Introduction

Islamic finance is distinguished from conventional finance in that its principles are derived from the sources of Islamic law (#Shariah), which includes the Quran, Prophetic teachings of Muhammad (S.A.W.) and scholarly consensus (ijma), among others. Its primary value proposition is that it is constructed on the principles of justice, equity and mutual benefit. This is succinctly captured in Chapter 4:29 of the Quran in which the Almighty states, “O believers! Do not devour one another’s wealth illegally, but rather trade by mutual consent…”

Ensuing from this Shariah basis, various contracts or contractual arrangements have been introduced in the Islamic finance industry to facilitate transactions between legal entities, consisting of natural persons (i.e. human beings) and juridical persons (i.e. institutions and corporations).

Types of Islamic Finance Contractual Arrangements

Of the many groupings of IF contracts or instruments, here is one that is appropriate:

A Contract / An Aqd

More important that the categorization of IF contracts is the definition of a contract. A contract or aqd is an “إتفاق بين طرفين أو أكثر“ or an agreement between two or more parties. It is made up of promises to do or abstain from doing something. These promises constitute considerations that the parties undertake to uphold. They may either be made unilaterally (i.e. by only one party) or exchanged bilaterally or multilaterally, meaning between two or more than two parties, respectively.

When contracts are binding, they become legally enforceable against the parties. This concept may be understood through the following story.

A Father’s Promise!

Ibrahim’s father, a man very concerned and heedful of his children’s Islamic education, promises his son the latest model of the BMW 2 Series if he memorizes the whole Quran before the end of the year. Determined to meet the deadline and earn this grand reward, Ibrahim puts all his other commitments aside, focusing entirely on ‘Mission Memorize the Quran.’

Fast forward to 31^st December, just 3 hours before New Year’s, Ibrahim bursts into the house while his family is having dinner and breaks the news “I just received my ijazah from Ustaz Adil!!” His father drops in tears. What a year it has been! What a New Year’s gift for his parents!

A week later, he reminds his father of the promise he had made earlier, but it seems his father keeps stalling him on the matter.

Ibrahim begins to think that his father does not intend to give him the reward he promised him – perhaps he never did. The question that is posed here is  the following:

Can Ibrahim’s father simply not uphold his promise? In other words, does Ibrahim have a Legal right to claim the gift from his father?! The answer would simply depend on whether or not the promise or the contract is binding… because if it is, then it is enforceable! To understand whether it is so, we first need to establish what a binding contract is.

Binding (and Enforceable) Contracts?

A contract that is binding (known as an aqd lazim) is one in which the contracting parties cannot unilaterally cancel or revoke the contract i.e. no one party can simply terminate the contract at will. The parties have to mutually agree upon it. A non-binding contract (an aqd ghair lazim), on the other hand, is a contract in which each party is free to revoke the contract without the prior approval of their counterpart.

It is the exchange of considerations that distinguishes a binding contract from a non-binding contract. Contracts like sale and purchase agreements, where money is exchanged for property, or lease transactions, where money is exchanged for lease services, are examples of binding contracts. On the flip side, a sadaqah or donation is an example of a contract or an aqd that is ‘ghayr lazim’, non-binding because only one party is extending the consideration.

Based on this principle, can you think of any other contract in which a party would have the right to simply change their mind or revoke their consideration without the consent or prior approval of the other party? If you thought about gifts, then you’re spot on!!

Gifts are contracts in which one party extends a consideration to the other without anything in return.

This rule, however, does not apply 100% of the time. The exception to when a non-binding contract becomes binding kicks in is when the person on the receiving end of the promise (i.e. the promisee) relies on the promise made by the promisor and either does something they otherwise would not have done or abstains from doing something they otherwise would have done.

In such an instance, the promisee’s reliance on the promise would constitute consideration on their part, transforming the contract from being ghayr lazim (non-binding) to being lazim; binding and enforceable against the party who made the promise. Let’s see if we can apply this principle to our current case:

The contract at play is a gift. The father in this case is the promisor and the son, Ibrahim, is the promisee. Now, as we mentioned earlier, the default rule is that promises are legally non-binding. HOWEVER, in this case, we know that Ibrahim had relied on his dad’s promise and memorized the whole Quran. Therefore, his memorization would constitute consideration in exchange for his father’s consideration, which is the car that he promised to buy him.

As such, this contract has now unfortunately – or fortunately – become binding and legally enforceable against Ibrahim’s father.

Spiritual Consequences of Breaking Promises in Islam

Practically-speaking, this principle applies in all legal systems, Islamic and others. In fact, AAOIFI, which is the highest Shariah standards-setting body within the Islamic finance industry, has dedicated a whole Standard (SS49) elucidating the Shariah rules that apply to unilateral and bilateral promises. There is, nevertheless, a distinctive feature that sets Islamic law apart from other laws, and that is the spiritual component. Numerous references in primary Islamic texts indicate that a Muslim should always honour their promise. In Chapter 23:8 of the Quran, Allah describes the honouring of trusts (Amanah) and covenants/promises (Ahd) as being a cornerstone feature of successful believers.

Additionally, a hadith reported in both Sahih al-Bukhari (33) and Sahih Muslim (59) states that amongst the signs of hypocrisy within a believer is his/her habitual failure to uphold promises. So even if Ibrahim’s father finds a way to not uphold his promise in this world, he would still have to face the consequences of it on the day of judgment.

Attributions and References

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https://quran.com/ms/an-nisa/29

https://quran.com/ms/23?startingVerse=8

https://www.abuaminaelias.com/dailyhadithonline/2014/01/27/three-signs-of-hypocrite/