bear the witness that

al-Salaf (al-Salam) stipulated for a stated term had been made legal by Allah in His Holy Book and His permission is in it’, he then recites ‘O you who believe! Whenever you give or take credit for a stated term, set it down in writing’.

• Narrated by Ibn Abbas: ‘The Messenger of Allah came to Medina and the society used to pay in advance the price of fruits to be delivered within one or two years. The Prophet said: ‘Whoever pays money in advance for dates (to be delivered later) should pay it for known specified weight and measure (of the dates).

• Ijma`: Jurists are consensus with regard to the permissibility of ‘bay` al-salam’; since one of counter-values present in the contract.

• The need of it; agriculture.

BAY` AL-MA`DUM is illegal as in hadith: Do not sell anything which is not with you’.

1) Bay` al-Salam is an exception (Some scholars).

2) (Some other scholars) said: The above hadith implies that the seller is not permitted to make any transaction if he is not sure of being able to deliver the goods, because such a sale is gharar. (Hassan, 1986).

Objectives of Bay` al-Salam1) Farmers do not have enough capital & no

one could loan out based on Islamic law. Alternatively, ‘Bay` al-Salam’.

2) Helping producers in stimulating them in production and to fulfill the instant needs by producers/sellers. If the price is not paid in full, the basic purpose of the transaction will be defeated.

3) Helping purchasers in the sense that at a discounted price.

45

Condition of al-Salam1) The jurists from various schools of thought agreed that al-Salam is permissible as long as it observes (4Ps + 2Qs):

- Product: Types of goods are clearly stated- Period: The duration is clearly stated- Price: The amount of capital/price is clearly

stated- Place: The delivery place is clearly stated- Quality: The characteristics/specifications are

clearly stated- Quantity: is clearly stated

The things whose quality or quantity is not determined by specification cannot be sold through salam. For example – precious stones cannot be sold based on salam, because every piece of precious stones is normally different in terms of quality, size or weight and their specification is not generally possible.

46

47

2) The majority of jurists (Hanafie / Shafie / Hambali) agreed upon the precise date of delivery is obligatory. No vague time period (winter/summer). Except Maliki.

3) Fully paid in advance. The seller must take possession of the price in full before departing one another; otherwise it will be tantamount to the sale of debt for a debt. However, Imam Malik – Sellers may give a concession of 2 or 3 days to the buyers (Taqi Usmani, 2005).

4) The price of Salam is normally lower than the cash & deferred payment. The jurists agreed upon full payment by the purchaser, so he should be given a discount price.

5) The product must not be attributed to a certain location. If the location is easily affected by diseases or natural disaster, it is not permissible to deal with Salam.

48

6) Must not involve ribawi items from the same category (Currency with Gold / sugar with salt). These items must be effected on the spot basis. Paper money can be used only in payment of a price, it cannot serve as a commodity to be sold.

7) Availability of commodity – Hanafi: The commodity remains available in the market right

from the day of contract up to the date of delivery. Unavailable commodity – salam cannot be effected though it is expected will be available at the date of delivery.

Others: Availability is not a condition for the validity of salam. What is necessary, should be available at the time of delivery.

8)Time of delivery – Hanafi/Hanbali: The time of delivery is, at least, 1

month from the date of agreement. Earlier than 1 month, salam is not effected. Argument: Salam is allowed for the needs of farmers/traders, then should be given enough opportunity to acquire the commodity; less than 1 month does not normally effect the lower price than the price in spot sales.

Imam Malik: Should not be less than 15 days – because the rates of the market may change within a fortnight.

Imam Shafie: The Prophet has not specified a minimum period for the validity of salam. The expediency may differ from time to time and from place to place. (Taqi Usmani, 2005).

49

9) Ensuring the delivery – The buyer/financier can ask him to furnish the security, in form of a guarantee (kafalah) or mortgage/pledge (rahn). The guarantor may be asked to deliver the commodity. Or the buyer/financier can sell the mortgaged property and the proceeds can be used to realize the commodity from the market. Imam al-Bukhari has captioned 2 chapters ‘Kafil Fi Al-Salam’ and ‘Al-Rahn Fi Al-Salam’ and reported the Prophet borrowing grain from a Jew against the pledge of an iron armour. Ibn Hajar explained: Imam Al-Bukhari intended to describe the permissibility of guarantee in Salam by co-permitting Rahn and Kafil. (Ayyub, 2007). Al-Shafie: the armour also amounts to a surety in a salam transaction. (Hassan, 1986).

10) Parallel salam has 2 separate contracts – Each one must be independent of the other. They cannot be tied up in a manner that the rights and obligations of one contract are dependent on the rights and obligations of the parallel contract. Each contract should have its own force and its performance should not be contingent on the other.

11) Parallel salam is allowed with a third party only – The seller in the 1st contract cannot be made purchaser in the parallel contract of salam, because it will be a buy-back contract. (Taqi Usmani, 2005).

12) Option (Khiyar) in Salam – Jurists disallow ‘option of condition’ (Khiyar al-Shart) in salam because it disturbs or delays the seller’s right of ownership over the price. – The buyer does not have the ‘option of seeing’ (Khiyar al-Ru`yah), but after taking delivery, he has the ‘option of defect’ (Khiyar al-`Aib) and the option of specified quality. If it not has the quality as agreed, the buyer can rescind the sale; amount of price can be recovered without any increase.

50

Literally: “Asking or requesting for something to be manufactured”.

Technically: “Requesting a manufacturer to make a particular goods to a particular specifications (subject matter); or in a particular way (skill); or a contract with a manufacturer to work on a particular thing (subject matter) which is under his obligation”.

Al-Istisna’

Legal EvidenceA) Quran:

1) “Allah has permitted trade and forbidden interest”. (Al-Baqarah, 2: 275).

NهNطQ SخSب Sت QذXي ي SقNومN ال SمSا ي XالQ ك SقNومNونS إ Sا الS ي ب gالر SونN Nل jك Sأ QذXينS ي ال Nلj jعN مXث Sي jب QمSا ال Xن Nوا إ QهNمj قSال ن

S Xأ XكS ب  ذvSل gسSمj jطSانN مXنS ال ي Qالش�   Sا ب gا �الرS ب gالر Sم QرSحSو Sعj Sي jب هN ال Qـ SحSلQ الل  �وSأ

2) “When you are dealing with a future/debt obligation, put it down in writing”. (Al- Baqarah, 2: 282)

NوهN Nب jت م�ى فSاك Sل� م�سSجS Sىv أ Xل jن� إ XدSي Nم ب Sنت SدSاي XذSا ت Nوا إ QذXينS آمSن �هSا ال يS Sا أ  �ي

52

B) Hadith: 1) Jabir bin Abdullah reported that a woman

had said: “O Rasulullah! Would you like me to make something for you to sit on it (during the khutbah) since I have a slave who is a carpenter. The Prophet replied: You can if you want. So the woman made the rostrum (minbar) for Him”.

عن جابر بن عبد الله أن امرأة قالت يا رسول الله أال أجعل لك شيئا تقعد عليه

فاءن لي غالما نجارا قال ان شئت فعملت المنبر

53

54

2) “Reported by Nafi’, Abdullah told him: that Rasulullah SAW has ordered a golden ring. When he put on the ring, he will turn its stone towards the palm of his hand. Later, there were a lot of people who also ordered manufactured golden ring for themselves. Then Rasulullah SAW stepped on the mimbar and praised Allah SWT and said: “I had once ordered a manufactured golden ring but now I am not wearing it anymore”, then he threw the ring and followed by the people.”

Majallah al-Ahkam al-`Adliyyah also provides that istisna` is permissible (article 389) provided that the descriptions and features of the ordered subject matter have been mutually agreed upon (article 390). Article 391 of the Majallah states that istisna` payments need not be made at the time of the contract. Istisna` and istisna` muwazi have also been allowed by the AAOIFI as long as the relevant principles are being followed accordingly. (AAOIFI, Al-Ma`ayir al-Syar`iyyah, Standard no. 11 (Al-Istisna` wa al-Istisna` al-Muwazi), paragraph 2 and 7.)

55

The Potential of istisna`

•Financing the construction industry – apartment building, hospitals, schools and universities.

•Development of residential/commercial areas and housing finance schemes.

•Financing high technology industries such as aircraft industry, locomotive and ship-building industries. (Ayyub, 2007)

56

Conditions of Istisna`

1) Detailed specifications: Category, quantity and characteristics of products. To avoid ignorance (jahalah).

2) The products are to be manufactured. It is invalid on items which cannot be manufactured such as fruits and fresh meat. These 2 items are under salam.

57

58

3) The raw materials are provided by the manufacturer.

4) Place of delivery must be specified.

5) Payment: In advance @ deposit @ installment – Istisna’ deals with production in stages all of which require capital injection. Whereas, in salam the lump-sum payment is parallel with the nature of agriculture production, when most activities took place in the planting stage. It is important to release all capital during this critical stage, after which less capital is required.

Istisna` and Salam involve the selling of something that does not exist (bay` al-ma`dum) at the time of contract (only the raw materials exist).

Salam vs Istisna’

Istisna` Salam

Motive The need of the buyer.

The need of the seller for cash to support his agricultural production.

Manufacturing Product that needs to be manufactured.

No matter whether it needs manufacturing or not.

Termination It is not a mandatory contract which allows its cancellation by either one of parties before the manufacturer starts the work. But according to Abu Yusuf, it is mandatory.

It is a mandatory contract (aqd lazim). Cannot be terminated by either one of parties once it has been effected.

Payment Full payment is not mandatory (more flexible). It is valid to pay the deposit (urbun).

Full payment in advance is mandatory.

Istisna` Salam

Subject matter 1) Specific product that is manufactured based on detailed description.

2) No need to have similar product in the market.

1) Fungible product as in the market. So that if the seller is not able to produce the goods by himself, he can get the same from the market.

Penalty Penalty in the form of a reduction in price on account of a delay in delivery will reflect the income of the purchaser (the principle of Shart al-Jazai approved by jurists).

Penalty for late delivery shall go to charity managed by the financier. (Since the price already pre-agreed paid lump-sum at the beginning of transaction. If it is modified towards the end of maturity date would lead to gharar)

Istisna` Ijarah

Materials The materials for production are provided by the manufacturer.

The materials are provided by the customer.

Asset risk Asset risk is transferred to the purchaser soon after delivery of the item to him and he has to pay the price irrespective of what happens to the asset.

Asset risk remains with the owner (lessor) and the lessee has to give rental only if the asset is capable of being used as per normal market practice.

العالمين رب لله والحمد

جزاكم الله خير الجزاء

THANK YOU