Jun 08

Aqad in Islamic Finance

One of the Islamic scholar – Al-Barbati defines ‘aqd or contract in his book, Al-Inayah ‘ala Fath al-Qadri, as : “Legal relationship created by the conjunction of two declarations, from which flow legal consequences with regard to the subject matter”.

The literal meaning of ‘aqd is ‘join’ or ‘tie’. The English word for ‘aqd is ‘contract’. ‘Contract’ can also be defined as being an expression of the matching between a positive proposal made by one of the contractors and the acceptance of the other contractor in a way which has impact on the subject of the contract. The contract must consist of:

Elements of ‘Aqd Description/Remarks
Aqidain (the parties to the contract It is a condition of a valid contract that the parties possess capacity. Capacity is a quality which makes a person qualified for acquiring rights and undertaking duties and responsibilities.
Sighah Sighah is the form of contract consisting of ijab and qabul (offer and acceptance). The offer made by the first party to the contract is called ijab because it gives and confirms the freedom of acceptance to the second party
Ma’qud alayh The subject matter and price. They are conditions to be taken into consideration according to Islamic jurisprudence for subject of contract has to be legal, in existent and identified
  • The above table is mainly for bilateral contract in nature i.e. for sale and purchase. However, takaful contract is an unilateral contract where the existence of ma’qud alayh (subject matter) is tolerable.
No Underlying Contract Example
1 Kafalah

A contract of guarantee whereby a person adds to himself a responsibility or liability on behalf of another person

In Takaful business, the participant contributes to the Takaful fund by a mutual agreement that the Takaful Operator is entrusted to undertake in managing the Takaful fund prudently and to pay the Takaful benefits to the participants in the event of a misfortune.

The kafalah contract is prevailing in takaful operational system in Malaysia and worldwide.

2 Tabarru

Means gift or donation which is given by one in favor of someone without seeking any consideration

In Takaful business, the participants mutually agree to contribute to the Takaful fund based on the contract of Tabarru

Tabarru contract is the core element in takaful operation and is not only practiced in Malaysia but is also practiced worldwide.

3 Wakalah

A contract of agency, in which a person (muwakkil) delegates his business to another and substitutes the other in his place. The person delegated is called wakil. Thus, both the principal and the wakil are equally bound by each other under contract of wakalah.

In Takaful business, the participants appoint the Takaful Operator as their wakil and to manage their Takaful coverage and the Takaful fund.
4 Jualah

A contract of hiring for services, in which one party undertakes to pay a specified amount of money for services rendered in accordance with the terms negotiated between them

In Takaful business, the participants contribute a sum of money to the takaful fund. The takaful operator is entrusted to manage the takaful fund prudently in terms of investment and pay out takaful benefits to the eligible participants in the event of a misfortune. The takaful operator is entitled to a fee for the services rendered.
5 Mudharabah

The nature of Mudharabah (Profit sharing) practices is that, it is a financial contract whereby one party (Rabb al-mal) provides fund to the other other party (Mudharib) who undertakes to manage the fund through investment or trade and generates profits, in which both the Rabb al-mal and also the Mudharib share in the profit in a pre-agreed proportion

In Takaful business, the participants contribute a sum of money to the takaful fund in which the participants are like Rabb al-mal, while the takaful operator is like Mudharib who agrees to manage the fund in view of making profit in which both, the participants and also the Operator share the profit proportionately. However, in the event of loses, it will be borne by rabb al mal unless the loses is due to negligence by Mudharib.

Mudharabah contract is practiced by Syarikat Takaful Malaysia when it first started operation. However, for some Takaful Operators in Malaysia, Mudharabah is still practiced only on certain products.

6 Musharakah

The contract of Shirkah (partnership). Musharakah is an agreement between two or more parties to operate a particular business in which all parties contribute to the capital in view of profit. In musyarakah dealing, the parties involved herein share the liability, profit, and also loss according to their agreement

In Takaful business, the respective shareholders mutually agree to contribute a sum of money to initiate the takaful business. Thus mutual agreement among the shareholders is called musharakah


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