Shariah explain certain requirements for a contract to be valid and lawful. Any contract which fulfills the prescribed requirements of Shariah, is deemed valid and lawful. Islamic financial contracts have been developed throughout the Islamic civilization based on the needs and requirements of society.

When Islam came in Arab society, various types of contracts were practiced by people in their business and financial transactions. Islam did not abolish them altogether, but it analyzed their practices. If a contract was found contradictory to fundamental rules of Shariah, then it was prohibited. And if a contract was not in line with Shariah rules, but it was modifiable, then it was modified and filtered from the prohibited elements. For instance, riba and gambling-based contracts were prohibited. Because, these were not in line with the fundamental principles of Shariah. But some contracts such as bay al-salam (commonly used for agriculture finance) was declared permissible after eliminating prohibited and unjust elements.

Definition of contract and its elements

After discussing the historical background of Shariah contracts very briefly, we move on to explain the elements and prerequisites of a valid contract in Shariah. Contract is also known as “Aqd” in classical literature of fiqh. Literally, this word “contract” or “Aqd” means to conclude or to tie. Technically, it can be defined as combination of offer and acceptance between contracting parties which constitute legal obligations on them.

There are mainly three elements of a valid contract:

1.     Form of the contract (offer and acceptance).

2.     Subject matter of the contract.

3.     Contracting parties.

Form of the contract

The form refers to the expressions which is made by contracting parties in order to show their will and intention to enter into a contract. It is also knowns as offer (Ijab) and acceptance (Qabul). The declaration which is made first to create an obligation, is termed as offer (Ijab). And the subsequent declaration to accept the offer, is called acceptance (Qabul). There are some general requirements of for offer and acceptance.  First, it should be in clear language and unconditional. Second, there should be conformity between offer and acceptance. Third, both offer and acceptance must be concluded in the same session. Generally, offer and acceptance are exercised in words. However, it is not necessary to express them only in words. It can be done by other methods such as writing and conduct etc.

Subject matter of the contract

Subject matter refers to the object of the contract upon which the legal obligations are manifested. It can be a good or property of sale contract or pledged object in a pledge contract and usufruct in a lease contract. The general requirements for subject matter are summarized in the following.

1.     The Subject matter must not be a prohibited item in Shariah.

2.     It should be in the ownership of the seller.

3.     It should be in existence or available at the time of conclusion of the contract.

4.  It must be identified and clearly known to the contracting parties in order to avoid any dispute later.

5.  The delivery of subject matter must be confirmed and certain at the time of contract.

Contracting parties

There are at least two parties in a contract, the offeror and offeree. The offeror is the one who makes an offer and offeree is the one who accepts that offer. The main condition for these parties is that they must have legal capacity and competency to enter into a contract. In other words, they must be mature and sane. The maturity means that a person is capable to deal his wealth properly and know the basics of business and trade. If someone is immature or not have the legal capacity, then he is not allowed to enter into a contract independently.

This is a brief introduction of an Islamic or Shariah contract. From the next article, we are going to learn different types of contract, especially those which are used in prevalent Islamic financial industry.