COMPARISON LEGAL CONTRACTS UNDER

ISLAMIC AND COMMON LAWS

PREPARED BY:NAME NO MATRIC

1. FARIKIN 230783

2. MUHAMMAD SHAHRIL SHAFIQ BIN SABIHAN

227268

3. MOHD SHAHRIL BIN KALIL 225287

4. MUHAMMAD SYAKIR BIN ISMAIL 233401

5. ABDIRISAK YUSUF ABDI 231233

6. IDRIS BIN ABDULLAH 231690

INTRODUCTION Contracts are the basis of many of our daily activities.

Definition:

Islamic Contract can be define is an agreement between two or more persons in legally.

When ever we are enter in legal contracts we have to make like, contracts by deed as formal legal documents signed

if one party fails to perform as promised, the other party can use the court system to enforce the contract and recover damages or other remedy.

In conventional contracts the parties can enter into the agreement freely, the purpose of the agreement must not be legal or illegal to public policy.

But if we are going to enter free contract or illegal we can do informal contracts and may be made in any way or any kind.

Allah {S.W.T.} said you who have believed, fulfill [all] contracts. Lawful for you are the animals of grazing livestock except for that which is recited to you [in this Qur'an] - hunting not being permitted while you are in the state of ihram. Indeed, Allah ordains what He intends.

TAXATION

Taxes are the states use the system to collect funds to finance government spending.

The government uses tax revenue to operate schools and hospitals, to pay army and police salary, to build dams and roads, to provide social welfare to provide public facilities for use by all citizens.

From the economic aspect is the transfer to the government and country wealth tax from households and businesses.

TAXATION BASED ON ISLAMIC LAW

Islamic taxes are taxes approved by Islamic law. It is based on the communal or religious status of the taxpayer and on the legal status of taxable land.

TYPE OF ISLAMIC TAXES Zakat - one of the five pillars of Islam. Only imposed

on Muslims, it is generally described as a 2.5% tax on savings to be donated to the asnaf category.

Ushr - a 5% tax on the harvests of irrigated land and 10% tax on harvest from rain-watered land. The term has also been used for a 10% tax on merchandise imported from states that taxed the Muslims on their products. Caliph `Umar ibn Al-Khattāb was the first Muslim ruler to levy ushr.

Kharaj - a land tax at first imposed only on non-Muslims but which was later imposed on Muslims as well.

Jizya - a per head tax paid by non-Muslims residents, categorized collectively as dhimmi.

TAXATION UNDER COMMON LAW

Taxation is a finance charge or other levy imposed on the taxpayer (an individual or legal entity) by the state or state equivalent functionality to finance various public spending.

Legal liability will be imposed in the event of failure to pay, or to tax evasion or resistance.

Taxes consist of direct tax or indirect and may be paid in money or its equivalent workers.

TYPE OF TAXATION BASED ON COMMON LAW

Income tax personal income tax and business entities,

including companies. charged based on the net profit of the

business and other income.

Corporate tax Refers to income, net worth, capital or other

taxes imposed on corporations. Rates of tax and the taxable base for

corporations may differ from those for individuals or other taxable persons.

CONTINUE…Taxes on property Recurrent property taxes may be imposed on

immovable property (real property) and some classes of movable property.

taxes may be imposed on net wealth of individuals or corporations.

Property tax Property taxes or tax millage is an ad valorem tax levy

on the value of property owned and must be paid to the government in which the property is located.

There are three common types of property: land, improvements to land (immovable man-made things for example buildings) and personal property (movable things).

INSURANCE

Insurance is a contract between two parties

The party bearing the risk is known as the 'insurer ‘

The party whose risk is covered is known as the 'insured'

i. Life insurance

ii. General insurance

TYPES OF INSURANCE:

TAKAFUL

Takaful is an Arabic word that means “Guaranteeing each other”

It is a system of Islamic Insurance based on the principle of TA’AWUN (mutual assistance) and TABARRU’ (Gift, Give away, donation) where the risk is shared collectively by the group VOLUNTARILY.

i. Mudarabah Modelii. Wakalah Model

(hybrid of Wakalah & Mudarabah)

iii. Wakalah based on Waqf Model.

Models Of Takaful:

INSURANCE VS TAKAFUL

Based on mutual cooperation

Tabarru’ Contract Free from Riba

(interest), Gharar (uncertainty), and Maysir (gambling)

Based solely on commercial factors

Buying and Selling Contract

Includes elements of interest, uncertainty and gambling

TAKAFUL INSURANCE

All or Part of the contribution paid by the Participant is a donation to the Takaful Fund, which helps other Participants by providing protection against potential risks

There is a full segregation between the Participants’ Fund account and the Shareholders' Fund accounts

The premium is paid to conventional insurance companies, and it is owned by them in exchange for bearing all expected risks

Premium paid by the Policyholder is considered as income for the company, and belongs to the shareholders

TAKAFUL INSURANCE

Claims paid from Participants’ fund

In case of a deficit in the Participants’ Takaful Fund, the Takaful operator (Wakeel) provides interest-free loan (Qard Hasan) to the Participants’ Fund. (From SH Fund)

Claims paid from Company's fund

In case of deficit, the company bears it.

TAKAFUL INSURANCE

Islamic Sharia

Prohibits Conventio

nal Insurance

Al-Quran

“O you who believe, do not consume your property among yourselves wrongfully, but let there be trade by mutual consent. (An-Nisa:29)

Hadith

The Holy Prophet says, “Do not buy fish in the sea, for it is gharar” (Ibn Hanbal).

National Fatwa Council (NFC).

It involves a ban on the conventional life insurance since it is said to contain the three prohibitive elements of riba, gharar (uncertainties), and maisir (gambling).

CONVENTIONAL AND ISLAMIC DEFINITION OF A CORPORATION

CONVENTIONAL A corporation is an association of persons

created by statute as a legal entity is treated by law as a person that can sue and be sued

An artificial person or legal entity created by or under the authority of the laws of a state.

The purpose of a corporation is either to carry out a business for profit or to provide a service

A corporation can own property in its name, It can transact business, incur liabilities and engage in litigation to protect its interest and observe legal duties and restrictions.

CONTINUE…ISLAMIC The scholars have approved the corporate form on

the basis of fiqh principles of qiyas (analogy) and istihsan, or maslaha mursalah (public interest).

The closest approximation to corporate legal entities found in Islam have been bayt al-māl (public treasury), mosque property, waqf (trusts), and Muwafada

However, it must be noted that institutions such as bayt al-mal and awqaf are essentially non-economic organizations.

Zakah is not levied on each business partner individually, and instead is payable on their shareholder.

COMPARISON BETWEEN ISLAMIC AND CONVENTIONAL FORMS OF BUSINESS

PARTNERSHIPS

Partnerships under Conventional Law a partnership is the relation that subsists between

persons carrying on a business in common and with a view of profit. (contractual agreement)

In law, partnership and corporation are two separate concepts, although the distinction is rapidly fading. A corporation is assigned a legal personality, whereas a partnership is not.

All partners are allowed (although not required) to share equally in the capital and profits of the business.

In English law, if the capital is not contributed equally, a stipulation to pay interest on capital is allowed.

Under English law, there is no necessary connection between the proportion in which the capital is contributed and that of profit and loss

CONTINUE…

the following matters are dealt with in almost all types of partnerships

nature and place of business; provision of capital; ascertainment and division of profits; management of the partnership business; indemnity against liability in the firm’s

business; remuneration; duration of partnership; death or retirement of a partner

Partnerships under Islamic Law The term sharika or shirka is used in Islamic

law to define partnership Sharika may be of two kinds: sharikat al milk

(non-contractual), and sharikat al uqud or shirka al aqd (contractual)

Sharikat al Aqd is an “agreement between two or more persons for common participation in capital and profits.

Under Islamic law, there is no assumption in the contract that liabilities will never exceed assets. The liability of a partner for the debts of a partnership is unlimited; Islamic law does not legitimize the concept of limited liability.

Partnership is allowed in Islam because when Muhammad (SAW) was sent as a Messenger people were dealing with companies and he (SAW) did not forbid this.

Al Bukhari narrated that Abu Al-Minhal said: “I and my partner bought something in cash and

credit. Al-Bara ibn 'Azib came to us so we asked him about this. He said: My partner, Zaid ibn Al-

Arqam, and I did the same and we asked the Prophet (SAW) about this.

He (SAW) said: 'That which is in cash you take, and that which is in credit you return it

back'.” Ad-Daraqutni narrated from Abu Hurairah that the Prophet (SAW) said: “The Supreme said I am the third of the two partners as long as one of

them does not betray his companion. If he betrayed, I would withdraw from them.”

THE HANAFI SCHOOL DIVIDES PARTNERSHIPS INTO TWO CATEGORIES

CATEGORY FORMS OF PARTNERSHIP

Work from both side Sharikat al-inan: Amwal – capital Amal – work Wujuh – credit worthniess

Work from one side only Mudaraba, muzara’ah, musaqah

BANKING MAIN INSTRUMENTS

i. Sale-based principle

ii. Profit sharing principle

iii. Lease-based principle

i. Capital and Interest

ii. Simple Interestiii. Compound Interest

ISLAMIC BANKING CONVENTIONAL BANKING

Murabahah – a contract of sale and

purchased transaction for financing of an

asset where the cost and profit-margin are

known.

Bai al-Salam – a sale whereby the seller

undertakes to supply some specific goods

to the buyer at a future date with an

advance payment of the full price from

buyer.

Bai al-Dayn – a sale of debt which

widely used for sale and ourchased of trade document

such as banker acceptance.

Bai al-Inah - a contract where the

seller sell his asset to the buyer at an

agreed selling price to be paid by the buyer

at a later date.

Bai al-Istisna – a contract where a party undertakes

to produce and sell a specific product. SALE-BASED

PRINCIPLE

CO

NTIN

UE…

PROFIT-SHARING PRINCIPLE

Musyarakah – a contract between

partners on both capital and profit which the proportional of profit

and loss been agreed.

Mudarabah – a partnership in which

one party provides the capital and the other

provides on the labour or skill.

LEASE-BASED PRINCIPLE

Ijara mean giving something to rent

Ijara is the contract that work on lease-base principle

Can be either operate on the operating lease mechanism or

financial lease mechanism

INTEREST S

imp

le In

tere

st

An interest is charged on the original amount, or principle amount lented.

Cap

ital an

d in

tere

st

An income that is received as a result of the possession of contractual obligation for payment on the part of another. C

om

pou

nd

In

tere

st

Interest paid on any previous interest earned, as well as on the principle borrowed which mean, interest earned over a period of time is add to principle.

INVESTMENT

Islamic finance means by raising capital by corporations in the Muslim world.

Investment must not involve interest also known as Riba’.

Cannot included in business that deals with prohibited items.

Islamic bank and customer share the risk of any investment on agreed terms.

Any type of investment on business that deal with prohibited items.

CONTINUE… Shariah compliant investment funds are

equity funds, real estate funds, and money market funds.

Ensure that the terms and rights of all parties are safeguarded in conformity with Islamic principles.

Mudarabah is an investment partnership where the investor give some funds for capital

Ijarah is a lease agreement of lending money and earning interest.

DIFFERENCE INVESTMENT IN SHARIAH AND COMMON LAW

Murabahah Sukuk Holders receive a share

of profit from underlying asset and accept a share of any loss incurred

Shariah Compliance Stocks

Fixed interest Bonds Receive regularly

scheduled interest payment for the life of the bond

Stock-exchange

Shariah Common law

CONCLUSION

We have different ways that both Islamic and conventional use contract, we can see here difference between takaful and conventional insurance, in takaful people donate their money to invest in halal places, but in conventional insurance policyholders give the money to the companies then this money is invested in non-sharia places

Thus, now it clear that Islamic and conventional use contracts both in legal and illegal in terms of:

i. insuranceii. taxationsiii. partnershipiv. investment