February 10, 2010
On The Permissibility of Contracts

Investment & Startups


5 min read

The general rule for all contracts, and especially in sales, is validity. Unless something is found deficient then the contract remains valid, such as:

1- one of the contracting parties lacking legal capacity

2- one of the objects of contract containing Riba or Gharar

3- or the fact that the object of sale is expressing forbidden, such as alcohol or pork-derivatives,

4- or the fact that is has no real or nominal value, for example a grain of sand

5- or the time of contract is sacred and as such it is not permissible to contract during, such as after the call to prayer on Friday

If the previous are avoided, any contract is permissible regardless of its structure.

If this view was actually implemented in Islamic finance today, we would probably see a lot more innovation and creativity in financing solutions. However, the system currently in vogue is one that depends solely on medieval contract forms, and any new introduction must be related back to that small pool of medieval approved contracts.

While  reasoning behind this is that Umar, the second caliph of Islam, said “No one will contract business in our market unless he has learned the rulings surrounding sales.”Yet this, at face value, seems to run in the face of the hadith “The greatest of Muslims in sin is the one that asked about something that was permitted and is then forbidden because of his questioning.”

To reconcile the two, it can simply be said that the legislative weight of Umar’s statement is less than that of a statement of the Prophet. To understand this further, the circumstances behind Umar’s statement should be analyzed to see if it applied generally to all transactions or specifically to a certain type.

As a general principle, the statements of the Sahabah are not to be taken according to their general connotations, unlike the Hadith of the Prophet.

Additionaly, it is possible that Umar’s statement was an act of trade regulation, based on the general principle of “preventing harm”, thus a policy and not an expression of substantive law.

Thirdly, the base ruling of all transactions is that they are permissible; this fact is agreed upon by all scholars except for Ibn Hazm of the Dhahiri School. Ibn Hazm held that all contracts must be approved of by God and his Messenger in order for us to use them. Even though the majority of scholars differed with Ibn Hazm in principle, by insisting on medieval contract forms they seemingly agree with him in practice.

This can be seen as mainly the product of the normalization period of Islamic law, which occurred between the 6th to 8th centuries. While this process has benefits in providing a redundant system for litigation and judicial procedure, it had a negative effect on legal research and to some extent social norms and acceptable practice, as everything was relegated back to a era affected by different socio-economic constraints. This system caused even more problems in the pre-colonial period, not allowing the legal systems of Muslim lands to adapt to the challenges that it faced from the rising economic power of Europe.

In conclusion, when looking for the “islamicity” of any contract, we do not need to look far, and many stipulations that were mentioned in the books of Islamic Law were mentioned to help in decision making during dispute resolution, not for product validation and creation.


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