UNDERSTANDING
FINANCE
Islam is not just a set of rituals to be completed
but an entire way of life. It provides a complete
structure and guidance for every aspect of
a person’s life. This can be proven by even
a cursory study of the lessons found in our
sources - the Quran and Sunnah.
In these sources, we find comprehensive
lessons related to a range of topics: We have
lessons that teach us how to purify ourselves,
how to pray, lessons in relation to marriage, civil
justice and the judiciary, and lessons pertaining
to wealth and trade in Islam.
When observing the rules and regulations
in relation to money, buying, selling and the
economy from an Islamic perspective, it’s
important to always remember that they stem
from the Divine Knowledge of God Almighty.
Ultimately, He knows us better than we know
ourselves, and naturally He truly knows our
best financial practices from our worst ones
and knows what will bring our economy and
society to a halt.
An important feature of trade in Islam, is that
it is built upon many noble values, the most
important being Justice and Mercy.
This reality is clearly highlighted in how the
Islamic model of trade strikes a clear balance
between two extremes- the extreme of
Communism and the extreme of Capitalism.
Communism as we are taught; is a 20th century
system which in theory required everyone to
share their possessions, such as food, clothing
and housing, equally. It recognised the harms
of only a few people – known as capitalists
- exploiting most of the people – known as
workers - to gain the greatest portion of
available money.
Capitalism on the other hand promotes the
exact opposite of Communism, as it believes
that society works best if people are free to
earn as much money as they can, as long as
they do it legally, making it a system based on
the promotion of for-profit activity.
On the contrary, Islam is a middle way between
these two systems, for it promotes the building
of an economy based upon for-profit activity, as
well as non-profit activity.
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Islamic model
Based upon the important values of equity and justice.
Which is the act of distributing a small portion of our earnings - if certain
conditions apply - to the less fortunate. This will enable them to buy, sell
and work towards financial independence, which in turn contributes
towards the creation of profit, and a stronger economy.
Which is the donation of an income generating asset that serves the
needs and development of society.
The prohibition of borrowing or lending with interest. This strict rule in
Islam is due to the many harms that are created when societies engage
in the act of financial usury or Interest, such as the creation of fragile
economies in which debt creation outgrows wealth creation. Thus
leaving behind an economy rich in debt, instead of actual wealth.
The Prohibition of trade which carries a high level of ambiguity or
uncertainty in terms of the price or outcome of the transaction, similar
to the levels of ambiguity found when gambling and betting. These
sort of transactions - in which the ‘winner takes all’ only allows for either
the buyer or seller in the transaction to profit at the expense of the
other. These sorts of transactions do not provide an equitable and fair
environment allowing both the buyer and seller a chance to benefit
from the trade, but rather an unfair environment whereby there will
always be one winner and one loser at the end of the deal.
The prohibition of trade considered oppressive in nature, such as
transactions in which trickery is used to convince the buyer or seller to
engage in a transaction, or strategies are used to drive up the selling
price, or offering the seller more money in order to cancel a deal he has
already agreed to do with a fellow Muslim.
Trade
Endowments
Zakah
If we look closely at the Islamic model for trade, we will notice that it aims to build a blessed
and robust economy that allows everyone the financial growth they deserve, based on the
following tenets:
Usury
Ambiguity
Oppression
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The concept of selling and purchasing in Arabic is
known as (Bay’). Some scholars state that the term
has an association with the Arabic term (Baa’) which
refers to one’s forearm, due to both the buyer and seller
stretching their forearms to exchange the item bought
or sold.
In Islam, trade falls within the category of practices
that Islamic Law considers permissible as a default rule.
This means that as a general rule, all types of trades
and investments are allowed in Islam unless specified
otherwise.
Knowing this rule is important especially for traders
for the following reasons:
Because from an Islamic perspective, there should
be no speech and practice, which includes trade,
before we educate ourselves about the Islamic
rulings in relation to those actions.
Because of this rule, traders would only need to
learn a handful of rulings with regards to buying
and selling in Islam, as every other practice aside of
them would be considered Islamically permissible.
In light of this rule, if someone was to specify any
transaction to be impermissible from an Islamic
perspective, they would have to produce specific
evidence from Islam’s sources proving their stance to be
correct. As a result, the burden of proof would solely be
on them.
It is also noteworthy that in Islam wealth is considered
to be a means to an end, with its ownership not
viewed as an end in and of itself. Also, wealth in Islam is
highlighted as something owned by God Almighty, and
only placed with His creation in different proportions as
a trust.
UNDERSTANDING
ISLAMIC TRADING
There are many evidences
for this in Islam’s sources,
such as:
Allah says in the
Qur’an,
“Believe in Allah, and His
Messenger, and spend of
that whereof He has made
you trustees….”
[57:7]
“Indeed, Allah has
purchased from the
believers their lives and
their wealth in exchange
for Paradise”. [9:111]
These verses along
with others similar in
meaning found in the
Qur’an highlight for us an
important reason behind
Islam having a keen
interest in our financial
matters.
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PROHIBITIONS
IN TRADE
Since wealth is a means towards the
purchase of the real estate of our
hereafter, it only makes sense that
it is left in our possession with rules
that ensure the benefits of wealth are
realised in this life and the next, as well
as with rules that prevent the spoilage
of our faith and character.
In light of this we find Islam
categorically forbidding some of the
following trade related activities:
• Usury or Interest, known as Riba in
the Arabic language.
• Deceiving and cheating in all forms.
• Unfair monopolies and harmful
forms of hoarding.
• Gambling.
• Deals dressed with high levels of
uncertainty or ambiguity.
• Transactions considered oppressive
in any way or form.
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Accordingly, we find legislation which aims to
protect traders from traits which negatively
affect one’s faith, character and society,
such as giving charity, both voluntary and
involuntary, as through it traits such as greed
and selfishness are corrected.
Finally, it is ultimately important that
everyone learns the fundamental Islamic
rulings in relation to trade before its
engagement, in order to continuously
maintain a conduct which is always pleasing
to God Almighty. The importance of this
cannot be stressed enough, and is especially
highlighted in the following teaching of the
final Messenger:
The Prophet ( صلى الله عليه وسلم) said,
“The son of Adam will not be dismissed from his Lord on the Day of Resurrection until he is
questioned about five issues: his life and how he lived it, his youth and how he used it, his
wealth and how he earned it and he spent it, and how he acted on his knowledge.”
Upon close inspection of this hadith, we find that
only one question will be asked regarding the
different elements stated in the narration, except for
wealth, which will have two questions attached to it:
• Firstly: A question related to how
wealth was earned…and
• Secondly: A question related to how
wealth was spent.
In light of the impact of financial related matters in our lives; the Messenger ( صلى الله عليه وسلم) taught us to
recite every morning the following supplication in order to seek assistance from God Almighty in
managing our affairs, especially our financial ones:
Allahumma inni as’aluka ‘Ilman naafi’an, wa rizqan tayyiban, wa ‘amalan mutaqabbalan
‘O Allah, I ask You for beneficial knowledge, and pure provision, and actions which are
accepted.’
PROHIBITIONS
IN TRADE
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TRANSACTIONS
IN ISLAMIC LAW
The books of Islamic Law dealing with trade
transactions classify contracts in which
something is bought and sold (or salebased
contracts) based on their methods
of completion in order to facilitate a greater
understanding of the Islamic rulings that apply
to each type of trade.
Examples of these classifications are as
follows:
1. Trade contracts classified by the nature of
the counter-values exchanged during a
transaction.
Under this classification we have the
following listings:
• The exchange of something fungible, like
money, for something non-fungible, such
as goods.
An example of this would be of someone
spending money to purchase a particular
product such as a shirt, or a vehicle, or some
medication.
• The exchange of something non-fungible
for something else considered nonfungible,
such as in the case of exchanging
a product for some other product.
This type of exchange is famously known as
barter trade, and in the books of Islamic law
as (Bay’ al Muqayyadah). An example of this
would include a home purchase, for example,
in exchange for a set number of cars.
• The exchange of something fungible for
something else considered fungible.
An example of this would be the exchange
of currencies, such as the exchange of British
Pounds for American Dollars, which is in the
books of Islamic Law is known as: Bay’ asSarf.
2.Trade Contracts classified based on the time
of delivery or exchange of the price and
product. This classification consists of the
following four listings:
• Spot trading – or hand-to-hand trading,
whereby the two counter-values (or the
price and product) are exchanged between
the buyer and seller before their departure
from the place in which the contract was
agreed to.
An example of this would be in the form of a
buyer paying the price of a product at the time
of the contract, and collecting his purchase
before departing the seller.
• Future Sales – in this form of trade, the
price is delivered immediately (or Spot)
to the seller, with the delivery of the
purchased product occurring at a later (or
future) date.
An example of this is when a buyer pays an
apple farmer in advance (or at the time of the
contract) the amount for 100kgs of apples, with
an agreement for the apples to be delivered
in 6 months time. This type of transaction In
Islamic law is known as Bay’ asSalam.
• Credit Sales – In this type of transaction, the
delivery of the purchased product occurs
immediately at the time of the contract,
with payment for the product occurring at a
later stage.
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An example of this is when a product is sold
with a payment plan being offered to the buyer,
which allows the buyer to pay for the product
over several months, or before a particular date
in the future.
• A sale in which both the buyer and seller
enter a contract intending for both the price
and the purchased product to be exchanged
at a later date.
An example of this is when a buyer and seller
agree to a deal without the price and product
being exchanged at the time of the contract.
In Islamic law this type of sale is called Bay’
alKaali’ bilKaali’ and is generally forbidden
Islamically by all the scholars of Islam, except in
exceptional circumstances discussed within the
circles of Islamic scholarship.
3.Trade contracts in relation to the method of
price quotation.
This classification entails two concepts of
transactions detailed as follows:
• Bay’ alMusaawamah. A sale in which the
quoted price of a product is listed without
the seller stating any input costs related to
the product, such as the cost price.
• Bay’ alAmaanah - trust-based sales. In this
type of sale the price of the product must be
quoted along with the seller listing all input
costs related to the purchased product.
Trust based sales, as found in the books of
Islamic law consists of three types:
• Bay’ alMuraabahah (cost-plus sale
transaction) – which refers to a sale in which
the seller makes a profit on the sold product
and honestly lists for the seller the cost price
of the actual product, as well as the mark-up
amount placed on top of the cost price.
• Bay’ alWadhee’ah (sale below cost
transaction) - which refers to a sale in which
the seller lists the cost price of the product,
and then goes on to sell it for less than the
actual cost of the product.
This type of sale may be used for goods that
perish without maintenance.
• Bay’ atTawliyah (sale at cost transaction)
- which refers to a product being sold at
cost price, with no profit or loss being
experienced from the sale.
A seller may resort to this type of trade in the
event of a volatile market with shifting prices, or
in the event of a buyer choosing to opt-out of a
contract due the seller not being honest about
the cost price during the transaction.
TRANSACTIONS
IN ISLAMIC LAW
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THE PILLARS OF
FINANCIAL
TRANSACTION
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For any contract to be considered to have taken
place from an Islamic perspective, the following
elements known as (Pillars of a Financial
Transaction) need to be present:
An example of the physical representation of
the offer and Acceptance would be a purchase
that takes place via a vending machine, or
via the internet where actual conversations
between the buyer and seller are replaced by
a set of actions recognised by our norms as an
offer being tendered by one party, and the offer
being accepted by the other.
Each of the pillars of a financial transaction are
associated with conditions which collectively are
known in Islamic law as ‘Trade Conditions’.
These conditions serve the purpose of
identifying a financial transaction as something
considered accepted or rejected from an Islamic
perspective. If one of the Trade Conditions is
not met, ownership of the price and product is
not considered to have exchanged between the
buyer and seller.
For any transactions to be considered accepted
in Islamic Law, the following seven conditions
have to be met:
1. Consent:
The agreement between the buyer and seller
to enter a transaction has to be purely based on
mutual consent between the two parties. Any
evidence of any party being forced to buy or sell
renders the transaction invalid and illegal.
There are notable exceptions however to this
general rule which are known within the circles
of Islamic Scholarship.
An example of this exception is the form of a
forceful sale of designated assets which takes
place via a judicial decree, such as in the case
of a court selling off the assets of a creditor who
intentionally defaults on paying due debts.
2. Legally Competent Parties:
The parties to a contract at the time of entering
the contract must:
a. Have reached the age of puberty
b. Have mental competence,
c. Have demonstrated sound judgement in
trade related decisions.
Islamic Law does however recognise an
exception to the rules of this condition, and that
is in the form of a minor purchasing a product:
• Considered expensive, but with the
permission of a guardian.
• Or considered inexpensive, even if without
the permission of a guardian, such as a child
purchasing a packet of crisps from the school
tuck-shop.
3. A Legal Purpose:
Parties cannot execute a contract to sell
THE PILLARS OF
FINANCIAL TRANSACTION
1. The Buyer.
2. The Seller.
3. The Price and Product, otherwise known as
‘The Mediums of Exchange’.
4. The Offer and Acceptance, otherwise
known as ‘The Commission of Contract’,
which can be in both verbal or physical
form.
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something considered forbidden in Islamic Law,
such as the sale of alcohol, cigarettes, musical
instruments or musical cds and albums, etc.
Included under this condition is the sale of
something which can only be used in Islamic
Law during times of necessity or need, such as
the meat of an animal that died before being
slaughtered, which can only be consumed in life
threatening circumstances due to the absence
of permissible or halal meat, or a dog acquired
for the purpose of hunting or assisting someone
blind.
The permissibility of using these elements in
Islamic law only during times of necessity or
need do not qualify these elements to hold the
status of having a ‘legal purpose’, and thus are
not permitted to be bought or sold.
However, in the event of these elements
not being accessible except through being
purchased; Islamic Law would not invalidate its
purchase during the times of necessity or need,
but will consider the seller of these elements to
be sinful because of the sale, and consider the
money gained from the sale to be unlawful or
haraam.
4. Complete Ownership.
This condition entails that the two countervalues
being exchanged in a transaction be
completely owned by both the buyer and seller
before the actual transaction takes place, as it is
forbidden in Islam to sell something not owned
by the seller, or purchase something with wealth
not owned by the buyer.
5. Knowledge of Product.
This condition stipulates that the buyer attains
complete knowledge of all aspects of the
product that affect the actual price of the
product.
This knowledge is acquired through the
buyer physically viewing and inspecting the
product, or receiving an honest comprehensive
description of the product from the seller.
Failure in giving diligence to this condition
renders the sale invalid due to the transaction
falling into the category of transactions with
unacceptable levels of ambiguity.
6. Ability to acquire the purchased product.
For any financial transaction to be counted
as valid in Islamic Law, there cannot exist
unacceptable levels of ambiguity with regards
to the ability of the buyer to actually receive the
purchased product.
As a result, Islamic Law forbids the sale of a
missing vehicle for example, or a type of fish still
swimming in the sea, due to the buyer’s inability
to acquire in hand the bought product.
7. Price specification.
This condition refers to both parties having clear
knowledge of the amount that is to be paid
during the transaction in order to avoid high
levels of ambiguity in relation to the price being
part of the transaction.
As a result of this condition, Islamic Law will
not validate a transaction in which the selling
price is unknown at the time of the contract,
or a contract in which more than one type of
currency can apply, without the actual currency
being specified.
THE PILLARS OF
FINANCIAL TRANSACTION
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As stated earlier, the directives of these seven conditions have
to be respected in order for a transaction to be considered valid
Islamically, and in the event of every condition being met, the
transaction will be considered binding upon both the buyer
and the seller in Islamic Law, with exchange of ownership
considered to have taken place, even if the price and product
are yet to be exchanged.
It should be noted however that in Islamic Law, the new owner
is not permitted to sell the newly acquired product at a profit
before the actual exchange of the product occurs, as in Islam,
a person only qualifies to enjoy profits from the sale of any
product if they carry the burden of any possible loss in relation
to the same product, such as in the event of the product
becoming unsellable due to it being defected, or stolen, as an
example.
Only If the seller carries the risks, in the event of something
negative happening to the product; does the seller have a right
to enjoy its rewards in the form of a profit.
In other words, from an Islamic perspective, the profit made
from the sale of a product is a worthy reward for the seller due
to the seller carrying the burden of possibly experiencing losses
because of that product, and this burden is only transferred to
the new owner of the purchased product when the physical
exchange of the product occurs between the buyer and the
original seller.
In light of this reality, an owner of the newly bought product
will take ownership of it upon the sale being deemed
permissible from an Islamic perspective, however, selling the
acquired product at a profit will not be permissible until the
previous seller releases the product to its new owner, either
through sending the product across to the new owner, or via
facilitating the collection of the product by its new owner, as
through the seller releasing the product to its new owner does
a transfer of guarantee take place, which - in Islamic Law - is a
condition before any profit can be earned from the sale of the
product.
THE PILLARS OF
FINANCIAL
TRANSACTION
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APPROVED
FORFEITURE CLAUSES
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A sale-based transaction in Islamic Law is
considered binding upon both the buyer and
the seller. This means that once the sale is
considered complete from the perspective of
Islamic Law, both parties cannot cancel the
deal, even if the product or price is yet to be
exchanged.
The wisdom behind this stance in Islamic Law is
to ensure that the benefit which both the buyer
and seller aim to achieve from the sale is truly
realised.
A party having the ability to cancel a deal
unconditionally doesn’t really allow the buyer to
take real ownership of the product, or the seller
of the price, which really makes the actual deal
in the first instance void of any substantial and
legal benefit.
Islam does recognise however the human
element to every buyer and seller, as well as
exceptional trade circumstances, and as a
result has permitted a number of conditional
stipulations known as ‘forfeiture clauses’ which
are defined in Islamic Law and aim to protect
both the buyer and seller from any harm due to
the transaction.
These forfeiture clauses range from clauses
stipulated directly by Islamic Law, to clauses
approved by Islamic Law but based upon
defined conditions stipulated and agreed upon
between the buyer and seller.
These clauses are as follows:
1. Khiyaar alMajlis – or a clause to forfeit a
transaction that is specific to the place of
contract.
This feature to forfeit a transaction has been put
into place directly by Islamic Law and allows for
either the buyer or seller to opt-out of a deal as
long as they have not departed each other after
its completion. This feature thus expires once
the two parties depart from each other.
2. Khiyaar ashShart - or an applicable clause
through stipulation of the buyer to cancel a
contract within a specified time period.
This clause is an example of the forfeiture
clauses approved by Islamic Law, with its
application dependent upon the buyer opting
for it, and the seller approving it. If the buyer
enters this feature as a condition for entering
into a deal before it’s finalised, and it is accepted
by the seller, the buyer will successfully be able
to opt-out of the deal after the transaction is
completed, within the set time-frame of the
clause.
3. Khiyaar alAyb - or a defect or nonperformance
clause.
This feature to forfeit a transaction has been
put into place directly by Islamic Law and gives
the purchaser of a product or service the right
to the following two solutions in the event of a
seller failing to deliver a product or service as
promised:
• A legal channel to cancel the transaction
and receive back the entire amount paid for
the product or service.
• A legal challenge which allows the
transaction to stand, on condition the
purchaser is refunded an amount that
equates to the ‘value difference’ between
the product or service in its complete form,
and it’s appropriate price in its defective or
incomplete form.
APPROVED
FORFEITURE CLAUSES
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The appropriate way, as discussed in Islamic
scholarship, with regards to working out the
value difference would be through using a
‘fractional difference’ formula which is clarified
in the following example:
Let’s say we have a scenario whereby a buyer
named Abdullah purchases a vehicle from a
seller named Mario for US$30,000. After the
purchase is complete and counter-values
exchanged; Abdullah finds out that there is an
engine defect which couldn’t have happened
since the purchase of the vehicle and was not
disclosed to him before the transaction. In
determining the value difference in this case,
Islamic Scholarship will seek the advice of those
who have expertise in this area.
If the experts for example explain that a fair
price for the car in question is around US$25000
if in normal condition, and US$20000 in its
affected condition; it would be determined
that the fractional difference between the two
circumstances is a fifth (or US$5000).
In this instance, Islamic Law would allow
Abdullah to:
APPROVED
FORFEITURE CLAUSES
a. Return the vehicle and receive back the entire fee of US$30000. Or
b. Keep the vehicle and receive back from the buyer a fifth of the
price paid which equals US$5000.
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traders in
islamic law
Every financial transaction
has its pillars and conditions
as shown in this booklet.
Another important feature of a
transaction is the placement of
conditions between the traders in
relation to the actual transaction, which
if agreed to, would entail both the buyer
and seller consciously and willingly
agreeing for the deal to be completed in
a particular way.
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Another important feature of a transaction is the placement of conditions between the traders
in relation to the actual transaction, which if agreed to, would entail both the buyer and seller
consciously and willingly agreeing for the deal to be completed in a particular way.
These conditions between traders are known as buyer or seller clauses and differ from the
conditions for trade, in the following two ways:
However, in the event of all the Conditions for Trade in Islamic Law being fulfilled, but a Clause
stipulated by a trader not being fulfilled; the actual transaction will be considered as complete
in Islamic Law, with Islamic Law giving the trader whose rights were not fulfilled the choice of
either accepting the situation for what it is and continuing with the transaction, or choosing to
reverse the transaction such that both counter-values are returned back to the buyer and seller
respectively.
In terms of Islamic Law, traders are allowed to stipulate any conditions as long as these conditions
do not lead to making something established in Islamic Law as permissible, impermissible, or
making something impermissible, permissible.
In Light of this important rule regarding Clauses between Traders; Islamic Law has classified these
clauses into two categories as follows:
traders in
islamic law
1.The Conditions for Trade are stipulated by Islamic Law, whilst the Clauses between
Traders are stipulated by the traders themselves.
2.In the event of a Condition for Trade not being fulfilled; the entire transaction would be
considered incomplete, which nullifies any transfer of ownership from the outset, as if
the parties never engaged the trade process in the first place.
1. Clauses which Islamic Law considers appropriate and lists them as acceptable.
2. Clauses which Islamic Law considers inappropriate and lists them as rejected.
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Confirmation Clauses
These clauses aim to confirm matters of trade
already established in Islamic Law, such as a
buyer of a vehicle stipulating a clause that the
seller will be responsible for any substantial
vehicle defects known to the seller and not
highlighted at the time of the transaction.
This clause is one which is already stipulated
by Islamic Law, and offers the buyer this right
during a transaction even without it being listed
as a clause by the buyer.
Collateral Clause
Which is a condition entered into the contract
by either party mandating some form of
collateral being part of the transaction which
can be used by the affected party to recover
any losses in the event of one of the two parties
failing in fulfilling their part of the contract.
An example of this would be a seller of a mobile
phone on hire-purchase requesting a watch
from a buyer, which will be kept in safe keeping
by the seller until the buyer can pay the entire
amount for the phone.
Descriptive Clauses
this refers to a clause stipulated by any party
describing certain particulars related to the
counter-values of a transaction, such as a seller
of a vehicle stipulating new bank notes, or a
buyer stipulating that the vehicle be a particular
color.
Exception and Exclusion based Clauses
These are stipulations placed in the contract by
the seller particularly, which allows for the seller
to benefit from the sold product for a specific
period of time, such as a seller of a home or
vehicle who stipulates that the buyer allows for
the seller to use the vehicle or home for a week,
or month after the sale is complete, or a clause
that excludes certain accessories added to the
vehicle by the seller from being part of the
transaction, such as a mobile phone holder, or
seat covers.
Restrictive Clauses
Such as a condition placed by a seller which
stipulates that the buyer gives the seller the
first right to purchase back the item sold in
the event that the buyer decides to sell the
purchased item in the future.
Contract-Stipulation Clause
This is a clause placed by the seller in a contract
which stipulates that the sale only goes ahead
between the buyer and seller on condition of
the buyer entering into another transaction with
the seller.
An example of this would be Abdullah selling his
house for US$200,000 to Ahmed, on condition
that Ahmed sells his vehicle to Abdullah for
US$30,000, or that Ahmed leases his vehicle for
a particular period of time, and a particular fee
to Abdullah.
However, this clause is only considered
binding in Islamic law if it doesn’t lead to an
impermissible outcome. An example of an
impermissible outcome would be a seller
stipulating that the sale only proceeds on
condition that the buyer loans money to the
seller or vice-versa, due to the Messenger ( (صلى الله عليه وسلم
forbidding a transaction in which loans are
stipulated as a part of it.
Penalty Clause
This clause is considered acceptable in Islamic
Law if used in Labour and Construction related
contracts, and not purchases.
With this clause; a contractee can stipulate a
penalty upon a contractor in the event of the
contractor delaying completion of the desired
project on time.
Examples of acceptable clauses include:
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An example of an acceptable application of
this clause would be of a person contracting
a construction company to build a house
for US$100,000 with a penalty clause which
stipulates the contractor losing one percent of
the stated amount for every month that passes
without the project being completed after the
agreed completion date.
On the contrary, an unacceptable application
of this clause would be in the case of a seller or
service provider stipulating late fees (or fines)
upon a person for delaying on paying anything
payment-related, such as a bill or debt.
Circumstantial Clause
This clause refers to a condition placed in a
contract which makes it dependent upon the
occurrence of an event.
An example of this clause would be a
transaction in which the seller says that he will
sell his car to a buyer on condition that the
seller’s father is pleased with the sale. Upon the
buyer accepting this condition and the seller’s
father approving his son’s actions; the contract
immediately becomes binding upon both
parties.
Another example of this clause is a transaction
accepted by the Hanbali scholars of Islamic
Law which entails a transaction with a nonrefundable
down payment (or deposit) being
stipulated as part of the contract. In this
contract, the buyer is required to pay a small
non-refundable percentage of the price up
front to the seller, which is considered part of
the entire payment in the event of the buyer
completing the purchase. However if the buyer
decides against completing the purchase; the
seller keeps the percentage taken.
In the above section, we discussed clauses that
are acceptable to place in a contract. There are
however particular clauses placed by the two
parties within a contract which Islamic Law
invalidates.
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Examples of unacceptable clauses include:
Clauses which bring about a result which the Shariah has forbidden, from the outset.
An example of this clause would be a Contract-Stipulation Clause which necessitates riba (or
interest) being a part of the transaction, such as a condition which stipulates that one of the parties
lend the other party money in order for the transaction to proceed. This clause is considered illegal
and non-binding as it creates a benefit for the lender which is forbidden in Islam, as Islamic Law
forbids any benefit whatsoever to be gained by the loaner because of the loan.
Any benefit created as a result of a loan is considered a form of Riba in Islamic Law.
Another example of this type of invalidated clause is when the clause stipulates that the transaction
takes place in a way that prevents either of the two parties from completing an Islamically
prescribed act, for instance a clause stipulating that the transaction takes place after the second
athaan of Jumuah. This is forbidden in Islamic Law due to verse in the Qur’an where Allah says,
Similarly a clause stipulating that the transaction is completed in a place that Islamic Law forbids
is also invalid. An example of this would be a clause stipulating that the transaction is completed in
the Masjid. Islamic Law forbids all forms of profit based transactions from occurring in the houses
of Allah Almighty. It is important to note that this prohibition includes all forms of electronic based
sales or purchases, whereby a person may purchase a plane ticket, hotel reservation or trade shares
or currency via the internet.
A clause which prevents an objective from the objectives of trade in Islam taking effect.
An example of this clause would be a condition which prevents the buyer from taking complete
ownership of the purchased product, such as a condition which forbids the buyer from ever selling
the purchased product.
• This clause prevents complete ownership of the purchased product from being transferred to the
buyer, and causes the transaction to only resemble a sale, without actually being one, which goes
against the objectives of trade in Islam.
“O you who have believed, when (the Adhan) is called for the prayer
on the day of Jumuah, then proceed to the remembrance of Allah,
and leave trade. That is better for you, if you only knew”. [62:9]
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IMPERMISSIBLE
TRANSACTIONS
In the previous chapters, it has been
established that the forbidden matters in
relation to trade in Islamic Law are far fewer
than the transactions and trade practices
considered permissible.
In addition to this it’s important to take note
that for every transaction or trade habit
considered impermissible in Islam, Islamic
Law has facilitated the process of wealth
creation through listing suitable permissible
alternatives.
More importantly; there is no trade practice
considered impermissible within Islamic
Law in relation to buying, selling and the
economy except that it has been forbidden
due to the harmful outcomes that will come
about should everyone be left to practice
them.
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We must also never forget that the laws of trade in Islam originate from Allah Almighty who
created us and possesses divine knowledge which is not confined to time and space. Naturally He
knows us better than we know ourselves and knows the harmful outcomes of our trade practices
before those outcomes are realised by us.
It is also worth noting that
mankind by design can be
overcome by desire, which can
lead to trade injustices taking
place, which is forbidden in
Islamic Law.
In light of all this, it is only
appropriate for the Law-Giver
to reveal trade boundaries that
no transaction should cross,
irrespective of the personal views
of the buyer and seller with
regards to those laws.
The Qur’an with all its wisdom
addresses this; for at the time
of the Messenger ( صلى الله عليه وسلم), the
disbelievers queried any issues
with usury by stating that usury
based transactions are no different in outcome from trade based transactions. In answer to their
misconception, revelation descended and Allah says in the Qur’an;
The transactions and trade practices which Islamic Law deems impermissible can be packaged
under the following three reasons:
1. Oppression
2. Ambiguity
3. Due to Riba (Usury/Interest)
Those who consume interest cannot stand
[on the Day of Resurrection] except as one
stands who is being beaten by Satan into
insanity. That is because they say, “Trade is
[just] like interest.” But Allah has permitted
trade and has forbidden interest. So whoever
has received an admonition from his Lord
and desists may have what is past, and his
affair rests with Allah . But whoever returns
to [dealing in interest or usury] - those are
the companions of the Fire; they will abide
eternally therein. [2:275]
IMPERMISSIBLE
TRANSACTIONS
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Oppression
Oppression in all forms is forbidden in Islam and
with regards to oppressive trade practices, God
Almighty says in the Qur’an,
Islamic Law forbids the following transactions
due to their unjust and oppressive nature:
A sale in which the buyer was deceived by
the seller with regards to the product. This in
Islamic Law is known as (alGhish).
All forms of cheating are forbidden in Islam, and
this includes all forms of deceptive behaviour
during trade. This prohibition is based on the
Prophetic Narration in which the Messenger ( (صلى الله عليه وسلم
said to a trader who deceptively poured some
dry wheat over the top of wheat which had been
affected by moisture, in order to deceive the
buyer regarding its suitability: “Whoever cheats
us is not from us”.
A sale in which the selling price was artificially
increased, which is known in Islamic Law as
(anNajash).
These forms of transactions were forbidden by
the Messenger ( صلى الله عليه وسلم) and entail artificially driving
up the price of a product through the following
practices:
A third transaction considered oppressive in
Islamic Law is one which takes place at the
expense of a fellow Muslim.
A transaction of this type includes selling,
buying and renting at the expense of another
Muslim, and entails a third party offering a
higher price than the one already agreed
to between the buyer and seller, in order to
convince the seller to break his agreement with
the original buyer.
This action is prohibited in Islamic Law due a
prophetic narration in which the Messenger ( (صلى الله عليه وسلم
forbade a Muslim from trading at the expense
of his brother.
It is important to note that this important rule in
Islamic Law does not include a Muslim placing
a higher bid for a product at the expense of
another Muslim during the bidding phase of an
auction.
• Planned strategic bidding during an
auction.
• Presenting an inaccurate description of
the sold item which necessitates a higher
price.
• Falsely stating a higher cost price of the
sold item in order to justify a sale of an
item at a higher price point.
IMPERMISSIBLE
TRANSACTIONS
O you who have believed, do not
consume one another’s wealth unjustly
but only [in lawful] business by mutual
consent. And do not kill yourselves [or
one another]. Indeed, Allah is to you ever
Merciful. [4:29]
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Transactions through which harmful forms of
hoarding occur.
This prohibition in Islamic Law is based on the
statement of the Messenger ( صلى الله عليه وسلم) which states:
“No one hoards except the disobedient sinner”.
Hoarding in Islam is considered harmful if:
A sale through which the facilitation of
something forbidden in Islamic Law occurs.
This rule is understood through a verse in the
Qur’an where Allah says,
“And assist one another in (practices) of
righteousness and piety, but do not assist one
another in (practices) of sin and transgression”.
[5:2]
Examples of this sort of trade include
transactions such as selling weapons to
individuals who are known to use the sold item
illegally, or selling equipment or ingredients to
buyers who will use the sold item in matters
considered forbidden in Islam, such as selling a
property to a commercial bank, or to a business
that will use the property as a bar.
Ambiguity
The second reason why a transaction may be
discarded in Islamic Law is due to the presence
of an unacceptable level of Ambiguity in
relation to the product, price or outcome of the
transaction.
High levels of ambiguity in a transaction render
the transaction void due to the Messenger ( (صلى الله عليه وسلم
forbidding these forms of trade.
Ambiguity in the Arabic language is called
(Gharar), and the books of Islamic Law highlight
the following conditions which necessitate
invalidating a contract due to Gharar:
• For the levels of Ambiguity or Gharar to be
in amounts considered high. This condition
recognizes that some transactions may have
necessary elements of ambiguity attached
to them, however they are considered to be
at a low level due to other factors that give
the buyer and seller the confidence that
they most likely will both benefit from the
transaction.
An example of this would be the purchase of
vegetables which are yet to be harvested after
studying the environment in which the product
was grown in and looking at other products
harvested from the same garden, or a lunch
buffet which allows the customer to view the
servings on offer before deciding to participate,
even though a fixed price is paid, and customers
will differ in the amounts of servings consumed.
• For the high levels of ambiguity to be part
of the actual product or service purchased.
To understand this condition better, let’s
consider the example of the purchase of a
pregnant cow.
If the transaction is related to the actual cow
with the selling price inclusive of the unborn
calf; the transaction would be permissible due
to the concept of gharar considered to be at a
low level, given that the actual cow is the intent
of the transaction and can be inspected by the
buyer, allowing the buyer to make an informed
decision which allows both the buyer and seller
to reach a level of confidence that they most
likely will both benefit from the transaction.
However, if the buyer was interested in
the unborn calf; the transaction would be
invalid due to the calf being the intent of the
transaction, which would necessitate the
presence of high levels of ambiguity, given the
unknown factors related to the unborn calf that
can affect the actual price of the transaction,
such as the calf passing away during birth, or
being born with a defect. In other words a deal
based on an unborn calf really constitutes a
gamble and gambling is forbidden in Islam as
stated in the Qur’an.
1. The hoarded product is something
required by the entire community, such as
staple foodstuffs, or fuel as examples. Or
2. The practice of hoarding occurs when
supplies of the needed product are
restricted due to shortages, or if the
hoarding actually leads to an increased
demand from the community for the
needed product.
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• For the transaction to be a for-profit one. This
means that the concept of Gharar will not
apply, irrespective of its level, in contracts not
considered to be for-profit.
Thus, it would be entirely valid for someone to
say for example: “I donate all the money I have
in my pocket to your charitable cause”, without
stating the actual amount in his pocket, as a
donation falls outside the scope of for-profit
transactions, making the unknown elements of
statement unharmful.
Riba / Usury / Interest
The third reason why a transaction would be
discarded in Islamic Law is due to the presence
of Interest. Interest necessitates an undeserved
gain and creates overwhelming harms to both
one’s self, society, and the economy. The 21st
century has provided unfortunate opportunities
for us to experience first-hand the oppressive
reality of Interest based economies and their
harms.
From its harms are:
• Social Segregation and the widening of the
financial gap between sectors of the society,
given that the rich will only get richer at the
expense of the poor getting poorer.
• Over-burdening debt, given that it takes two
elements to make actual money through
honest work, time and effort, and only one
element to make money from an interest
based debt, and that is time. In other words,
it just takes the ticking of the second hand
on the clock for interest based debts to
increase, making it impossible to anyone to
produce actual wealth that can meet the
demands of the debt.
At different intervals in this booklet; Islam’s
opposition to interest has been shared and there
are several evidences in the sources of Islam to
prove beyond doubt that Interest is forbidden in
Islam, and that dealing with interest as a taker of
it or a giver is a major sin.
The prohibition of Riba ensures the presence of
many far reaching benefits, such as:
• Equity in exchange.
• Protection of wealth by making unjust and
unequal exchanges illegal.
• Promotion of charity, kindness and financial
proactiveness.
• Removal of selfishness and selfcenteredness,
which can create social
antipathy, distrust, and resentment.
From the many evidences forbidding usury or interest; Allah says in the Qur’an:
Those who consume interest cannot stand [on the Day of Resurrection] except as one stands
who is being beaten by Satan into insanity. That is because they say, “Trade is [just] like
interest.” But Allah has permitted trade and has forbidden interest. So whoever has received an
admonition from his Lord and desists may have what is past, and his affair rests with Allah. But
whoever returns to [dealing in interest or usury] - those are the companions of the Fire; they will
abide eternally therein. [2:275]
And He says,
“God destroys usury, but blesses charitable deeds with multiple increase: He does not love the
ungrateful sinner.” [276]
“You who believe, beware of God: give up any outstanding dues from usury, if you are true
believers. If you do not, then be warned of war from God and His Messenger. You shall have your
capital if you repent, and without suffering loss or causing others to suffer loss.” [278-279]
After these manifest evidences, the only thing left to ask is: “Who can ever win in a war with
Allah Almighty and His Messenger ( .”?(صلى الله عليه وسلم
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Debt-Based Transactions.
Debt based Usury entails interest charged
due to a loan, either at the beginning of the
transaction, as we find with home based
mortgages as an example, or at the end of
the time period of the loan in the event of the
borrower requiring extra time to pay off the loan,
as we find with credit card based transactions.
Sales-Based Transaction
Islam also forbids Sales-based Riba in respect
to certain types of wealth which is called Riba
based wealth.
The teachings of the Messenger ( صلى الله عليه وسلم) list Riba
based wealth as two categories, as follows:
• Gold, Silver, and wealth considered similar. In
today’s age, this would include fiat money,
like dollars and pounds etc.
• Dates, wheat, Barley, Salt, and similar
storable staples, such as rice in today’s age.
• Islam’s rule with regards to these catagories
of Riba based wealth is as follows:
If the same wealth from the same category are
traded between the parties; the exchange will
be invalid unless two conditions are met, as
follows:
a.That the transaction be Spot- with immediate
exchange of both counter-values taking place at
the time of the contract, and:
b. That the quantities of the counter-values are
equal.
Examples of this would include:
• 10kgs of old gold for 10kgs of new gold or
• 5kgs of Silver for 5Kgs of Silver or
• 100 Dollars for 100 Dollars or
• 50Kgs of a particular type of date, for 50 Kgs
of another type of date.
Failure to meet these two conditions constitutes
and interest based transaction having taken
place.
• If different wealth from within the same
category are traded with each other; the
exchange will be invalid unless one condition
is met. This condition is that the transaction
be Spot. It is not a requirement for the
quantities of the counter-values to be equal.
Examples of this would include a spot exchange
of
• 2kgs of Gold for 5kgs of Silver or
• 2Kgs Silver for 500 Dollars or
• 50 Pounds for 1g of Gold, Wheat for Dates,
Barley for Rice etc.
Failure to meet this condition constitutes an
interest based transaction to have taken place.
If wealth from one category is exchanged with
wealth from another category; there are no rules
which apply. This means it would be permissible
to have a deferred exchange of
• 100 dollars for 4kgs of dates or
• 1g of gold for 10kgs of rice as example.
There are many financial and social wisdoms
that can be derived from the genius listing of
these types of wealth and their rules by Islam.
May Allah help us to secure our wealth in a way
that is pleasing to Him, ameen!
In Islamic Law, the topic of Usury is listed to occur in
the form of:
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ISBN: 978-603-8297-85-8
