Understand These 6 Sharia Contracts before Investing to Make Sure It’s Halal and Blessed

Many people are often confused about how to differentiate sharia-compliant investment and its conventional counterpart. Among the fundamental aspects that distinguishes sharia-compliant investment from the conventional is the stipulated contracts. 

In sharia-based financial transactions, the contract that applies can make the transaction halal or haram. According to the principles of the the Islamic law, different transactions entails different responsibilities born by the parties involved. 

These contracts apply to all kinds of transactions regulated by the Islam, including investment. In addition, sharia-based investment instruments take into account not only the lawfulness or unlawfulness of the transactions but also the social and environmental impacts that they bring. 

Why is it important to invest? As explained by ALAMI’s Head of Funding Muhammad Triarso, investing our money is a way to prepare for our future, especially when we are no longer productive but still have to make ends meet. Read more about why we should begin investing in this article

Before you invest your money to develop your wealth, it’s best for you to understand the these types of transactions to keep your investment halal and blessed. 

6 Kinds of Contracts in Sharia Transactions

1. Al-Wakalah Bil Ujrah

Wakalah Bil Ujrah is a kind of contract through which a party can give authority to another party to act on their behalf, including to manage their funds, and the party appointed as an agent receives ujrah or fees. This dealing happens typically due to the boundaries of time and place that make it unable for the transacting parties to directly interact.

2. Al-Mudarabah Al-Muqayyadah

Al-Mudarabah Al-Muqayyadah is a transaction in which two parties i.e. the capital provider and the entrepreneur collaborate in an investment where the capital provider agrees to invest in exchange for a portion of the profit. This contract also specifies how and under what circumstance the entrepreneur may use the capital. 

Should losses occur, the capital provider will bear the responsibility unless there’s an intentional mistake by the entrepreneur by violating the contract stipulated at the beginning of the investment. 

3. Al-Musharakah

Another alternative contract that may take place in sharia investment is the Al-Musharakah or partnership. In this contract, the parties work together to finance a project. These partners share the profits and losses of the enterprises as the contract requires. They can work together to manage the enterprise or appoint other parties as the entrepreneurs.  

Illustration. In Al-Musharakah or partnership, the funders share the profits and losses of the business. (Pexels/Sora Shimazaki)

4. Al-Ijarah

Al-Ijarah or leasing is a contract that involves the transfer of the use of an object for a specified amount of time. There is no transfer of ownership, and the lessee will have to pay to the owner of the object (lessor) an amount of money (rent) as specified in the contract. 

5. Al-Istisna Bil Wakalah

This contract is used to order a certain product that will be used as the object of an investment, but the capital owner appoints another party as an intermediary or agent. As a consequence, the party acting as an agent by the capital owner will receive a share of the profits as stipulated in the contract. 

6. Kafalah

Kafalah is a contract where one party acts as a guarantor for another party regarding the fulfillment of an obligation to a third party. 

These are six contracts in sharia economics that are usually involved in investments. Before you invest your money, make sure you understand the contracts involved so you can avoid what is haram, and your investments will be blessed.

After you read about the different types of business contracts, are you interested in growing your wealth through sharia financial institutions? If you are interested, ALAMI can be a good choice for you. 

ALAMI as a sharia-based P2P funding platform licensed by the Indonesian Financial Services Authority (OJK) offers you an opportunity to take part in developing sharia economics in Indonesia by funding Indonesian SMEs using sharia-compliant contracts.

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