Shari'ah Non-compliance Risk Management and Legal Documentations in Islamic Finance

Chapter 5

Understanding the Sharī`ah Requirements for Mitigating the Sharī`ah Non-Compliance Risk in Islamic Finance

5.0. INTRODUCTION

It is important to have a good understanding of Sharī`ah requirements in the financial transactions in order to appreciate the Sharī`ah non-compliance risk in the Islamic banking activities. The fundamental Sharī`ah requirements in formulating a financial contract are: the sigah/statement of the contract, the contracting parties, and the subject matter of the contract. These three pillars have to fulfill some specific requirements in order to be valid and accepted from Sharī`ah perspective. These conditions are discussed briefly next.1

5.1. THE FUNDAMENTAL ISLAMIC PRINCIPLES IN ISLAMIC CONTRACTS

5.1.1. The Formation of the Financial Deal through Offer and Acceptance/Sighah

Sighah of the contract (offer and acceptance), known also as the statement of the contract, is the appropriate way to form the contract in Islamic commercial law; each financial transaction needs a specific formula in order to conclude the transaction. In a sale, the offer and acceptance are the words used for concluding a sale by common usage and custom of the place.2 Therefore, sighah in contract reflects the consent of the parties in the contract and is considered as a primary condition of any contract. Obviously, the sighah is formulated through an offer (ijab) and acceptance (qabul). Sighah is an external proof of the contract that reflects the internal and intangible ...