CHAPTER 2 PART 2

SHARI’AH CONTRACTS

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Classification of Shariah Contract
A. Exchange Based Contract (Uqud al-Muawadat)
B. Charity Based Contract (Uqud al – Tabarruat)
C. Waiving Contract (Uqud al- Isqatat)
D. Partnership Contract (Uqud al-Ishtirak)

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Types of Shariah Contract

1. Contracts of exchange (‘uqud al-mu’awadat)

2. Contracts of security (‘uqud al-tawthiqat)
3. Contract of save custody (wadi’ah)
4. Contracts of charity/gratuity (‘uqud al-tabaru’at)
5. Contracts pertaining to utilization of usufruct
(‘uqud al-manfa’ah)
6. Contracts pertaining to do a work (wakalah,
ju’alah)
7. Contracts of partnership (‘uqud al-shirkat)
3 3
1. EXCHANGE BASED CONTRACT/
TRADING CONTRACT/ SALES
CONTRACT
(‘UQUD AL- MU’AWADAT)

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DEFINITION
® Contract that transfer the ownership of goods and
merchandise
® Involve an exchange of a commodity for another
commodity (barter trading), a commodity for money
(sale), money for money (sarf)

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Types of Sales Contract
´Bay’ al-Murabahah
´Bay’ al-Salam
´Bay’ al-Istisna’
´Bay’ al-Dayn
´Bay’ al-Sarf
´Bay’ al-Inah
´Bay’ Bithaman Ajil (BBA)
´Bay’ al-Tawarruq
´Ijarah
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Bay’ al- Murabahah (cost – plus sale)
® Derived from the word ‘ribh’ which means increase or
profit.
® Implies the notion of increasing in the price of things
® A form of business transaction whereby the customer
is informed that the goods are sold at price which
includes the cost price and profit.
® It is one of the proposed mechanisms or alternative
suggested by Islamic scholars that can assist Muslims
to avoid riba.
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Essential elements of Bay’ Murabahah

Seller

Contract Buyer

Price Item sold

8
 The essential elements and conditions of Bay’
Murabahah contract
Seller (ie Islamic bank)
•Must be sound mind/achieve age of puberty/intelligent
Buyer (ie financing •Able to carry out responsible
customer) •No restricted in dealing with business transaction
• Not been forced to enter into a contract
Asset/merchandise •Exist at the time of transaction
•Bank must be the owner of the merchandise
•Must be pure substance (lawful)
•Must be some use or some value
•Can be delivered
•Known to both seller & buyer
Price • must be known to both seller & buyer
• type of currency is specified
Contract (offer and •Absolute, definite & decisive language (in the past or present
acceptance) tense)
•Offer & acceptance must be made at the one & the same
meeting
•The acceptance must agree with the offer
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Bay’ al-Murabahah (Mark Up Sale)
3

Bank Customer

2 1

Seller/ Company

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FLOW OF TRANSACTION
® Procedures: (for motor vehicle financing) pg:209
1. The customer identifies the motor vehicle to be acquired.
2. The bank purchases the identified motor vehicle from
owner on cash basis.
3. The banks sells the motor vehicle to the customer at a
cost plus profit on credit basis.
4. The customers pays the bank within the agreed terms of
financing.

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BAY’ AL – SALAM (FORWARD CONTRACT)

® Literally:
It is a sale with postponed delivery of the merchandise but
immediate payment of the price.
® Legally:
The sale of a deferred item in exchange for an immediate
(forward) price.
It is essentially the selling of goods or products which
normally does not exist with the buyer during the time the
contract such as wheat, cotton or bean with the condition
that the delivery must be completed at the time of yield
which is the harvesting season.
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Types of Bay’ al-Salam

® Ordinary Salam Contract ® Parallel Salam Contract

• It involves only two – It is a contractual

transacting parties which arrangement that consists
is the buyer (musallim) of two different and
and the seller (musallam independent contracts; one
ilayh) in which the bank is a
buyer
– And the other in which the
bank is a seller
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Condition of Bay’ Al-Salam
® The price of goods must be fully paid in cash given
during the time of the contract and both parties are
available at the time of the contract
® Goods that incurred in bay’ salam must be made
available at the time of contract
® The sold items must be clearly justified in terms of its
quality, quantity, weight, brand or measures
® The price must be made known in terms of its quality
especially those goods which are exchanged with
money
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The essential elements and conditions
of Bay’ al- Salam contract
Seller (ie Islamic •Must be sound mind/achieve age of puberty/intelligent
bank) •Able to carry out responsible
•No restricted in dealing with business transaction
Buyer (ie financing • Not been forced to enter into a contract
customer)
Asset/merchandise •The commodity should not yet exist when the finance is provided
•Must be pure substance (lawful)
•Must be some use or some value
•Must be delivered by seller to the buyer
•The object type, volume, weight, number, size, must be known to both seller & buyer. (i.e.
full details of the goods is known to both parties)

Price •Spot settlement price must be known to both seller & buyer
• type of currency is specified
•The price has to be paid in full to the seller at the time of effecting the sale.

Contract (offer and •Absolute, definite & decisive language (in the past or present tense)
acceptance) •Offer & acceptance must be made at the one & the same meeting
•The acceptance must agree with the offer
•The exact date & place of delivery must be specified in the contract.
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 1

Bank
Farmer 2
3 4

3
4

Customer B

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FLOW OF TRANSACTION
1. The bank enters a salam contract with the seller &
pay cash in full for the commodities to be delivered at
an agreed time in the future.
2. The bank enters a parallel salam contract with the
buyer who will purchase the commodities from the
bank when they are delivered.
3. The commodities are delivered to the bank.
4. The commodities are delivered to the purchaser who
pays the agreed price to the bank.
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Bay’ al-Istisna’ (Manufacturing Sale)
- To request a manufacturer to manufacture something
- A contract of selling a manufacturable thing with an
undertaking by the seller to present it manufactured
from his own material, with specified description and
determined price.
® This type of contract involves product that will be
manufactured by the trader such as tailor, fashion
designer, carperter and etc.

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 The essential elements and conditions
of Bay’ al-Istisna’ contract
Seller (ie
Islamic bank) •Must be sound mind/achieve age of puberty/intelligent
•Able to carry out responsible
Buyer (ie
financing •No restricted in dealing with business transaction
• Not been forced to enter into a contract
customer)
Asset/merchand •The object to be manufactured must be precisely determined in its type, kind, quality
ise and quantity
•Must be pure substance (lawful)
•Must be some use or some value
•Can be delivered
•Known to both seller & buyer
Price • can be paid in partial or full amount
• must be known to both seller & buyer
• type of currency is specified
Contract (offer •Absolute, definite & decisive language (in the past or present tense)
and •Offer & acceptance must be made at the one & the same meeting
acceptance) •The acceptance must agree with the offer
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Bay’ al-Istina’
1

2 Bank
Customer (Sani’)
(Mustasni’)

4 3
Contractor (Sani’)

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Flow of Transaction
1. Customer requests the bank to construct a specified asset at a pre-
agreed price consisting of cost price plus profit margin determined by the
bank, payable on deferred payment basis. Both will sign a sale
agreement based on an istisna’ contract where the customer is the buyer
(mustasni’) and the bank as the manufacturer (sani’).
2. The bank delegates the customer to appoint a contractor on his behalf to
construct the asset as specified in the contract at the price determined
by the bank which is payable by installment.
3. Both bank and contractor sign a purchase agreement based on an
istisna’ contract where the bank becomes the mustasni’ and the
contractor is sani’.
4. Upon completion of the asset, the contractor will deliver the completed
asset to the bank and the bank will deliver the asset to the customer.
The contractor may also on the authority of the bank deliver the asset
directly to the customer 21
SALAM vs. ISTISNA’
Salam Criteria Istisna’
Goods, services and Underlying The goods need to be
commodity assets manufactured or constructed.
Required to pay the full price at Payment Not required to pay the full
the time of payment price at the time of payment.
The order cannot be cancelled Cancellation The order can be cancelled
unilaterally. of order before the manufacturer
undertakes the
manufacturing.
Both the buyer and seller must Time of There is flexibility in time of
follow the time of delivery delivery delivery.
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 Status of the contract
® Istisna’ contract is binding on the contracting parties provided
that all the necessary conditions have been fulfilled
® Validity of the contract once the buyer sees the subject
matter.
- Some Hanafis, he has the right to confirm or cancel
the contract, no matter whether the thing is in
compliance with the description given to him before or
not
- The majority, the contract is considered binding if the t
thing is totally in compliance with the description given
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Bay’ al-Dayn
® Al-dayn is the Arabic word for debt as opposed to qard
(loan).
® Technically dayn is defined as “ mal hukmi fi al-
zimmah” or “a constructive asset in the obligation of
the debtor.”
® Therefore, dayn is a form of mal (asset) or haqq mali
(a financial right).
® Basically, bay’ al-dayn (sale of debt) is a transaction
that conforms to shariah under current Malaysia
regulation which regards the sale and purchase of
securities or debt certificates.
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Cont’d
® Regarding the definition of bay’ al-dayn, Muslim jurists
have defined bay’ al-dayn as a kind of sale contract where
the creditor’s payable right upon the debtor is being sold
either to the debtor himself or to a third party.
® Bay’ al-dayn is also known as debt purchasing in Islamic
banks because the bank normally purchases the
customer’s right to the debt and securitized it as bills of
exchange known as Accepted Bills-i.
® The bank purchases the debt from the customer at a
discount price which is agreed among both parties. The
bank can sell the debt to a third party also at a discount
price.
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Cont’d
® Contrary to ‘ayn, dayn is considered as
intangible asset
® Hence, dayn is considered as right of the
creditor established in the liability of the debtor
® Even though it is considered as property of
value (mal mutaqawwam), but the jurists differ in
their recognition of its independency in
becoming object of sale.

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 Legal Ruling Regarding Bay’ Al-dayn
® 1) Selling of debt to the debtor
Majority of jurists uphold that it is permissible, except that of the Zahiris who
maintained that the sale of debt is disallowed even to the debtor himself
® 2) Selling Of Debt To Third Party
® Majority of jurists disallowed it.
® Some allow it with certain condition
® - Some Shafies (al-Subki, al-Nawawi, etc) with a few conditions
® - Some Shafies – only confirmed debt
® - Some Malikis – 8 conditions
® Ibn al-Qayyim – allowed
® Islamic Fiqh Academy – allowed to a debtor or to a third party provided that
the rules of riba’ and gharar are observed.
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Cont’d
® 3)The selling of debt at discount under the
concept of Dha’ wa Ta’ajjal

® Dha’ wa Ta’ajjal in general refers to the act of debt

discounting and early payment
® Majority of jurist – disallowed
® Ibn Abbas – allowed based on ra’fah and takhfif
(lifting the burden)
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 Application of Bay’ al-dayn in the Islamic
Banks
® Itis applied mostly in the securitization based products
such as in;
® Islamic Money Market Instruments
® Islamic Treasury Bills
® Islamic Negotiable Instruments
® Islamic Accepted Bills
® Export Credit Refinancing
® Islamic Bonds (Sukuk)
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Sale of Debt

1
Issuer Investors
2

4
5

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Flow of transaction
1. The issuer sells an asset worth RM200 million to investors on a cash
basis.
2. Subsequently, the investors sell back the underlying asset to the issuer
for RM220 million on a credit basis.
3. The issuer makes payment to investors through the issuance of debt
certificates (shahadah al-dayn).
4. Primary Notes (PNs) are sold to investors at par value redeemable
upon maturity to guarantee the repayment of capital. In this case, it
represents the amount of RM200 million which will be sold back to the
issuer upon maturity for RM200 million on cash basis.
5. Secondary Notes (SNs) are sold to the investors at par value
redeemable at the time agreed upon. In this case the issuer will pay
RM20 million via installments over a certain period of time.

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Bay’ Bithaman Ajil ( Deferred Payment
Sale)
® Definition
® A normal sale with the payment of the selling price deferred to an
agreed later date.
® Practice
® The item to be sold exists at the time of contract.
® The Shariah does not require that the cost price be know to the
buyer.
® This refers to the sale of goods where the buyer pays the
seller after the sale together with an agreed profit margin,
either in one lump sum of by installment.
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 2 Bank
You
4
1
3

Owner of Asset

33
Flow of transaction
1. You pick an asset you would like to buy.
2. You then ask the bank for BBA and promise to buy the
asset from the bank through a resale at a mark-up price.
3. Bank buys the asset from the owner on cash basis.
4. Bank sells the good, passes ownership to you at the mark-
up price.
5. You pay the bank the mark-up price in installments over a
period of time
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Bay’ al-Tawarruq
® Tawarruq is defined as a trading of commodity which involves
three parties where the owner of the commodity as the first
party sells his commodity to the first buyer that is the second
party with a price to be paid on deferred payment basis.
® The first buyer will then sell the commodity to the second
buyer who is the third party for a price to be paid in cash.
® The price in this second sale is lower than the first sale.
® The purpose of this trading of commodity is for the first buyer
that is the second party to get cash and he owes the first party
certain amount to be paid in certain period.

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Rulings on Tawarruq
® The AAOIFI has outlined in detail the shariah
guidelines and requirements for tawarruq in its Shari’a
Standard No. 30 to be followed by all Islamic financial
institutions in order to ensure the validity and
permissibility of the contract.
® Nevertheless, the AAOIFI has stressed that only in the
case where an institution faces the danger of liquidity
shortage that will harm its viability and sustainability
can it resort to tawarruq.
® At the same time, tawarruq cannot be used as a mode
of investment or financing to get more profit for the
institutions.
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Application of Tawarruq
®Commodity murabahah deposit facility and
placement
®Personal financing, asset financing,
commodity murabahah financing, working
capital financing
®BNM Islamic Accepted Bills
®Sukuk Ijarah
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Ijarah
®Definition
®A sale of the use of another’s property.
®Practice
®The property to be leased belongs to the
lessor.
®The lessor has the right to repossess the
property on a default of the lessee.
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1
4
3
Asset

6
5
Client 2
Bank
7

39
Flow of transaction
1. The client identifies and approaches the vendor or supplier of
asset that he or she needs and collects all the relevant information.
2. The client approaches a bank for ijarah of the asset and promises
to take the asset on lease from the bank upon purchase.
3. The bank makes payment of price to the vendor.
4. The vendor transfers ownership of the asset to the bank.
5. The bank leases the asset, transfers possession and specific right
of use to the client.
6. The client pays ijarah rentals over future (known) time period(s).
7. The asset reverts back to the bank if it is an operating lease or is
transferred to the client if it is a financing lease.
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 Musharakah
Mudarabah

PARTNERSHIP CONTRACTS
Musyarakah (Joint venture)
® In the context of business and trade, Musyarakah refers to
a partnership or a joint business venture to make profit.
® Profits made will be shared by the partners based on an
agreed ratio which may not be in the same proportion as
the amount of investment made by the partners.
® However, losses incurred will be shared based on the
ratio of funds invested by each partner.

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Musyarakah (Joint venture)
1
You Bank
2

Investment/ Asset

4 3 4
5 Profit 5
Loss

1. You and the bank both invest in a project according to Musyarakah

terms.
2. The money is then invested in a project which may result in a profit
or a loss
3. Profit is shared between you and your bank based on a pre-agreed
ratio.
4. Loss will be borne according to percentage of investment amount.
Mudharabah (Profit Sharing)
® Mudharabah is a profit sharing arrangement between
two parties, that is, an investor and the entrepreneur.
® The investor will supply the entrepreneur with funds for
his business venture and gets a return on the funds he
puts into the business based on a profit sharing ratio
that has been agreed earlier.

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Mudharabah (Profit Sharing)
® Theprinciple of Mudharabah can be applied to Islamic
banking operations in TWO ways:
® (1) between a bank (as the entrepreneur) and the customer
as the capital provider, and
® (2) between a bank (as capital provider) and the customer
as the entrepreneur.
® Losses suffered shall be borne by the capital provider.
Mudharabah (Profit Sharing)
1
You Bank

2
Investment/ Asset

3
4 4
5 Profit
Loss
1. You supply funds to the bank after agreeing on the terms of the
Mudharabah arrangements.
2. Bank invests funds in assets or in projects.
3. Business may make profit or incur loss.
4. Profit is shared between you and your bank based on a pre-agreed ratio.
5. Any loss will be borne by you. This will reduce the value of the assets/
investments and hence, the amount of funds you have supplied to the
bank.
 Kafalah
Rahn

SECURITY CONTRACTS
Contract of Kafalah or Dhaman (Guarantee)
® The essential elements of Kafalah or Dhaman are as
follows:
® Dhamin (guarantor)
® Madmun lah (creditor)

® Madhmun anh (debtor)

® Madhmun bih (debt)

® Contract (Offer and Acceptance)

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Rules Related to Personal Guarantee
1. It is permissible to have more than one guarantor to secure the debt.
2. Personal guarantees are divided into two types. One type is a guarantee
where the guarantor has a right of recourse to the debtor, and this guarantee
is offered at the request or with the consent of the debtor. The other type is a
nonrecourse guarantee, which is offered voluntarily by a third party without
the debtor’s request or consent (voluntary guarantee).
3. It is permissible to fix the duration of a personal guarantee. It is also
permissible to set a ceiling on the amount to be guaranteed, and it is
permissible that the personal guarantee be restricted by, or be contingent
upon, a condition or a future event.
4. It is not permissible to take any remuneration whatsoever for providing a
personal guarantee, or to pay commission for obtaining such a guarantee.
The guarantor is, however, entitled to claim any expenses actually incurred
during the period of a personal guarantee.
 Contract of Rahn (Pledge)
® The essential elements of Rahn are as follows:
® Pledgor

® Pledgee (i.e. Islamic Bank)

® Obligation or right to a claim (debt)

® Pledge (property pledged)

® Contract (Offer and Acceptance)

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Features of Pledged Property
® One pledge may be exchanged for another.
® It is lawful to increase the debt that is secured by the
pledge.
® One pledge can be taken as security for two different
debts from two different creditors.
® A borrowed property can be used as a pledge.
Features of Pledged Property
® The Bank has a right to possession on the pledge until
its redemption.
® A pledge does not become necessary to be returned
when the debt is partly paid off. The pledgee has a
right to hold it until the debt is paid in full.
® It is invalid for the pledgor or pledgee to sell or pledge
a pledged property without the others’ consent.
Features of Pledged Property
® The pledgor is forbidden from uplifting the pledge.
® The pledgee may on his own accord, release the
property from the pledge.
® On maturity of the debt and the pledgor refuses to
make payment, the pledgee may apply to court to
compel the pledgor to sell the pledge in order to pay
the debt. If the pledgor refuses to make payment, the
court may sell the pledge to pay the debt.
Essential elements & conditions of rahnu contract
•Pledgor/Rahn •Must be sound mind/achieve age of puberty/intelligent
•Able to carry out responsible
•No restricted in dealing with business transaction
•Pledgee/murtahin (ie •Not been forced to enter into a contract
islamic bank)
•Obligation or right to a •The underlying debt must an established, binding & enforceable one
claim (debt)/marhun bih either through a loan, sale or damages in the torts against a property.
•The underlying debt must be known & defined to both contracting
parties.
•The underlying must be mature/binding or about to be matured.
•The underlying debt must be liable to be paid off.
•Pledge/marhun (property •Being a valued property
pledged) •Being a permissible item
•Being existence at the time of contract
•Being deliverable
•Being in the possession of the creditor
•Being a non-fungible property, not usufruct.
•Contract (offer and •Absolute, definite & decisive language (in the past or present tense)
acceptance)
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Rahn
1

1. Bank A provides financing of RM5,000 to customer B.

2. Customer B pawns his valuable item (e.g. jewelry) as collateral for the
financed amount.
3. Customer B pays the debt.
4. Bank A returns the jewelry to Customer B.
END CHAPTER 2 PART 2
THANK YOU

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