1. Mahyuddin Khalid
emkay@salam.uitm.edu.my
ISLAMIC FINANCIAL
LEGAL FRAMEWORK
LEGAL DOCUMENTATION FOR ISLAMIC
BANKING AND FINANCE

2. CONTENT
2
 INTRODUCTION
 BASIS OF DOCUMENTING AN
AGREEMENT
 RULINGS IN DOCUMENTING AN
AGREEMENT
 THE IMPORTANCE OF LEGAL
DOCUMENTATION
 CONCLUSION

3. INTRODUCTION
3
 The Islamic banking and finance industry has
become more advanced and complex, the main
basic safeguard is to transact all products in
written form with all parties concerned.
 The Islamic fiqh also recognize written contract
as valid although not as strong as its proponent
to oral contracts.
 It is importance of have legal documentation or
written contract drawn up, agreed a executed by
all parties concerned to avoid conflicts and
injustice not just to aggrieved party but to the
industry, the people and Islam as a whole.

4. BASIS OF DOCUMENTING AN
AGREEMENT
4
 In practice and by law, all agreements whether given in
writing or by word of mouth, are within certain exceptions of
equal.
 For the sake of evidence, however, it goes without saying
that it is appropriate to have agreements drawn up in
writing.
 Islam is also equal to the same principle and this type of
document is called al-sakk.
 Al-sakk refers to documents involving the written
documentation of a transaction involving the terms
conditions of an agreement or the action of transferring a
property by an individual.
 Documenting agreement is one of the principle in Islamic
contract law.
 It derived its basis in having written contract in any
transaction from Al-Quran

5. RULINGS IN DOCUMENTING AN
AGREEMENT
5
 Allah SWT has commanded that all transactions
involving future payment or future consideration must
be reduced to writing.
 The Muslim jurists differed whether the word has the
effect of obligatory (wajib) or voluntary option for
parties in such transaction to put in writing on
whatever agreed between them.
 It can observe the importance placed by Shariah in
clearly expressing the intention of any party or
parties to enter a contract and putting all that has
been agreed in a written form of documentation
which in return:
 Binding and has legal effect
 Enforceable in law
 Able to be referred back in the event of variation or
determination of the transaction

6. RULINGS IN DOCUMENTING AN
AGREEMENT
6
 Majority of Muslim jurists have placed the status of
recommendation as to the writing of contracts in
transaction of fixed future obligation.
 Later Muslim jurists have emplaced importance to
documenting such transactions
 It is based from the observation that there's need to
document those transaction due to the complex and
sophisticated nature of the contract.
 This is line with the principle- as Islamic law or
Shariah which has been upheld and proven as
universal, appropriate and be fitting with any
generation.
 Documentation is important to safeguard the IFI from
being labelled injustice or equivalent to the
conventional banking and financial practice.

7. THE IMPORTANCE OF LEGAL
DOCUMENTATION
7
 The importance of documenting all transactions
in Islamic and Finance is so crucial at this period
of time.
 Opinion by the earlier majority Muslim jurists can
only be employed only to those normal day to
day transaction.
 With regard to Islamic Banking and Finance
products, legal documentation is crucially
required and it can be seen from the following
reason:
 To Comply with Shariah Principle and Junction Laid
Down in the Surah Al-Baqarah verse 282
 To prevent doubt among parties
 Requisites of Being Shariah Compliant and the
Malaysian Law

8. TO COMPLY WITH SHARIAH PRINCIPLE AND
JUNCTION
8
 This injunction is interpreted as a
recommendation by majority Muslim jurists.
 Later Muslim jurists have placed documenting
future transactions as crucial and obligatory to
parties involved.
 Islamic Banking and Finance has tremendously
changed and become as complex and advanced.
 Muslim jurists has differed their views from the
majority and placed importance in documenting
the transaction.
 This current view should be followed and
adhered to by all parties.

9. TO PREVENT DOUBT AMONG PARTIES
9
 Allah SWT’s verdict clearly stress on having a
documentation as proof and evidence of an agreement to
transact on certain terms and conditions which binds parties
or their/successors in the future.
 When there is a written contract:
 Doubts as to the scope and limit of parties’ duties, obligations
and liabilities may be dispelled.
 May be used and tendered by the parties in the court or
arbitration proceeding, provided that it is valid according to the
law,
 Any risk in a transaction can be minimized to the lowest extend
as parties may wish and agreed to.
 Without legal documentation, aggrieved party may find
themselves left in a lurch without getting back any redress,
remedy or damages as they have nothing as proof to the
existence of the contract.

10. REQUISITES OF BEING VALID AND
ENFORCEABLE
10
 Key elements for validity and enforceability of the legal
documentation are:
 Compliance with the Shariah principle
 to ensure that all the terms and conditions of the transaction has all
the characteristics of being in line with the Shariah so that it ensures
acceptance, validity and enforceability from the Islamic law.
 Compliance with the existing laws of the country
 The documentation must adhere to the laws of the country to
determined the status of the document in the eyes of the law.
 Such document must get its validity to enable it to be tendered as
evidence in any courts.
 Must be structured in manner to be enforceable in the courts
 The documentation should also comply with the Shariah principles
 In drafting Islamic contracts should avoid using terminologies which
is conflicting with the Shariah principle
 The structure of the document must adhere to Shariah principles to
avoid conflict as to the terms and conditions in the contract.

11. FUNDAMENTAL DIFFERENCES
11
 Islam has prohibited interest and permitted trade - no
loan term in Shariah documents
 The Islamic finance legal documentation must
emphasize the spirit of the transaction
 The lawyer must ensure:
 The contract free from any elements forbidden by Islam
 Exercise the ethics and integrity of and not to simplify
things or try to cheat
 Must rank his obligation to Allah SWT above his
obligation to his clients
 That legal documentation should reflect the contract
as intended by the contracting parties
 This would give rise to evidence of the contractual intent
and content by the parties involved and the agreed terms
and conditions set forth.

12. FUNDAMENTAL DIFFERENCES
12
 The terms and conditions in the document must use past
tense
 Muslim jurisprudents (fuqaha’) have agreed that the contract
should be expressed in the past tense by both parties.
 There is no agreement on the use of other tenses, like the
present indicative or the imperative.
 The importance in the language also signify whether it is a
mere promise or a contract.
 The Mejelle provided that the use of future tense indicates mere
promise is not binding on the party making it even if it is
breached, the party cannot enforce it while the use of past or
present tense leads to binding contracts.
 That there should be no jumbling together of multiple
contracts
 This should be the way in drafting Islamic contracts to avoid
dubiousness or uncertainty of the Shariah principles applicable
in an Islamic Banking and Finance transaction.

13. RATIONALE
13
 Rationale of having legal documentation to bind
parties in an Islamic Banking and Financial
transaction is:
 To enable us to meet the religious requirements of
Muslims.
 The documents evidencing the transaction of Islamic
nature would be different in its principles and
objectives and to enable all Islamic principles of
justice and fairness is duly documented.
 To differentiate and make clear the principles of
Shariah in Islamic banking and finance.
 All parties would focus on accuracy & integrity in the
terms and conditions in the documentation process.

14. CONCLUSION
14
 It is important in documenting transaction of
future debts or obligation.
 No matter the majority muslim jurists are in
favour of placing the Quranic injunction as
only an option to parties involved, in current
Islamic banking and Financial practice, it is
crucial that transaction be put in writing.
 It is wise and well prepared if parties reduce
whatever terms and conditions they have
agreed to writing.

15. 15 END OF CHAPTER