Shariah classifies contracts into three main types. Let’s have a look at different types of Contracts in Islamic Law.
1. Contracts Resulting In A Permanent Transfer Of Ownership
These are the contracts that result in a permanent transfer of ownership of the subject matter of the contract. For example, a regular sale (or bai) of a car, where one party buys the car by paying agreed consideration to the other party. Under this exchange agreement, the title of the car is transferred to the party that bought the car, resulting in a permanent transfer of ownership.
2. Contracts Resulting In The Temporary Transfer Of Ownership
These are the contracts that result in a temporary transfer of ownership of the subject matter of the contract. For example, a loan agreement. Here the loaned amount temporarily transfers its ownership to the borrower, who can then use the received money. At the maturity of the loan agreement, the borrower returns the loaned amount to the lender, thus transferring the ownership back to the lender.
3. Contracts Resulting In No Transfer Of Ownership
These are the contracts that result in no transfer of ownership of the subject matter of the contract. A lease contract is a common example here. The lessor leases the automobile to the lessee under the terms of the lease. There is no transfer of ownership, as the lessor holds the legal title of the asset and the lessee only has the right to use the leased asset for the term agreed in the lease agreement.
Although, under a finance lease agreement the title of the leased asset might transfer to the lessee, that would be at the end of the lease term. It is important to understand the difference between different types of contracts. This is because, when structuring Islamic financial products, we might have to combine two or more different types of contracts. We must ensure that the end result of such a combination is also permissible. Therefore, we cannot combine contracts that are inconsistent (for example, combining a hiba contract (gift) with an ijarah contract (lease) might not be seen as permissible. As the former results in a permanent transfer of ownership, whereas, the latter results in no transfer of ownership).
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Very interesting and informative article regarding the Islamic way of contracts and transactions!
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