Option (Khiyarat) in Islamic Financial Contract

Presented By:

230712 Yuhan Satapo

230716 Siti Mariam Waedueramae

230823 Simsit RonKriya

231108 Chek Nazirah Binti Chek Yum

231219 Marsyanila Adinda

233255 Ku Azamuddin Bin Ku Azam

233835 Nur Dini Binti Shuib

235080 Siti Nurhanani Binti Abdul Hamid

The options / rights for contracting parties to confirm or exclude themselves from

performing the contract

Table of contents

Introduction Definition Type of Khiyar

Khiyar Majlis (Option of Meeting)

Khiyar Ta’yin (Option of Determination)

Khiyar Shart (Option of Condition)

Khiyar ‘Aib (Option of Defect)

Khiyar Ru’yah (Option of Inspection)

Khiyar Naqd (Option of Payment) Conclusion

INTRODUCTION

Islam promotes justice and prohibits unlawful behaviours. If any individual involved in unlawful actions, he will be seriously punished. Thus, in the context of business transaction, if a party falls in injustice transaction caused by another party, the minor party is given a right to verify or cancel the contract. This is the reason of the existence of Khiyar or option in Islamic Finance. It has purpose of flexibility for the practice of Islamic finance itself as it is giving the right to the buyer as well as the seller with clear agreed price and condition within predetermined time.

Wahbah al-Zuhaili defines Khiyar as “an option to continue or discontinue the contract due to certain circumstances.”

The 2 Possible Decision:(i) To RATIFY by choosing from among the alternative objects; or(ii) To CANCEL the contract entirely

The Establishment of Khiyar(i) The rule of the Shari’ah(ii) The agreement between parties

DEFINITION

Khiyar al-

Ta’yin

Khiyar Majlis

Khiyar Shart

TYPE OF KHIYAR

Khiyar ‘Aib

Khiyar Naqd

Khiyar Ru’yah

KHIYAR MAJLIS

(Option of Meeting)

KHIYAR MAJLIS

• Khiyar Majlis is the right for both parties, between the seller and buyer to perform the transaction or cancel it as long as still in place (the ceremony) of the transaction.

•The option is available to either parties concerned and should be decided before conclusion of contract.

•When both have departed from the ceremony, then the right of the khiyar will be lost until there can be made no more changes to it.

•Based on Hadith from the Prophet Muhamad (PBUH) :

( ومسلم ( البخارى رواه يتفرقا مالم بالخيار البيعان

Meaning :

“Sellers and buyers can do khiyar before it separates“ (Narrated by Bukhari and Muslim).

The option is terminated by :

•Natural termination of the Majlis.

•Loss of the object during the Majlis.

•The death of either of the contracting parties.

•Unilateral refusal of the option, whether explicit or implicit

by conduct such as changing topic.

•By agreeing to a Khiyar al-Shart.

KHIYAR AL-TA’YIN

(Option of Determination)

KHIYAR AL-TA’YIN

KHIYAR AL-TA’YIN is the right of the buyer to choose and

determine one object out of two or more which are proposed to him/her and,

the seller to specify the subject matter of the contract.

Effects of the option

Imam Shafi’is and Hanbalis - the option of ascertainment is not

permissible.

Imam Hanafis and Malikis - the option of ascertainment is permissible.

Duration of Khiyaral-Ta’yin

Imam Abu Hanifah - the period of this option is 3 days.

Imam Abu Yusuf and Muhammad - there are unlimited time for this

option

Condition of Khiyaral-Ta’yina. The items should be ranged into three categories, which are good, medium,

and poor.

b. Every products should be difference in value and the price of each items must be known.

c. The period of the option should be determined.

Effects of the Khiyaral-Ta’yin For items: the option of determination is binding for the seller and no-

binding for the buyer. So, the buyer have the right to revoke purchase all the three items.

For the termination of time period: For Imam Hanfi’s: if the contract is on the period of termination, the

contract become binding and the buyer must buy the ascertain one of the item.

For Imam Maliki’s: the option must be exercise within the period otherwise the contract is void.

Factors terminating the option

Exercise of the contract whether express or implied

Destruction of one items.

Death of one of the possession of the option.

KHIYAR SHART

(Option of Condition)

KHIYAR SHART

Khiyar al-shart or option of condition is a particular choice that is set within the conditions of certain contract, which is an option in sale contract concluded at the time of signing the agreement.

The buyer and seller have a right to agree or to cancel the contract within a specific number of days.

Khiyar al-shart gives a duration of time, so that the buyer and seller have time to do evaluation in terms of benefit and costs involves in that contract.

Legality of Khiyar Al-Shart

It is reported that the Holy Prophet (pbuh) granted this option to Hibban ibn Munzir who complained that he was defrauded each time he made purchase. He was directed by the Holy Prophet (pbuh) to say whenever he made a purchase “No Cheating, and I reserve option for three days”

The purpose of option is to give chance to a person who suffered some loss in transaction to revoke contract within stipulated time

Termination of khiyar Al-Shart

The death of either buyer and seller of the contracting parties.

Termination of the period.

The destruction of the subject matter due to any accident such as burn in the fire or lost.

KHIYAR ‘AIB

(Option of Defect)

Khiyar Aib

• It is an option given to a party to rescind the contract when he discovers in the subject, defect that reduces its value that makes a fall short of its requirements or specification.

•The goods are liable to be a reject if undeclared defect are discovered.

•But, if the seller specifically states that he is not responsible for any defect then the buyer bears the risk.

The Purpose of Khiyar Aib

• If the defect reduces the value of the object, so it is only fair give the party a choice as when the subject matter has defect, the consent or satisfaction of parties involved are one-sided.

• “O ye who believe! Eat not uo your property among yourselves in vanities: but let be there amongst you traffic and trade by mutual good will: nor kill or destroy yourselves: for verily God any hath been to you Most Merciful!” ( An-Nisa:29)

Conditions under which right of option of defect to become applicable

1. The defect have existed in the subject matter prior to time of sale or o occurs before the delivery and while it is still in the hand of seller.

2. The defect which existed in the subject matter decreases its value or renders it until for the purpose to which it is intend.

3. The buyer should have no knowledge of the defect the time of the contract or at the time of delivering.

4. There should not be any agreement of non guarantee on item purchased.

Conditions under which right of option of defect cannot be exercised

1. When the buyer, after he has known the defect in the subject matter, insists or continues on buying the thing.

2. When the buyer knew the defect in the subject matter but transfers of gives it to other persons or gift or as a selling thing. He loses his right of option of defect.

3. When the seller sells a thing with a condition that he shall not be made liable for any defect in subject matter and the buyer agreed upon that condition.

KHIYAR RU’YAH

(Option of Inspection)

Definition

•Khiyar al-Ru'yah or options during the observation has been defined basically as a right to a purchaser either confirm a purchase agreement or reject it after seeing the subject of the contract that have been agreed.

Example:

• In buying motorcycle or car process, the concept real for al-ru'yah apply when potential buyers are allowed test drive any vehicle you want to buy.

In affirming the right to vote related to khiyar al-ru'yah, the Prophet Muhammad (PBUH) has said:

"Anyone who buys an item without seeing it, then he have the right to choose when he sees it.” (Abu Hurairah)

FactorS terminating option of inspection

•The party made his declaration of option after he

saw the subject matter.

•The subject matter is destroyed.

•Death of the party.

KHIYAR NAQD

(Option of Payment)

Length of payment

Hanafies and Hambalis jurist:If fail to pay within 3 days, the contract would be invalid

Other jurist:Not exactly within 3 days, payment can make on later day based on agreement of parties.

Example

•Car Financing

•Home Financing

•Machine Financing

The Difference betweenKhiyar Shart and khiyar naqd

•Khiyar Shart Fail to pay within 3 days contract revoke

•Khiyar naqd not pay within 3 days contract not revoke because the sale is not binding

CONCLUSION

• A device to safeguard contracting parties.• The option offers either to ratify by choosing from among the alternative objects or to cancel the contract entirely.• Options allowed in Shariah are:

- KHIYAR MAJLIS (Option of Meeting)

- KHIYAR AL-TA’YIN (Option of Determination)

- KHIYAR SHART (Option of Condition)

- KHIYAR ‘AIB (Option of Defect)

- KHIYAR RU’YAH (Option of Inspection)

- KHIYAR NAQD (Option of Payment)

•The options are established either through Shariah or the agreement between parties.

•The Options could assist in ensuring the fairness in trade.

• It also ensures the contracting parties to have transactions which are in line with the Shari’ah.

REFERENCES

Ahmed, K. H. (eds.). (2013). Contemporary islamic finance: innovations, applications and best practices. Canada: John wiley & Sons,Inc.Haron, R. (2014). Derivatives, Pricing Efficiency and Gharar: Evidence on. Journal of Islamic Finance, 41.Harun , H., Ahmad, S., & Markom, R. (n.d.). Existence Of Elements Khiyar. Makrom, M. H. (Disember 2013). PENGHARMONIAN PRINSIP KHIYAR AL- RU’YAH DALAM TRANSAKSI PERNIAGAAN DI MALAYSIA. 185.Mohd Murshidi Mohd Noor. (2013). The rights of khiyar (option) in the issue of consumerism in Malaysia. Middle-East Journal of Scientific Research, 13 (2), 154-161.Mohd Noor, M., & Sulaiman, I. (2013). The Rights of Khiyar (Option) in the issue of Consumerism in Malaysia. Middle-East Journal Of Scientific Research, 156.Nuradli Ridzwan Shah Mohd Dali. ( March 1, 2008). Business contract (akad) in Islam: Business contract based on akad Amanah & Tabaruah. Retrieved from http://www.slideshare.net/nuradli/islamic-finance-5Obaidullah, M. (1998). Financial Engineering with Islamic Options. Islamic Economic Studies, 101.Vogel, F. E. & Hayes, S. L. (1998). Islamic law and finance: religion, risk, and return. Netherlands: Kluwer Law International.