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«A Holistic View of Legal Documentation from Shari’ah Perspective Ezry Fahmy Eddy Yusof International Centre for Education in Islamic Finance ...»

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Munich Personal RePEc Archive

A Holistic View of Legal Documentation

from Shari’ah Perspective

Ezry Fahmy Eddy Yusof

International Centre for Education in Islamic Finance (INCEIF),

Malaysia

November 2009

Online at http://mpra.ub.uni-muenchen.de/20721/

MPRA Paper No. 20721, posted 16. February 2010 22:39 UTC

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A Holistic View of Legal Documentation from Shariah Perspective

Ezry Fahmy Bin Eddy Yusof

Abstract

The legal documentation having several features tends to make legal writing formal. This formality can take the form of long sentences, complex constructions, archaic and hyper- formal vocabulary, and a focus on content to the exclusion of reader needs. Some of this formality in legal writing is necessary and desirable, given the importance of some legal documents and the seriousness of the circumstances in which some legal documents are used.

Yet not all formality in legal writing is justified in the Shariah point of view. It may sometimes to the extent that formality hinders reader comprehension, and do not reflect clear communication. This paper will explore some clauses of the legal documentation and analyze it check and balance from the Shariah perspective. In the second part of this paper, we will investigate some of controversial clauses that are deemed as prohibition elements. This paper conclude by proposing some suggestion in Islamizing the currently practice legal documentation in order to incorporate with the Shariah requirement.

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Objectives of the research:

The objectives of this paper are:

(i) To analyze the legal documentation that being practice currently.

(ii)To investigate whether there are any prohibition elements included in any clause of the legal documentation.

(iii)To propose some suggestion in Islamizing the currently practice legal documentation in order to incorporate with the Shariah requirement.

Key terms of the research: Legal documentation, rights and liabilities, Shariah requirement, prohibitions in legal documentation.

Table of content

1.0 Introduction

2.0 Main functions of the legal documentation from Islamic perspective

3.0 Incorporation of Shariah requirement into legal documentation in Islamic banking

4.0 Specific prohibitions in legal documentation

4.1 Prohibition Interest (Riba’)

4.2 Avoiding Uncertainty (Gharar)

4.3 Avoiding Maysir or Qimar

4.4 Two Contracts in One Contract

5.0 Terms and conditions in legal documentation

5.1 Terms and conditions which affect the rights and liabilities of parties in Islamic financial contr

–  –  –

1.0 Introduction The focus of Islamic finance industry has been on contract forms used in various financial transactions. Contract is a very essence of various transactions which without it may lead to void of legal significance. Islamic commercial law laid down fairly detailed rules in leading to the formation of contract. We could see that Islamic commercial law is enriching with various types of contracts that are useful to meet people’s need in varied circumstances.

The core of transactions in Islam emphasizes in ethical, social and dimensions of financial transactions to enhance equity and fairness for the general good of society. This ideal environment can be explain through the important verses in the Quran which stressed out the importance and how it enjoins believers to "keep faith contracts" (Awfu bi al-'Uqud), "keeping promise", ''mutual consent" (At-Taraadhee) and many more.

The law of contract in Islam is developed starts with Quranic verses which already contain both the fundamentals of several types of contracts as well as certain maxims of general import later developed by the Islamic jurist. A contract under Islamic law is expected to exhaust all its purposes as soon as it is concluded. It is to be found in the Shariah requisite that transactions enters by any parties in a contract must abide by the rules and regulation set under Shariah in order to protect all parties involved.

According Nabil (1990) and Mohd (2008), there is no exact definition of a contract as such is to be found in the treatises of Islamic law until the 19th centuries. This is because Islamic law never developed a general theory of contract, thus majority of Muslim jurist have focused on the contract of sale which they regarded as the model for all sorts of contracts.

Only the Majallah al-Ahkam al-'Adliyyah and Murshid al-Hayran are two manuscripts that started to give a precise definition to a contract as the Islamic Civil Law Codification.

2.0 Main functions of the legal documentation from Islamic perspective Nowadays, to become an integral part of an economic system, the Islamic banks need to have a variety of legal documentation to meet all the requirements of every sector of the economy, mainly such as industry, mining construction and agriculture, as well as commerce and services, and it is the job of a bank personnel to find the optimum solution for each client.

Legal documentation can be defined as a document that documented some contractual relationship or grant some right to the parties involved in. It is important for those who Page |4 involve in any transactions to come out with written or legal documents to reflect the agreement between both or more parties that stated what has become into agreement between them. Muhammad Ayub (2007) believes that Islamic banks and financial institutions are required to adopt transparency, disclosure and documentation to a greater extent than the conventional banks.





The Quran enjoins us to write down and take witnesses in all transactions that involve credit one way or the other. It is clearly mentioned in the Quran: “O ye who believe! When ye contract a debt for a fixed term, record it in writing. Let a scribe record it in writing between you in (terms of) equity. No scribe should refuse to write as Allah hath taught him, so let him write, and let him who incurreth the debt dictate, and let him observe his duty to Allah his Lord, and diminish naught thereof...”1. The verse explained that the person who makes contract a debt on a fixed term, he or she need to record it in writing and the writer must be write in truth. In addition, this verse also mentions that the person who is in debt should to dictate and observe his duty to Allah. That person also needs to ensure that the total debts are not reducing. This is the view that every rule in the Shariah is meant to bring benefit or prevent harm, which is a prominent theme in the work of most pre-modern jurists and legal theorists.

Gamal (2008) quoted from Ibn `Ashur that explains how `Izzuddin ibn `Abdel-Salam says in his book that there is a verse in the Quran which contains within it the canonical Shariah roots for all branches of jurisprudence., the verse is: “Verily, God enjoins justice and beautiful dealing, and generosity toward relatives, and He forbids shameful, blameworthy, and unjust activities; He exhorts you so that you may remember”.2 This is important verse which reflects the essential of doing justice in any transactions made.

Islam view legal documentation not as from a western perspective or their legal aspect, but it’s being part of faith since there are many verses in the Quran which mentioned about the important and/or how to deal in the transaction with justice, not only from what people’s sees it, but as well as the acceptance of God. Whereby from the verses mentioned earlier we can understand that, in legal documentation that the writer must ensure that the 1 Al-Baqarah 2 Verse 282 2 Al-Nahl 16 Verse 29 Page |5 guardian of the interests dictate in term of equity for the person who owe the debts is low understanding, or weak, or unable himself to dictate. Moreover, in order to deal with this transaction, need to call for the two witnesses among the men. If there are no men, then a man and two women can be call for approve as witnesses, so that if one of them forgotten the others will remind.

The writer must know the purpose of recording those transactions is in order to ensure that there is no harm to scribe or witness. Besides that, when the person deal with trading, they also need the witness and ensure that if one of them entrusted to another let him who is trusted deliver up that which is entrusted to him (according to the pact between them). With the faith that the person must observe his duty to Allah because of Allah is Aware of what they do, it is hopefully that the contract can be fulfil accordingly.

Other aspect that may reflect the main function of legal documentation is in order to make sure that there is no prohibited element or anything that against the Shariah exist in the contract. The Shariah requisite that transactions should be devoid of riba (unlawful advantage by way of excess or deferment), gharar (uncertainty, risk, speculation), maysir (gambling) and so forth (will be discussed further). Whenever a transaction involves the exchange of two counter values, it was strongly advised that this exchange should be made forth- with in order to eliminate any possibility of prohibited elements. Nabil (1990) feel that all these were the ideal contract, if not idealistic way to secure a just balance between the contracting parties and to prevent exploitation of the weak.

In current state, all these are the essential elements that need to be taken into consideration to all parties involved in a contract. Through a proper legal documentation, the parties involved able to establish their rights and liabilities as well as to render them enforceable by the courts of law (if necessary) if any of the party did not exercise their obligation that already agreed upfront.

–  –  –

effects arising from a contract; be it a valid, void or avoidable contract respectively. The injunctions of the Shariah are directed towards the realization of various objectives for the welfare of mankind. Legal documentation from Shariah perspective must covers a variety of dealings and transactions to meet the needs of the society. The legal documentation that incorporate with Shariah in Islamic banking should have certain criteria which would make it

effective serve it purposes. Some of the criteria that could think of are:

(i) The documents must be valid according to Islamic law (ii) The document must also comply with the existing legal requirements. Or in other words, comply with various laws applicable to financial transactions (iii) The document should be structured in a manner that can be enforced in the Civil Court.

All the above criteria plays a vital role in order to make the legal documentation exercisable in the practical system that protect all parties involved in certain transaction.

Iraj (2009) believes that:

None of the Islamic contracts must have, or give the impression of having; any involvement with the interest and it is the responsibility of the bank’s economists and Shariah scholars to ensure that all is well in this regard.

Recognition of riba-invovlement in a contract is the most delicate of tasks, and lies far beyond the scope of laymen (p.271).

Islamic legal documentation may sound awkward since the current way of doing documentation more or less are the same as what been practice by conventional banking system. However, the legal documentation of Islamic banking must adhere to Islamic law principle of transaction or known as fiqh muamalat. It is an ideal Islamic legal documentation to reflect true intention of the contracting parties and maintain the Shariah principles according to the applicable Islamic contracts. What it means by Islamic legal documentation is if the legal documentation of Islamic financing contract should be different than what being used by conventional financing. Each Islamic contract has its special features using different Islamic finance concepts. Conventional contracts are merely on loan under interest based system for the past six decades. Thus imitating the conventional ways of legal documentation will not reflect the speciality and differences of Islamic legal documentation.

Page |7 This is due to the relationship that binds over the contracting parties whereby in conventional it is solely based on lender and borrower relationship while in Islamic legal documentation, the contracts may varies according to the concept used. The Islamic contracts need to be classified into several categories, depending on their legal character, effectiveness and economic consequences. According to Iraj (2009), among the Islamic contracts that can be used for specific categories are in the area of production (manufacturing), trade, services, housing and household needs. We can narrow the categories into three different contracts that are widely used which are sales and purchase contracts, partnership contracts and leasing contract.

Thus good Islamic commercial products must be backed by a clear legal protection.

There must be sound and legal documentation to protect the interest of all parties and appropriate sanctions which are enforceable in the courts of law. How Islamic commercial law plays its role in the legal documentation mainly it acts as legal mechanism that work in a manner to resolve all dispute effectively and expeditiously. It is clearly importance to demonstrate the Shariah rules and regulation into the legal documentation and make it Shariah compliance.

It is important to note that Islamic system disapproves of any exploitation or injustice on the part of any of the parties involved. To achieve this objective, the Shariah has advised some prohibitions and recommended some ethics. Detailed study of the rules and norms reveals that Islamic finance is, in essence, an ethical system and ethics need to be an inseparable part of the system. The incorporation of shariah into the legal documentation is in order to make it become into a valid contract from Islamic perspective. According to Muhammad Ayub (2007), a valid contract is essential and must comprise the following

intrinsic elements:

• The form, i.e. offer and acceptance, which can be conveyed by spoken words, in writing or through indication and conduct. The acceptance should conform to the offer in all its details.

• The contracting parties, who must have the capacity for execution.



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