Valid sale transactions......

Transactions in Islam could be classified in five categories: prohibited, reprehensible, indifferent, meritorious, and obligatory. Islam recommends avoiding reprehensible transactions and encourages meritorious acts; indifferent acts (Mubah) are Shari’ah neutral. While, prohibited activities have to be avoided in every respect, and obligatory acts must be carried upon and never to be ignored;




However, the underlying principle in Islamic contracts is permissibility and validity. And since most of the new banking and financial transactions did not even exist as such when classical law held sway, any of these transactions would be considered as valid unless there is an explicit text or religious rule proving its prohibition and voiding. Therefore, Islamic banks enter into different concepts while doing the business, namely promises or contracts. 

Islamic banks use the concept of promise, made unilaterally by the client or the seller, in many types of transactions such as Murabaha to purchase orderer, Ijara muntahiah bittamlik, sale and lease back, diminishing Musharakah, Salam and Istisna´a. And according to the Muslim jurists, a promise is morally binding on the promisor, unless there is a valid justification. It would be also legally binding if it is made conditional upon the fulfilment of an obligation, and if the promisee has already sustained costs on the basis of that promise. The binding nature of the promise means that it should be either fulfilled or compensated for damages caused by the unjustifiable non-fulfillment. In case of some promises, Islamic banks take token or earnest money from the promisee to guarantee their sincerity in the purchase the relevant asset.

Contracts in Islamic banking are used for trade, lease, partnership, agency, loans, guarantee, etc. These contracts include Amānah, Qard, Mudarabah, Bai´, Ijara, Shirkah, Ujrah, Wakalah, Kafalah, Ju´alah, Hawalah, etc. Exchange of ownership in the form of trade involves mutual exchange of property rights along with usufruct, the asset and its usufruct are both transferred to the buyer following the sale agreement irrespective of cash payment having been made immediately or in the future. In addition, the ownership of the asset and its transfer from the seller to the buyer is an important aspect for Islamic banking transactions since risk remains with the party who owns the asset at a point of time following the transaction. For example, in the case of Ijara, the lessor gives the usufruct against rental but retains the ownership along with liabilities relating to ownership.

Moreover, Islamic banks should respect necessary conditions for a valid sale to legalize the transaction. In fact, both the buyer and the seller must willingly agree to all details of the transaction, both participants should be allowed to engage in the transaction, both parties in the transaction must own the property they are trading or have the permission of the owner to sell the asset on behalf of him, sold goods must be permissible and should be handed over at the time of the sale and both the goods and the price must be something clearly known to both participants in a sale.