Understanding Islamic Finance - Doha Academy of Tertiary Studies

Islamic Law of Contracts and Business Transactions 117an officer at Makkah deputed by Caliph Umar (Gbpwh), which states that he bought fromSafwan Ibn Umayyah a prison house for Caliph Umar (Gbpwh) for four thousand dirhamson condition that if the Caliph approved of it, the deal would be final, otherwise Safwanwould be given four hundred dirhams. 32The majority of contemporary jurists are of the view that if a buyer in actual saletransactions stipulates by his free will and without any duress that he will either finalize thedeal within so many days or the sale will be considered cancelled and the seller will getthe amount given in advance, it could be considered legal. But open options, even in validsales, wherein the parties have no intention to buy and want profit simply by transferringrisk to the other party, are against the basic philosophy of Islamic finance. That is whyconventional options have not been accepted as genuine instruments in Islamic finance. Weshall discuss this in detail in Chapter 8. Here, we can briefly say that the concept of ‘Arbūnis acceptable to the extent of part payment after finalization of the deal. Its legality as aseparate sale, i.e. Bai‘ al ‘Arbūn, and its implications for the legality of conventional optionsare not acceptable, in general, to scholars.5.7 TYPES OF CONTRACTSContracts can be classified with respect to a number of perspectives. With respect to validityor otherwise as per Sharī´ah rules, jurists in general divide contracts into two types, namely:valid (Sahih) and invalid (Batil) contracts. A valid contract is one that satisfies all of itsconditions, while an invalid contract is one in which one or more conditions for legality areviolated. 33Hanafis, however, divide contracts into three categories of valid (Sahih), voidable/defective(Fāsid) and void (Batil). Thus, they divide the void contracts into defective/irregular (Fāsid)and invalid categories. 34 If one studies the details of these categories in books by the Hanafijurists, one may face some confusion regarding this categorization unless deep understandingis developed by thorough and extensive study. That is why Zuhayli, while discussing voidablecontracts according to Hanafis, says:“I have distinguished between examples of invalid and defective sales to avoid confusion, incontrast to what most books of Hanafi jurisprudence discuss under the heading of defective sales.The majority of such books use the term ‘defective sales’ to mean the more general category of‘defective and invalid sales’, i.e. all sales that are legally prohibited. It is also common for theauthors of such books to use the term ‘defective’ (Fāsid), when they really mean ‘invalid’ (Batil).The reader is then forced to infer their meaning from the surrounding text or by telling statementssuch as their saying: ‘thus the contract does not become valid’ in the case of invalid sales, and‘thus the contract returns to being valid’ in the case of defective ones.”In the following pages, we will be discussing the three categories as described by Hanafisbecause these provide more options for practitioners to apply the Islamic law of contracts inmodern-day operations.32 Ibnul Qayyim, 1955, 3.33 Zuhayli, 2003, 1, p.74.34 For details see Zuhayli, 2003, pp. 71, 72.