What makes a valid contract under Shariah principles

In-Depth Analysis

Having discussed the elements which make an offer invalid, we shall today deliberate on what features make a valid Shariah contract and how a contract can become void. A golden Shariah principle is that gain is to be realized only when there is a risk of loss. The seller must undertake the ownership and possession risks over the subject matter of the contract which must be in his or her possession at the time of making the offer. For example, if an Islamic bank has extended a trade financing facility to its customer, it must first acquire the ownership of the goods and possess them before selling them to the customer. For so long as the goods are held by the Islamic bank, from the time these were purchased from a third party until these are sold to the customer, the bank remains exposed to the ownership and possession risks. If the bank tries to wriggle out of these risks by way of some fabricated means, the transaction shall become void in Shariah law. What can happen when the bank remains exposed to the ownership and possession risks? The goods may get destroyed due to fire or flooding or could be stolen. These are precisely the ownership risks Shariah requires a potential seller to remain exposed to. In the leasing arrangement, there could be a situation that it is a headlease and sublease arrangement and the lessor under the sublease is not the owner but the sublessor. In this case too, the ownership risk will remain with the actual owner (the head-lessor) whereas the possession risk shall transfer to the lessee to the sublease. However, this is only true if the actual owner has permitted the sublessee to sublease the asset. What if a leased asset gets destroyed while it is in the possession of the lessee? Obviously, the actual owner of the asset shall bear that risk. It will be examined if the destruction was caused by the negligence of the lessee or not.