As the operation of Islamic banking is based on Islamic contracts, it is worth briefly discussing the contracts themselves. Although each contract has its own condition, there are some conditions which are necessary for all contracts and are vital for contract accuracy.
3.2.1 Intention of all Parties
This is a very important condition, especially in Islamic banking operations. It means here, intention regarding the performance of the special contract. The late Allameh Sheikh Mortadha Ansari (1991: 117) said:
from conditions is to intend the meaning of the contract. There is no controversy between jurisprudents in this regard that intention is not only a condition for contract accuracy but also in fulfilment of its purport. So the contract does not take place either without verbal intention or without meaning intention.
For instance, if a person says by mistake or in jest, ―I sell you my car‖ it is not really a contract. In the same way, in Islamic banking operations, understanding the meaning of a contract and intention of that meaning is essential. Therefore, the banking
authorities, are responsible for explaining the meaning of the contracts used in their operations clearly either in a leaflet or verbally.
3.2.2 Satisfaction of Both Parties
Another condition for contract accuracy is satisfaction or agreement of both parties. In books of jurisprudence this condition is introduced as option (ekhtiar) or authority, which is not in contrast with compulsion (ijbar) but is in contrast with reluctance (ikrah). It is worth noting that there are three concepts which are similar to each other but different in jurisprudence. The first is compulsion (ijbar) which means that the party has no any choice. The second is reluctance (ikrah) which means that the party has a choice but a third party threatens him, For example, if an oppressor threatens somebody, saying ―you should sign this contract, otherwise I will hurt you or I will kill you‖. The third is distress (idhterar) which means because of some needs, someone accepts a special condition in a contract or sells his commodity cheaper than the market price.
Compulsion and reluctance lead to nullification of contracts but distress (idhterar) does not. Imam Khomeini in Tahrir Al-Wasilah said: ―distress (idhterar) does not harm contract accuracy‖. This brings about the matter that in the case of banking activity, those requiring financial facilities usually find themselves in a situation whereby, because of their need for those facilities they have to accept them even if they do not agree with the conditions imposed on them. The question is whether this constitutes compulsion (ijbar), reluctance (ikrah) or distress (idhterar). The answer is that they are from meanings (masadiq) of the distress (idhterar). So there is no problem regarding the accuracy of these contracts.
3.2.3 Competence of Both Parties
Both parties should have competence of possession of their properties which is obtained by three conditions, namely: maturity, growth and wisdom. It means that they should be at least fifteen years old for men and nine years old for women according to shariah law. It is worth mentioning that according to the civil law of Iran this has been increased to eighteen years for both men and women. Also, they should not be insane or of a state of mind where they are unable to recognize the benefit of the property.
3.2.4 Necessity of Determination of the Subject of the Contract
It is important that not only the subject of the contract is determined but also every adjective which affects the value of the contract subject should also be determined, otherwise the contract would be uncertain (gharari) and all jurisprudents believe that uncertain (gharari) contracts are null. This condition is very important especially in salam transactions (post delivery sale) and sale by instalments which are used in banking activities.
3.2.5 Necessity of the Purpose of the Contract being Shariah-Compliant
There is a specific purpose for every contract which takes place. This purpose should be shariah-compliant. For example, when somebody buys grapes it is possible to use them to make wine which is prohibited in Islam or it is possible to use them in a halal way. Of course, it is not necessary for the seller to ask the buyer their reason for buying the grapes, but if the buyer says that they want them to make wine or the seller understands himself that they want them for this purpose, the seller must not sell the grapes to them.
If we do not know whether the contract fulfils the general conditions for contract accuracy, we should believe in its accuracy because of Asalat Al-Sehhah which means any contract of which you are in doubt of its accuracy should be considered accurate.
According to article 133 of Iran‘s Civil Law, ―every contract which takes place is correct except those that their corruption is proved‖.
Before discussing Islamic banking in Iran, it is worth looking at some contracts which are used in Iran‘s Islamic banking regardless of type of activity. Contracts such as agency (vekalat), guaranty (dhemanat) and solh are used very much in different areas of Islamic banking, not only in Iran but in all Islamic banks.
3.2.6 Agency Contract (Vekalah )
Agency (vekalah ) means that one person or a group of people hand over their affairs to another person to carry out on their behalf while they are still alive. Imam Khomeini in Tahrir-Al-Vasilah (n.d: 186) says ―agent is giving over an affair to another person to do it for client during the client‘s life‖. In Islam jurisprudence, agency (vekalah) is for specific contracts, so, all the basic conditions for contract
accuracy must be fulfilled. Agency (vekalah) is easier than most contracts as it does not need special words; in fact it does not need any words. Any way that both parties make themselves understood is enough for fulfilment of agency. For example, if person A makes person B his agent to sell his house and person B, without saying anything, starts to sell the house, this starting to work itself is a sign of acceptance and is enough for fulfilment of agency by person B.
Agency is revocable10 which can be a weakness in this contract, especially in banking activities. However, this weakness can be compensated by ―conditions provided in the contract‖11. Moreover, agency is not normally free, so if it is free that should be made clear. If agency is absolute and without any clarifications it is not free and the agent should be paid the normal rate (Ojrat- Al–Methl). In Islamic banking activities, lawyers‘ fees (honorarium) are usually determined in advance. However, according to article 677 of the Civil Law of the Islamic Republic of Iran, in the case of silence regarding the lawyer‘s fee, the agent can ask for the normal rate (Ojrat –Al-Methl ).
In addition, both agent and client should be adult, sane and aware and these conditions must continue until the end of the contract. So, if during the contract either one or both of them lose their sanity or become deprived of possession of their property, it will cause nullification of the agency. Imam Khomeini in Tahrir Al-Vasilah (n.d: 187) says ―if agent or client become mad or the client is prohibited from possession of his property, the agency would become null. However, if the hindrance is removed, a new agency contract should be created‖.
Furthermore, agency is divided into two kinds: (1) Specific agency, which means that both case and manner of possession are specific. For example person A tells person B
―you are my agent to sell my house‖. Here the case is his house and the manner is its selling. (2) General agency, which is divided into three kinds. First, it is general in the manner of possession but specific in the case. For instance, person A tells person B
―you are my agent to do everything in my house‖. Second, the case is general but the
10All contracts are divided into two types, revocable and necessary. Revocable contracts can be cancelled at any time by parties whereas necessary contracts can only be cancelled in special conditions.
11 These are conditions provided in a contract which engage one party or both parties more than the contract itself. They may be made within the contract itself or within another contract.
manner of possession is specific. For example, person A tells person B ―you are my agent to sell all my properties‖. Third, both the case and the manner of possession are general. For instance, person A tells person B ―you are my agent to do everything in all my properties‖. In Islamic banking in Iran the first kind of general agency is normally used. Depositors tell the bank authority ―you are my agent to use my deposits in all profitable ways‖.
3.2.7 Guarantee Contract (Dheman)
This contract is defined as a contract whereby one person agrees to pay the debt of another person. According to Shiah (Jafari School) jurisprudence, dheman means the transfer of debt from debtor to guarantor. In this interpretation, after fulfilment of the guarantee (dheman), the debtor does not have any responsibility with regard to paying. However, there is another interpretation of guarantee which is from Sunni schools. According to this interpretation, both debtor and guarantor are responsible for paying the debt.12 The guarantee which is common in the banking system is the second kind; therefore it is not dheman according to the Shiah interpretation. Thus, Shiah jurisprudents such as Imam Khomeini have tried to solve this problem by using conditions provided in the contract itself or in another contract. For instance, person A can stipulate in a contract that if person B does not pay his debt he will pay it for him.
3.2.8 Solh Contract
Solh literally means peace (Mahyar, 1991) but in jurisprudence terminology it means
―mutual consent on something such as making an owner (tamlik) of a thing itself or its benefit or relinquishment (esqat) of a debt or right‖ (Imam Khomeini: n.d, volume 2:
67). It is understood from the jurisprudence definition that the main characteristic of a solh contract is mutual consent. There is considerable flexibility in this contract which makes it appropriate for solving some problems, especially in banking activities. In this contract, similarity of price and goods in value is not necessary. For instance, it is possible to pay hundreds of pounds for one bottle of water on the condition that both parties agree.
12 For more information see Abdollahi, Mahmood, 1994, Jurisprudence Basis of Islamic Economics, Qom, Islamic Publications Office.
Solh is an independent contract which has its own terms and conditions even in the case that its result is the result of another contract. ―Solh in the case of transaction, although it is the result of a special transaction, does not have the terms and conditions of that transaction, but has its own terms and conditions‖ (article 758 of the Civil Law of the Islamic Republic of Iran). In addition, it is not necessary to use special words for solh, it can be fulfilled by any words. Furthermore, a solh contract is a necessary, uncancellable contract, which can be very useful in banking activities.
So, it is possible that solh is used instead of a revocable contract in order to have its effect but not its revocability. Having introduced some general contracts used in Islamic banking in Iran, we will now discuss Islamic banking itself in Iran. It is worth mentioning that other contracts used in the Islamic banking of Iran will be discussed in its particular place in the banking system.