INTRODUCTION

Islam acknowledges the importance of commercial transactions in fulfilling the needs of human being. Under the light of the Divine sources, there is Islamic teaching and system named as Shariahas a guidance to regulate all human actions in ibadah(personal worship to God) and muamalat (mutual dealing) (MohdAkram, 2006). The Maqasid Al-Shariah (objectives of Shariah) aim at securing benefits of people and preventing harm from people (MohdAkram, 2006) regardless of race, religion, geography and sex as expressed in Al-Quran: And We have not sent you forth (O Muhammad s.a.w) but as a mercy to all the worlds (Al-Anbiya:107). Commercial transactions, which inclusive of exchange of commodities, buying, selling, pawn, mortgage, lending, hir e, leasing, debt, etc., are included as one of the branches of muamalatunder Shariah (Faizah, 1995; Abdurrahman, 1999). However, commercial transaction under Shariah is differ from the conventional commercial transaction in the sense that it is not solely to gain individual profit but most importantly, it is also contents obligation towards Allah s.w.t. Consequently, commercial contract which is in compliance with Shariah underlines the elements of justice, accountability and transparency, thus it is c ompatible to be used whether by Muslim or non-Muslim. Construction is unique and complex, thus contracts related to it are also share the similar attributes. Therefore, formation of contract is a momentous event in procuring construction as a contract sets the involved parties rights, requirements, responsibilities, remedies and liabilities in relation to the construction works undertaken. The practice of construction contract in Malaysia is governed by Contract Act 1950 (Act 136). According to Siti Nora Haryati and Khairuddin (2008), Construction Industry Development Board (CIDB) recorded that more than 37,000 government and private construction contracts with value more than RM 380 billion have been awarded to contractors since the year 2000 until June 2 007 (CIDB, 2007). This statistic embraces projects from different categories i.e. residential, non residential, mix development, social amenities, infrastructure and others.

Notwithstanding the value of construction contracts awarded, there is no known literature has been found discusses on whether the practices in the formation of construction contracts comply or otherwise with the Shariah. In Malaysia, the application of Islamic commercial dealing is well -known in the areas of banking, insurance and capital market. The materialization of Islamic Banking Act 1983 and Takaful Act 1984 lead to the establishment of Islamic financial system in Malaysia (NikNorzrul, Mohamed Ridza&MegatHizaini, 2003; Bank Negara Malaysia, 2005). With the support from the gov ernment, Malaysia is now leading towards becoming a global hub for Islamic finance. It is reported that Malaysia is the largest sukuk (Islamic bond) insurer in the world accounting for about US$47 billion (RM157.54 billion) equal to two -thirds of total Islamic bonds outstanding worldwide (The Edge Daily, 12 December 2007). Islamic banking in Malaysia is also the largest in Asia (The Edge Daily, 12 December 2007) with assets accounting RM147 billion (US$43.8 billion) for the year ending 2007 (BeritaHarian, 3 0 January 2008). The tremendous performances of banking and financial systems give positive effects to the other sectors of the economy. In relation to the construction industry, such systems affect the way facilities being procured specifically in fin ancing construction projects. Clients and construction industry players frequently employ products such as bay bithamanajil (deferred sale contract), bay al mudharabah (profit sharing contract), bay al-Istisna (manufacturing contract) and sukuk (debt security) in financing projects. Moreover, it is also common in the industry to insure against risks through one of the many products available under the various takaful schemes (Khairuddin, 2007). New Pantai Expressway and Kuala LumpurInternationalAirport are examples of construction projects that involve Islamic debt securities during their execution. Islamic financing given to construction sector also showing increment, for example, Bank Muamalat reported that Islamic financing to construction in year 200 7 reaches RM 859 million as compared to year 2006, about RM 659 million (Bank Muamalat, 2008). The outcome of the study is considered significant in terms of enhancing understanding of the muamalat in the area of construction procurement in relation to contract formation.

OBJECTIVES y

To study the current practice in construction procurement (PAM) with specific reference to contract formation and appraises the practice in terms of its compliance with the principles of Shariah.

To study the current practice in the formation of construction contract whether in compliance or in contrary with Shari'ah.

LITERATURE REVIEW y

Shariah is important to be implemented in human daily lives as the primary objective of the Shariah(maqasid Al-Shariah) is the protection on five basic aspects of human life (al-Kulliyat al-Khams) i.e. religion, life, mind, lineage, and property. The transgress ion against any of these is prohibited by Islam as these elements are the foundation of the harmonious and peaceful society (Haron Din et. al., 2003; MohamadAkram, 2006). It is to fulfill obligation as Muslims towards Allah s.w.t which requires us to ident ify the halal (lawful) and haram (prohibited) in our everyday dealings. The Prophet Muhammad s.a.w mentioned (Narrated by At -Tirmidzi, No. 2416 in Zaharuddin, 2008): A son of Adam is not to escape on the Day of Judgment in front of Allah s.w.t unless he h as been asked on five matters: About his age on how he had spent, about his youth on how he had used, about his properties from where they came and how they were spent, and about his knowledge on how it was used.

The concept of Shariah has been discussed by Siti Nora Haryati and Khairuddin (2008). Therefore, concept of Shariah compliant refers to any activities or affairs which is made or done according to Shariah rules and standards derived from its sources (Al-Quran, As-Sunnah, Ijma, Ijtihad ) and embrace the objectives of Shariah (maqasid al-Shariah).

In Islam, it has been agreed by scholars that Istisna is considered as the most appropriate Shariahcompliant contract agreement to be used for construction (Wahbah Al-Zuhayli, 2002; Muhammad Al-Bashir, 2001).Istisna is commission to manufacture contract which it is a contract to purchase item to be manufactured by the manufacturer who provides raw materials and labour in producing the final products as specified in the contract. However, this contract is not only restricted to the traditional production but also can be extended to the construction sector (Wahbah Al -Zuhayli, 2002). Currently, Istisna contracts are mostly used to finance construction projects by financial institutions whereby the financial institutions act as the middle man between clients and contractors. Therefore, there are no direct contractual agreements between contractors and clients, for the contractual relationships between clients and the contractors in constructio n to be Shariah compliant, the arrangement should be based on the Istisna. In fact, Saudi Arabian General Investment Authority (2005) reports that Istisna contract in construction has been practiced in Saudi Arabia since 1998. A hadith reported by IbnMajah mentioned the practice of reducing contract into writing that has been demonstrated by Prophet (s.a.w) i.e.: From Abdul Majid bin Wahab, he said: Adda bin Khalid bin Hauzhah said to me,Do you want me to read to you a letter that has been sent to me from Rasulullahs.a.w? I answered, Yes. Then, Adda has shown to me a letter that stated: This is the evidence of contract regarding a matter that has been bought by Adda bin Khalid bin Haudzhah from Muhammad, Rasulullahs.a.w, that has been bought from him a male or female slave which is free from any disease, damage and defect. This transaction is the transaction between Muslims (Muhammad Nashiruddin Al-Albani, ShahihSunanIbnMajah, Hadith No. 1838 Kitab al-Tijarah, 2007)

O believers! When you contract a debt from one another for a fixed period, put it (its amount and period of repayment) in writing. (Al Qur'an, Surah Al-Baqarah: 282).

LONDON, 23 January 2006 Construction finance based on the Islamic Istisna contract is set to increase both in the Muslim markets and elsewhere as structurers innovate new ways to make it more competitive in pricing and delivery especially in a conventional construction setting. In the UK, for instance, London -based ABC International Bank, a wholly owned subsidiary of the Arab Banking Corporation (ABC) Group in Bahrain, has pioneered a Parallel Phased Istisna (PPI), which it says sets new standards for the provision of Shariah-compliant construction finance in the UK. Istisna, according to the Shariah scholars, is a forward sale contract of acquisition of goods by specification or order, where the price is paid progressively in accordance with the progress of a job completion. This is practiced for example for purchases of houses to be constructed where the payments made to the developer or builder are according to the stage of work completed. On Shari'ahCompliant Construction Contracts, our studies so far indicated that the concept of Istisna (manufacturing contract) is relat ively compatible with the current practice in construction contracting, that the contract drawings and the bills of quantities are key documents making the current contract practice shari'ah compliant, etc. In terms of Shari'ahCompliant Construction Marketing, our studies so far indicated that the concept of 5 Ps in conventional marketing could We be also re -organized observed that to make supports them shari'ah compliant.

towards Shari'ah compliant construction procurement: contract, marketing, financing, etc is gaining momentum (Construction in the Muslim World, 2009).

Islamic finance is one of the fastest -growing segments oftodays banking industry. Formerly deemed a marginalindustry by some, Islamic finance is now recognised as avital and thriving market. While the size of Islamic financeand banking activities, estimated to range from $500bn to$1,000bn, is still a fraction of conventional banking, theimpressive growth rates of 10 15% seen in recent yearsemphasise the potential market for such activi ties. It is the fact that this growth is increasingly being seenoutside the traditional markets of the Gulf CooperationCouncil (GCC) countries and Malaysia which has meantthat global market participants and policy makers areincreasingly paying attention to its potential. Both NewYork and London have launched indices affiliated to theirmain Dow Jones and FTSE indices, to provide abenchmark for equity prices for investments in Islamicfinancial institutions. The UK Government has also playeda major role in try ing to make the City of London theglobal centre of Islamic finance by extending supportwherever possible, including the abolition of double stampduty on Islamic mortgages, and the recently announcedplans to test the feasibility of issuing Shariahcompliantsukukbonds. The 2007 Budget introduced new measuresfor sukukbonds to be issued, held and traded on the UK .

The Shariah contract parameter for Istisna is aimed to become true source ofreference on the nature and features of Istisna contract for the Isla mic financialservices industry, and to facilitate the consistent implementation of Istisna contract inMalaysia. Specific definitions and the basis for its legitimacy are described to facilitatethe understanding of the Shariah contract requirements. The features identified in thisparameter shall serve to assist the Islamic financial services industry to identify,understand, apply and distinguish the contract from other prevailing contracts in the industry. The features identified and described in this param eter are extracted from the text offatwas opined by the Shariah boards or committees of financial authorities andinstitutions. For each of the fatwa on a particular conditionality, activity, situation orcontext relating to the contract, the underlying conc epts and principles are deducedand synthesized to guide the development of the Shariah parameter.The features outlined in this parameter may serve as a

general guidance forapplication of an Istisna contract. Any practices of the IFI which are not specified inthe parameter can be conducted as long as they do not contradict the features asoutlined in the parameter.This parameter also takes into consideration relevant mechanisms and contracts suchas Wakalah, Kafalah, Rahn, Wad, Urbun and Ijarahwhere applicable and these areidentified and proposed as secondary features (Bank Negara, 2008)

SAUDI ARABIA: ABC Islamic Bank closed the US$100 million three -year syndicated revolving Murabahah facility for Munshaat Real Estate Projects Company. Participating banks included BNP Paribas, Emirates Bank International, Saudi British Bank, Abu Dhabi Islamic Bank, Libyan Foreign Bank, Arab Islamic Bank and Banque BIA. The syndication is Munshaats first, and proceeds will go to the development of prime properties in Mecca and Madina(Islamic Finance Review, 2008). UAE: Shariah compliant firm Rasameel Structured Finances net profits leapt to KWD2.17 million (US$8.18 million) for the financial year ended the 31 st March 2008 from the previous financial years KWD1.21 million (US$4.56 million). Total assets rose from US$119 million to US$179 million, while total liabilities stood at US$50.53 million, up from US$1.2 million in the financial year ended the 31st March 2007 (Islamic Finance Review, 2008).