Principles of Islamic Accounting

CHAPTER 7Islamic Commercial Contracts

Learning Outcomes

At the end of this chapter, you will be able to:

1. Explain why commercial contract law is important for business and accounting.
2. Describe the different systems of law in the world.
3. Explain the origins and development of Islamic commercial law and its revival.
4. Define and explain the differences between Sharia and fiqh.
5. Categorize and explain the components of the Sharia.
6. Describe the pillars and conditions of Sharia contracts and explain the rationale for these pillars and conditions.
7. Identify prohibited elements in contracts.
8. Classify contracts according to their legal validity.
9. Compare and contrast sale, lease-based, and investment contracts used in Islamic finance.

INTRODUCTION: LAW AND THE BUSINESS ENVIRONMENT

Students of accounting may be wondering what a chapter on commercial law is doing in an accounting textbook – perhaps a misprint that should have gone into a law book? Rest assured that this is not the case.

Accounting is mainly concerned with businesses, and businesses in every civilized society are operated under a set of laws we can loosely term ‘commercial law’. These laws prescribe the terms and conditions of various types of business contracts. It also involves situations where there are no specific contracts between parties but legal responsibilities exist, e.g. in case of the tort law of negligence.

Commercial laws set out rules by which, if and when the transacting parties are in dispute, the courts ...