TUTORIAL 4

1. Subject matter of the contract refers to the contracted object upon which the legal rulings
and effects of the contracts are manifested

Discuss.

There are several conditions that need to be fulfilled in a contract. The Shariah has laid
down some essential conditions of the subject matter that need to be fulfilled. One of the
conditions is subject matter and the conditions must be fulfilled in order to make it a valid
subject matter.

The first condition of the subject matter is the value of the subject matter. The Subject
matter must be of value in the eyes of Shariah, it must also be consistent to Islamic teaching.
Therefore wine, carcass, pork and liquor are considered non valuable and cannot be a subject
matter of a contract.

The second condition which must be fulfilled is the knowledge. The parties involved in
the contract must have the knowledge of subject matter. Parties if the contract must precisely
determine the subject matter. The subject matter also must be ascertained by description to avoid
misunderstanding. Both parties to the contract must have the knowledge for subject matter as
selling something which is unknown constitutes Gharar.

Another condition is the subject matter must exist at the time of the contract. The selling
of a house that is yet to built is invalid. Other situation which will make the subject matter
invalid due to non-existence is a contract involving an embryo which is still inside the mothers
womb.

The forth condition of the subject matter is deliverability. The seller must be able to
deliver the goods to the buyer. Therefore selling a stray animal is void because the deliverability
from the seller is questionable. The subject matter must be legally owned by one of the parties or
unauthorized a s an agent.
 Tutorial 5

1. Distinguish between Manufacturing Sale (Istisna) and Forward Sale (Salam).

In Arabic language, Istisna means to request someone to manufacture an asset.
Technically, Istisna is a contractual agreement with a manufacturer to produce an items with
specified descriptions at a determined price, and manufactured from his own materials with his
own effort. It is a process where payments are made in stages to facilitate the work of
manufacturing and processing. On the other hand, Salam means advance and leaving. It is a sale
contract whereby the seller undertakes to sell some specific commodities to the buyer at an
agreed future date in exchange for a price fully paid in advance on a spot basis. There are several
difference between Istisna and Salam.
The first difference between Istisna and Salam is in term of legality. Salam is approved by
Prophet in Hadith. On the other hand, Istisna has no clear provision in Quran or hadith. Istisna is
based on istihsan or legal rule by Hanafi on the basis of legitimate needs of society.
The second difference between Istisna and Salam is the objective of the sales. The
objective of Salam is to serves the interest of the seller due to his need liquidity. It also serves the
need of buyer to get the commodity at certain price in the future. The objective of Istisna is to
serve the need of buyer to obtain the goods to be manufactured according to his specifications
which is not in the market
The third difference is the time of delivery. The time of delivery for Salam must be fixed
upfront. As for the time of delivery of Istisna, Hanafi school suggested that the time of delivery
is not fixed. However, Abu Yusuf stated that it is possible to have a fixed date of delivery.
The next difference between the two is the methods of payment. In Salam, it is essential for
buyer to pay the full amount of price at the time of contract. However in Istisna, the payment is
flexible whereby the parties may agree the payment to be deferred. The payment can also be paid
in lump sum or instalment.
The last difference to be considered is the binding nature of the two. Once a contract of
Salam is concluded, the contract will be irrevocable and binding to both parties. The contract
cannot be revoked by either one of the party. Only when the consent of another party is obtained,
the contract can be cancelled.

TUTORIAL 6
1. Identify which statements areTrue or False.

a. Sukuk were initially introduced as alternative to the Islamic equity market.(false)

b. Bonds are evidence of asset ownership. (false)
c. Sukuk structures and their underlying contracts are very similar to bonds. (true)
d. Sukukare wider than bonds because they include both debt and non-debt assets. (true)

2. The following are true bout sale-based sukuk, Except:

a. SukukMurabahah represents rights of claim on accounts receivable.

b. Sukuk Salam are freely tradable in the secondary market according to the global Shariah
standard. (false)
c. The Malaysian version of SukukIstisna is not acceptable in the Middle East.

3. Which of the following is most accurate about SukukIjarah:

a. the issuance price of SukukIjarah has no relationship with the value of the underlying asset.
b. SukukIjarah represents the rental income to be received. (true)
c. The sukuk holders are responsible for major maintenance and insurance of the assets.

4. Discuss the structure of SukukIjarah and give an example how its work.

Under this structure, the Issuer must have taken a particular asset from the Investor on lease
(Ijarah). Normally, the asset is originally from the Issuer, and sold to Investors (normally
intermediated by a SPV), before being leased back to the Issuer for a rental. The lease contract
has created a financial indebtedness/ obligation i.e. obligation to pay the lease rental. To evidence
this, the Issuer issue SukukIjarah to the Investor. The Investor may sell the Sukuk to the
secondary market based on selling of debt which is backed by a tangible asset.

For example the Segari Energy Ventures SdnBhd (SEV), who sold its asset of RM 522 million to
the Financiers who then, lease the asset back to SEV in return for Ijarah rentals. SEV then issues
RM 522 million sukukijarah as evidence for the rentals. The sale of the issued sukuk is towards
the investors.

TUTORIAL 7
Question 1 - Elucidate the contract among Takaful participants

The word Takaful is derived from the Arabic verb "kafala" which simply means to take
care of one's need. Therefore, the pact between at least two parties agreeing to jointly guarantee
one another in the event of a loss, as a consequent of being afflicted by a calamity defines the
term "Takaful".

Section 2of IFSA defines Takaful (Islamic insurance) as an arrangement based on mutual
assistance under which Takaful participants agree to contribute to a common fund providing for
mutual financial benefits payable to the Takaful participants or their beneficiaries on the
occurrence of pre-agreed events. In general there are two contracts currently used in Takaful
namely the Mudarabah model and the Wakalahmodel.

To begin with,Mudharabah is defined as a profit sharing principle applied normally to a

business or commercial contract between the party that provides the fund or capital and the party
that manages the business. For Takaful this would mean the contract of profit sharing between
the Takaful participants and the operator from the profit, if any, of the Takaful business. Under
this arrangement, a profit sharing contract is signed between the operator, as the entrepreneur or
termed Mudharib entrusted with managing the Takaful business and the participant(s) as the
provider of capital, called sahibul-mal who is obliged to pay the Takaful contribution as the
capital or rasul-mal. The contract will define profit of the Takaful business and the ratio to be
shared between the two parties such as 50:50, 60:40 or 70:30 between the participant and
operator respectively. In essence, profit in Takaful is defined as returns on the investment and
surplus from the underwriting in respect of the Takaful funds only. Therefore this does not
include profit posted by the Shareholders Fund.

Notwithstanding the above, it is the responsibility of the operator to safeguard the interest of the
participants in order to ensure the business will not be seriously affected by the loss that might
jeopardize the credibility and confidence of Takaful as a whole. For this reason proper
governance, prudence and professionalism in managing the business on the part of the operator is
imperative. In the event of such loss, it is incumbent upon the operator to make good the loss by
qard or loan by the shareholders. An important feature to note is that under the Mudharabah
model, management expenditure is not charge on the Takaful fund instead it is borne by the
shareholders fund. Revenue of the latter is its portion from the profit sharing of the Takaful
funds with the participants, and all returns on the investment of the shareholders fund itself.

As for the second term wakalah, in Arabic it means agency. Therefore under the structure, an
agency relationship is agreed between two parties to conduct a certain business undertaking.
Based on this premise, the model describes an agency agreement between the operators, acting as
the agent or wakil to the participant as the principal to manage the participation of the latter in
a variety of Takaful products provided by the operator. In return for rendering the agency
services, the operator is permitted to charge a fee under the agreement. The fee is payable from
the Takaful contribution paid by the participant. In this sense under the above model,
management expenditure can be charged to the Takaful fund as upfront charges.

By this model, the operator earns its revenue from the agency fee described in the
aforementioned as well as returns on the investment of its shareholders fund. However, there are
also operators practicing the above model charged performance fees on its roles and services of
managing the investment of the Takaful fund. In the event of a cancellation or surrender, the
participant will be refunded of the net balance of his contribution, if any, after deducting all the
upfront charges such the Wakalahfees and other management expenses from the Takaful fund.