Islamic Contract Law: Principles Uncovered

Understanding Islamic Contract Law: Key Terminologies and Principles

In the world of law, contract law holds immense significance because it governs legal relations that are economically significant to parties involved. Similarly, Islamic contract law outlines rules that govern the relationships of economic agents governed by Islamic law, i.e., Sharia law. So, in simple words, Islamic law about making agreements is built on a few basic ideas that help us get how this law works. Just like how the Indian Contract Act of 1872, which is a special area of law, is built on many rules and these rules are used and followed by judges, Islamic agreement law does something similar and is not totally different from it.

Islamic Contract Law: Principles Uncovered
Islamic Contract Law: Principles Uncovered

During the formative/classical period of Islamic law, jurists did not expressly lay down a general theory of contract that can be associated with Islamic law. Because of the same, there two radically different, although equally mistaken, conclusions have arisen. The first point says that Islamic contract law doesn’t have a basic theory to rely on, and this shows that it’s not well-developed and can be unclear. This idea is commonly agreed upon by non-Muslim experts in Islamic law. The second point, in response to the first one, comes from Muslim experts who argue that there is indeed a general theory of contract law. They believe that Islamic law can enforce contracts even if they are not specifically named or described.

Contract under Islamic law involves three terms, namely, Riba (Interest) Gharar (Uncertainty) and Maysir (Speculation)


Riba is a term used in Islamic Law that refers to interest. It’s the additional amount charged on deposits and loans. In Islamic practice, Riba is strictly prohibited, even if it’s at a low interest rate, because it is considered unethical and against the law. Sharia law prohibits Riba for various reasons. In the Islamic banking system, different arrangements are in place to ensure that transactions occur without charging explicit interest amounts. There are two types of Riba:

  1. Riba in a loan contract: This refers to the charging of interest in loan agreements.
  2. Riba in a sale or exchange contract: This pertains to the presence of interest-like practices in contracts involving buying, selling, or exchanging goods or services.
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Gharar is also known as uncertainty under Islamic law. It is associated with deception, risk, hazards. It is prohibited under Islamic law as it gives rise to unclear or suspicious claims of ownership. For example, Futures and option contracts (contracts which have dates of delivery in the future time) give rise to gharar.


Maysir is also known as speculation under Islamic law. It is prohibited in Islamic law as it creates money by chance or by gambling without hard work. Due to Maysir, various financial products are not generally used such as the options, futures, etc. Maysir is a practice of getting anything with short cuts too easily. It is like either a person wins by chance or fails. Earning like this can be declared as “Haraam”.

There are six essential elements which need to be fulfilled:-
i. The offeror.
ii. The offeree.
iii. Offer.
iv. Acceptance.
v. The subject matter.
vi. Consideration

To enter into a legally enforceable contract, both the parties must attend the age of puberty and both have to be of sound mind. Therefore, in a contract, both physical and intellectual maturity are of great importance to determine the validity of the contract. Contracts can occur both in oral and written form and also be entered by the conduct of the parties. There is a kind of flexibility in the contract where an offeror is able to withdraw its offer before an offeree accepts it. The subject must be:
i. Lawful.
ii. In existence.
iii. Not fabricated.
iv. Deliverable.
v. Precisely

The Islamic law prohibits dealing with nuisances to public orders such as alcohol, pork, gambling, pornography, etc.

Good faith principle of Islamic Contract Law

The good faith principle of Islamic law establishes justice, fair dealing, prohibits Riba, speculation, or high risk. This principle is an absolute necessity for the functioning of the international legal order. The principle is not only to make one understand what good or bad is but what we are to be and to do in situations that turn out to be divergent and complicated, for a just and reasonable better living. The good faith principle also goes ahead to safeguard both the investors’ and also the firm, thereby disclosing misrepresentation, fraud, cheating, illegal purposes, and people exploitation owing to their ignorance.

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Contracts resulting in a permanent transfer of ownership

In these types of contracts, there is a permanent transfer of ownership of the subject matter of the contract. For example, a regular sale of a house, where one party transfers the ownership to the other party where the other party pays agreed consideration for the ownership.

Contracts resulting in the temporary transfer of ownership

These are the types of contracts where the transfer of ownership is not permanent. For example, a loan agreement where the loan amount is transferred by the payee on a temporary basis to the borrower. At the maturity period, the borrower returns the amount to the payee again.

Contracts resulting in no transfer of ownership

These are the types of contracts where there is no transfer of ownership. For example, lease agreements where the lessor leases the assets to the lessee under the terms of the lease. There is no transfer of ownership; here, the lessor has the legal title over the assets, the lessee only has the right to use the assets. Sometimes, under a lease agreement, the title of the leased asset might transfer, but for a time after that, it would end.

Existence of parties to the contract:

* Both the parties must be real, not insane, and are responsible enough for their work.
Existence of the subject matter of the contract:
* The subject should be permissible and should be in the possession of the relevant part.
Existence of offer and acceptance:
* They can either be oral or written and are time-bound.

Free will of the parties:

* Both parties are free to enter into the contract, there should be no force, threat, or coercion.
Contract should not contradict any objective of Shariah:
* The contract shouldn’t contradict the objectives which are referred to in the Maqasid Al- Shariah.
Contract should be free from the prohibition of Shariah:
* The contract should be free from the major prohibitions, which are stated above in this article. Apart from that, the contract should be prohibited from the sale of debt with debt.

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Al – Kharaj- Bi- Daman:

That means if a person is willing for profit of any sort, then he/she must be willing for the loss to incur in the future.

Conditions for cancellation of the offer

* When the offer withdrawal.
* If the death occurs of either of the party.
* Termination of the session.
* Destruction of the subject matter.
* Revocation of the offer.

Under Sharia law, not every contract agreement is deliberately ignored unless it is not allowed in the disclosure in the book of God; it is invalid. The Sharia hardly talks about contractual freedom beyond the standard contract types. Rather, it provides a situation where a contract can be merged. Some more ban upraise by other Hadith, some pertinent ones are a ban on loan and sale, two sales in one, and a sale of what one does not have. The contract may or may not be void if the court observes a condition void. Revocation is allowed under some specific circumstances, such as when the seller fails to perform his or her obligations, when the product is not in the proper manner, either it is defective or completely broken, when the…

In conclusion, understanding Islamic contract law and its underlying principles and terminologies is of great importance to anyone who wants to execute any legal transaction under Sharia Law. This law is an integral part of Islamic law, and every legal transaction must be in compliance with its principles and rules.