International Journal of Economics and Financial Issues Al‑'aqd Al‑sahih: The Legal Basis for Determining the Validity of Islamic Financial Transactions

International Journal of Economics and Financial Issues ISSN: 2146-4138 available at http: www.econjournals.com International Journal of Economics and Financial Issues, 2016, 6(S2) 140-143. Special Issue for “Asia International Conference (AIC 2015), 5-6 December 2015, Universiti Teknologi Malaysia, Kuala Lumpur, Malaysia” Al‑‘aqd Al‑sahih: The Legal Basis for Determining the Validity of Islamic Financial Transactions Abdullahi Saliu Ishola1*, Yusuf Abdul Azeez2, Norfadhilah Mohamad Ali3 Department of Law, College of Humanities, Management and Social Sciences, Kwara State University, Malete, Nigeria, 2Fakulti Syariah dan Undang-Undang, Universiti Sains Islam Malaysia, 3Fakulti Syariah dan Undang-Undang, Universiti Sains Islam Malaysia. *Email: abdullahi.ishola@kwasu.edu.ng 1 ABSTRACT There is no modern activity premised on Islamic law that does not have a link with one of the traditional practices in the classical Islamic law society. Failure to ind its root in the past may even be a justiication for such activity to be rejected as alien to Islamic law. The contemporary Islamic inancial transactions (IFT) otherwise referred to as Islamic banking system, cannot equally be free from that inevitable litmus test. Consequently, through the principles of al‑‘aqd al‑sahih (a valid contract) in Islamic law, the inexplicable requirements for the activities of the Islamic banking and inance (IBF) to be Shari‘ah compliant could be more easily and reasonably spelt out while the extent of such a compliance could be clearly assessed. This paper, therefore, examines the role of al‑‘aqd al‑sahih as the pivotal instrument for validating any IFT and its obligations. Thus, what will make any contract to be invalid in Islamic law is primarily applicable to any IBF transactions in the modern world. The study emphasises the danger in losing the sight of the contractual nature/basis of IBF Transactions and hypothesis that al‑‘aqd al‑sahih is the pivotal legal basis for the validity of IFT. Keywords: Islamic Financial Transactions, Islamic Banking and Finance, Al‑‘aqd Al‑sahih, Shari‘ah Compliant, Islamic Law JEL Classiication: G2 1. INTRODUCTION A deep look at the general nature of the modern inancial business transactions and the usage of technology to effect its transactions reveals that except for a change in terminology and nomenclature and perhaps, to some extent, in the packaging, it can hardly be said that there is anything new about them. At least, with respect to Islamic law, they cannot be said to have come with principles that were never articulated at all, however scanty it may be. A deep study of the Islamic Financial system reveals this as a truthful juxtaposition. The observation of Nadwi (n.d., p. 15) in this direction instructs this assertion when he posits that: Most of the trade transactions that go on today are the same thing as that went on thousands years ago. The trade of the Muslim world was conducted under these laws for fourteen centuries, and the abandonment of these laws by the (contemporary) world and by the people who call themselves Muslims today has not brought anything except scandalous luxury and corruption for a few and the most utter misery and oppression 140 to the vast majority of mankind… The commercial laws that are in use today also derive in large measure from these very laws. It therefore follows that, for a proper appreciation of the position of Islamic law on any activity, such a kind of activity must be put in the perspective in which a similar traditional activity is placed. This cannot be proved otherwise, as the recent decades have witnessed strong assertion and corroboration of the classical Islamic identities (Alamer et al., 2015), and it is only by adopting this kind of approach that the Islamic issues will not be addressed through the terms that are dictated by other legal systems (Oba, 2004). Thus, a well-grounded approach to any study in Islamic Law must be holistic in nature. Notably, diverse views have been expressed on the legality of the contemporary Islamic inancial transactions (IFT), commonly referred to as the Islamic banking system (IBS). The polemics have so much been heated in arguments that some Muslim writers International Journal of Economics and Financial Issues | Vol 6 • Special Issue (S3) • 2016 Ishola, et al.: Al‑‘aqd Al‑sahih: The Legal Basis for Determining the Validity of Islamic Financial Transactions have come to the conclusion that what is referred to as IFT or IBS is most un-Islamic, i.e., haram (Vadilo, 2006). This has not just been stirred up; it has been informed by inability or ignorance of those who have made that position to appreciate the basis for IFT in Islamic law. This however is not to suggest that, if IFT cannot ind any basis in Islamic law, their view will still not be corrects; deinitely it will be. However, this paper stands to demonstrate that their view is highly misconceived and most unfounded. 2. THE PRINCIPLES OF AL‑‘AQD AL‑SAHIH UNDER THE ISLAMIC LAW A treatment of al‑‘aqd al‑sahih as the pivotal legal basis for determining the validity of the contemporary IFT demands a background information on the concept of al‑‘aqd itself. In business dealings, up to the point of mutual agreement, the principles of Islamic law and those of other legal systems like the English common law, for example, are in tandem, and the understanding of one could still be utilized to appreciate the other. Although, it has to be asserted, from the onset, that the concept of al‑‘aqd in Islamic law is connotatively wider when it is compared with the term ‘contract’ in the common law (Doi, 2008). In the ordinary English language, the term “contract” is deined as “an oficial legal agreement” (Hornby, 1995). In a legal parlance, the Osborn’s Concise Law Dictionary explains that “contract” connotes “an agreement enforceable at law.” An essential feature of contract is a promise by one party to another to do or forbear from doing certain speciied acts. The offer of a promise becomes a promise by acceptance. Contract is that species of agreement whereby a legal obligation is constituted and deined between the parties to it (Rutherford et al., 1993). In a similar vein, a legal writer on commercial law from the common law perspective, while giving a vivid explanation of what “contract” connotes states that a contract is an agreement which legally binds the parties. Sometimes contracts are referred to as “enforceable agreements.” The underlying theory is that a contract is the outcome of “consenting minds,” each party being free to accept or reject the terms of the other (Abbott and Pendlebury, 1996). By the provisions of the Islamic Law, however, there are certain salient requirements needed to be fulilled before al‑‘aqd on IFT could be considered as valid, and these are as highlighted below. 2.1. Al‑‘aqd Al‑sahih as the Cornerstone of Every Mu‛āmalah Within the scope of Islamic law, al‑‘aqd al‑sahih is the cornerstone of the various subjects of transactions known as mu‛āmalāt, and it is under this category that the modern IFT fall. In other words, all forms of transactions in the modern world are regulated through the mu‛āmalāt (Islamic law of transactions). It therefore follows that in order for any developed Islamic Finance products to meet the Islamic standard, the Islamic principles of mu‛āmalāt must be the yardstick. Mu‛āmalāt have been described as “the ways and means by which a man earns his living and makes the necessities of life available to the people.” Undoubtedly, as observed by Nadwi (n.d.), there are countless ways of earning a living, but in general outline, people basically obtain their livelihood by means of trade, agriculture, manufacture, labour, investment and partnerships, loans and securities, and by their mental skills. As long as the IFT is clothed with any of the means of mu‛āmalāt described above, it will, therefore, be sanctioned as being legal and being valid. In explaining the notions of legality and validity, Doi (2008) clariies that ‘the Arabic word for contract is “aqd, which literally means an obligation or a tie. It is an act of ‘putting a tie to a bargain.” When two parties enter into contract, it is called in‘iqad, that is joining or tying the offer and the acceptance together. The obligations thus arising out of contracts are called ‘uqud. 2.2. Al-mal as the Subject of Al‑‘aqd Al‑sahih One of the conditions applicable to al‑‘aqd al‑sahih, is that it has to centre on the property (Zubair, 1991). Therefore, anything that could not be validly regarded as property in the Islamic points of view cannot constitute the object of al‑‘aqd al‑sahih. It should be a yardstick that in order to develop a product for IFT, such a kind of product must qualiied as a property (al‑mal). Accordingly, one could easily distil the legality or otherwise of the modern Islamic banking and inance (IBF) products like sukuk and takaful etc., if it is assessed from the perspective of whether their object, as being packaged, qualiies each of them as al‑mal in the context of Islamic law (Doi, 2008). 2.3. Observation of the Guiding Principles of Al‑‘aqd Al‑sahih The guiding principles of al‑‘aqd al‑sahih in Islamic law are of two kinds; positive and negative. The positive principle is that all transactions must be based on mutual agreement, while the negative principle is that the transaction must not be batil (useless or wrongful). For example, in buying and selling, it is necessary that the buyer and the seller should both agree. In the same way when any arrangement is made between an employer and an employee, it is necessary that it be done by mutual consent. If either one of the parties does not consent to the arrangement, then such a kind of transaction in Islamic law, will be declared as impermissible. With respect to the negative condition which is set together with that of mutual agreement, the Islamic law is quite different to other systems in the sense that, it is a stipulated condition that this mutual agreement must not involve any wrongful transaction or anything that is prohibited (Nadwi, n.d., p. 21). It is not enough, as it appears to be the general trends, to pay attention only to the satisfaction of the negative guiding principle by ensuring that any IFT product does not contravene such rules on riba (usury), gharar (deception) and maysir (gambling). Rather, a signiicant focus should also be placed on the satisfaction of the positive guiding principle by ensuring that there is sincere, voluntary and clear mutual consent into the transactions by the consumers at the receiving end. 3. THE TENETS OF AL‑‘AQD AL‑SAHIH UNDER THE ISLAMIC LAW From the foregoing analyses, the following points could be referred to as the tenets of al‑‘aqd Al‑sahih under the Islamic law: i. Al‑‘aqd al‑sahih, under the Islamic law, involves an agreement (mutual when two or more parties are involved), and or a sole decision (when the choice is unilateral, e.g., divorce). International Journal of Economics and Financial Issues | Vol 6 • Special Issue (S3) • 2016 141 Ishola, et al.: Al‑‘aqd Al‑sahih: The Legal Basis for Determining the Validity of Islamic Financial Transactions ii. The subject-matter of al‑‘aqd al‑sahih must be permissible under the Islamic law. iii. Al‑‘aqd al‑sahih must be for lawful purpose (s). iv. The scope and limitation of the agreement in al‑‘aqd al‑sahih must be observed; e.g., the transaction must not involve riba or gharar or any other act that is prohibited under the Islamic law. One of the conditions governing mudarabah is that the rabb al‑mal or the provider of the inance should voluntarily release the needed capital to the mudarib. This means that the decision to release money to the amil (agent) must not be coercive, and there should be no concoction or deception either. Where the rabb al‑mal is forced to provide money, such a contract is vitiated. It must be quickly added here that for every contract to be valid in Islamic law, except for some special contracts that can be unilateral, the conditions of offer and acceptance (al-ijab wa al‑qabul); consent of parties or valid legal capacities of parties or furnishing of consideration, among others, must be satisied (Nawawi, 1999). Any transactions where all these factors or elements are found are, therefore, qualiied to be regarded as al‑‘aqd al‑sahih. Similarly, under this contract, the business to be entered into must be legalized in Islamic law.” It must also be stated that, in compliance with the tenets of al‑‘aqd al‑sahih under the Islamic law, the Islamic inancial institution utilizing the product of mudarabah must ensure that the object or material involved in such a kind of transaction should not be prohibited in Islam. It is, therefore, evident that al‑‘aqd al‑sahih is the legal basis for determining the validity of this kind of a product. 4. RELATIVITY OF THE CONTEMPORARY IFT WITH AL‑‘AQD AL‑SAHIH While it is not disputable to say that it was not too long that Muslims were able to ine-tune what they now regard as the contemporary IFT, it can, however, not be validly said that it is solely a product of the present era because any issue that has afiliation with Islam must be traceable, in one way or the other, to the time of the Prophet or the eras of the rightly guided caliphs. IFT, in this case, is not an exception (Abikan and Jaffar, 2006). Ismail (2015) provides a relatively detailed background information on this when he observes that the origin of Islamic Finance, as with all things Islamic, is dated back to the time of Prophet Muhammad, Peace Be Upon Him (P.B.U.H). Islamic history is replete with the fact that the Prophet (P.B.U.H) himself happened to be an epitome of honesty with regards to his trading activities under Khadija (May Allah be pleased with her), refraining from usury and ensuring transparency. These speciic qualities, among others, earned him the title al‑amin (the trustworthy) in the pre-Islamic Arabia. Many other principles and qualities exhibited by the Prophet (P.B.U.H) came as a result of the direct orders he received from the Qur’an, such as the prohibition of interest which now forms the cornerstone of IFT. What will then follow, at this juncture, is to identify the basic products of the contemporary IFT and see what constitute their basis. The most commonly practiced policy and products in IFT are three, and they are as follows: i. Mudarabah (proit-sharing) ii. Musharakah (partnership); and iii. Murabahah (cost-plus sales). 4.1. Mudarabah (Proit‑sharing) This has been deined as a contract in which one party; the owner (rabb al‑mal) provides capital, while the other party (darib), brings labor and effort with the intent to share the proit in some predetermined proportions (Moshood, 2003). A critical look at the above deinition of mudarabah, like any deinition for other products that are similar, states categorically that it is a contract. This presupposes that, it does observe the tenets of al‑‘aqd al‑sahih earlier outlined in this paper. To demonstrate this further, it must be noted that the parties to the mudarabah inancial transaction must enter into the contract mutually and freely without any compulsion. Omipidan (2006) aptly explains this point when he says: 142 4.2. Musharakah (Partnership) Generally, the word sharikah is the legal term for partnership. But in the modern world, the term is used to refer to both “partnership” and “corporation.” Although in differentiating partnership from corporation, a company is called sharikah musahamah in some Arab countries. However it may be, the essence of this product is explained by Ruxton (2004) when he says that a partnership, in the widest sense of the term, exists where property is held in common between two or more co-proprietors. It is a contract by which a person alienates an undivided share of his property, in return for an undivided share of the property of another, each having a right to administer the whole. Thus, a partnership, therefore, is a contract by which each partner is authorized and is enabled to empower another to administer the common property. On the other hand, the Hanais deine sharikah as a contract between a group of individuals who share the capital and proits. Al-Zuhayli (2003) is of the opinion that the deinition given by the Hanais is the best for the term “musharakah” since it explicitly states the nature of partnerships as a contract, whereas the other deinitions only mention the goals and outcomes of having a partnership. What Al-Zuhayli is emphasising is no other than a demonstration that musharakah has no other basis for its validity rather than being al‑‘aqd al‑sahih. This cannot be proven otherwise because if not for al‑‘aqd al‑sahih which it has as its basis, how would it have derived its authority from the Qur’an, the Sunnah, and the consensus of the Muslim scholars? (Mustapha, 2010). The point which must, therefore, be made is that it is because this product of IFTs has its basis as a valid contract that it is been speciically referred by the jurists as sharikat al‑‘aqd (Nyazee, 1997). The recent illustration of this product which Nyazee has come up with, further draw home the point that al‑‘aqd al‑sahih is the legal basis through which the validity of this product is determined. To draw curtain on this analysis, it is because of its nature as al‑‘aqd al‑sahih that it is stipulated that it can only exist between the persons under no legal disabilities, and it becomes binding by the mere consent of the parties either tacitly in accordance with local custom or expressly by statements which is followed with a conformable answer (Ruxton, 2004). Equally, this kind of a product cannot be inherited by the heir who is not a party to it (Rushd, 1996). All in all, it is clearly demonstrated that being an‘aqd‑sahih is the legal basis for which the contract of musharakah is validated. International Journal of Economics and Financial Issues | Vol 6 • Special Issue (S3) • 2016 Ishola, et al.: Al‑‘aqd Al‑sahih: The Legal Basis for Determining the Validity of Islamic Financial Transactions 4.3. Murabahah (Cost-plus Sales) Murabahah has been identiied as one of the innovations of the modern IFT because it was not, originally, a mode of inancing in the Shari’ah. By its nature, it is a form of trust sales in IBF (Saliu, 2010). It can, however, be explained as a sale on a cost-price where payment of the price (including the mark-up) is deferred to a later date. A further description murabahah implies that it is a form of transaction that covers short term commercial inancial agreement. Under a murabahah contract, the lender takes the actual title and sells the goods to the borrower on an agreed date, at a proit (Moshood, 2003). Usmani (2009), on the other hand is of the view that murabahah is a speciic kind of sale where the commodities are sold at a cost-plus basis. What should be of concern here is the fact that murabaha is “a kind of sale,” and sale, which is otherwise referred to as trade, is a contract on the basis of being an an ‘aqd‑sahih. Thus, if this is the case, there cannot be any other legal basis for murabahah rather than being an ‘aqd‑sahih (Alamer et al., 2015). It must be added here that the ultimate goal of trade in Islamic law is to ensure that the parties mutually relate for commercial purposes, and this is also the targeted notion in the murabahah transaction. 5. CONCLUSION This paper has critically examined what could be said to be the pivotal legal basis for determining the validity of IFT. The paper, thus, comes up with a inding that al‑‘aqd al‑sahih is the central legal basis for the contemporary IFTs and it occupies, exactly, the position which a contract in the anal of Islamic legal corpus occupies. It is, particularly, demonstrated in the course of our analyses that the evolution of IFT in the modern world is an offshoot of the privilege given by Islamic law to the law of contractual obligations to develop and nourish throughout the different epochs and eras within the limit permitted by the Shari’ah. 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