Fiqh of Transactions Part 06

Understanding Types of Contracts in Islamic Finance:

Islamic finance revolves around specific types of contracts (Uqood) that align with Shariah principles. These contracts ensure that all financial transactions are conducted fairly and ethically. Today, we will review the main types of contracts essential in Islamic finance:

1. Exchange Contracts

Sarf: Asset-for-asset exchanges. This refers to currency exchange where one type of currency is traded for another.

Ijarah: Asset-for-service exchanges. This is essentially a leasing contract where one party provides an asset to use or service and the other party pays an agreed compensation or money.

2. Trust-Based Contracts

Wakalah: An agency contract in which one party acts on behalf of another.

Wadi’ah: A safekeeping contract where one party entrusts an asset to another for safekeeping.

3. Partnership Contracts

Musharakah: A joint partnership where all parties provide capital and share in profit and loss.

Mudarabah: A partnership where one party provides capital and the other provides expertise and management. Profits are shared at an agreed ratio, while losses are borne by the capital provider with the service provider bearing the loss of time and effort.

In some cases Mudarib (expertise and management provider, engaged in business party) is liable to pay for the loss of the capital, which can be explored in the context of Mudarabah in future discussions, Insha'Allah.

Musaqat: An agricultural contract where the landowner provides the land and labor is provided by another party; profits are shared based on an agreed ratio.

Muzara’ah: Similar to Musaqat but usually involves more detailed agricultural agreements.

4. Security Contracts

Rahn: A guarantee contract where an asset is pledged as collateral for a loan.

Kafalah: A guarantee contract where one party assures the debt or liability of another.

Hawala: A contract that transfers debt from one party to another.

5. Gratuitous Contracts

Hibah: A gift contract where one party transfers ownership of an asset to another without compensation.

Qard: A loan (Qard Hasan) contract where money is loaned without interest and is repaid according to the agreed terms.

Aariyah: A temporary loan contract, usually involving an item given for use and returned after use.

قال رسول الله صلى الله عليه وسلم: العارية مؤداة

-سنن ابي داود

"The item taken for temporary use will be returned (after use)"

-Sunane Aboodaood

It's a part of a full hadith.

Content Selection & Organization - Mufti Faraz Adam - UK