Contracts of Exchange

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 Murabahah
Murābaha is derived from the root word rabah means
gain, profit or addition.
The Malikis define it as sale whereby the seller informs
the buyer of the cost at which he obtained the object of
sale, and collects a profit margin either as a lump-sum
(e.g. I bought this for RM 10, and you pay me 2 as
profit), or he may state the profit margin as a
percentage or ratio (and you pay me 20% profit).
The Hanafis define it as the transfer of the object
obtained through a prior contract in exchange for the
original price plus a profit margin
Cont…
The Shafi’is and Hanbalis define it as sales whereby the
seller sells at the principal plus a profit margin, provided
that both parties know the principal (cost of obtaining the
object of sale).
It is basically a trust sale (bay’ al-amānah) in which the
buyer depends and relies upon the integrity of the
purchaser as regard the cost he mentions to buyer.
It is the moral and legal obligation of the seller to be
honest and truthful in stating the price at which he
purchased the goods.

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 Legality of the Murabahah
The price and profit of Murabahah contract is fixed
on the mutual concern of the buyer and seller, this
is permissible according to the Holy Quran.
Surah Nisaa: 29, Allah Almighty says: “O ye who
believe! Eat not up your property among yourselves
in vanities: But let there be amongst you Traffic and
trade by mutual good-will”

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 Types of Bay’ al-Murabahah
Contract Definition Key conditions

Sale of goods at price = cost plus

1. Ordinary Seller should disclose to the
an agreed profit mark up.
Murabahah purchaser the:

●Price at which the goods is

● Sale of specified goods at purchased (acquisition cost);

acquisition cost plus an agreed and

2. Murabahah for profit mark up based on ● Amount of profit

Purchase Order promise (wa’d) to purchase ●There must be offer &
(MPO) given by the purchaser. acceptance,
● Promise to purchase may be ●The goods should be lawful
binding or non-binding & precisely determined
 Conditions for Valid Murabahah Contracts
1. Product and selling price
 Product must be clearly defined including its type, quantity and other descriptions.
 Selling price- its cost and profit must also be disclosed clearly and truthfully.
 Act of concealing cost price and/or margin of profit render transaction null and void.
2. Contracting parties
 Seller/ financier is responsible for supplying the product ordered by the buyer.
 Buyer/ customer is obligated to pay for the product he purchased according to agreed terms
of the agreement.
 Both parties must be adults, rational, intelligent and can be held accountable & seller must
own the good sold.
3. Offer and acceptance
 Buyer must accept to buy the goods when everything is clear about price, profit rate, quality
and other description
 Similarly, seller must agreed to sell his goods at that given price.
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 Application of Ordinary Murabahah

Transactions description:
(1)Islamic bank purchase the goods for murabahah sale from the vendor and pays for it.
(2)Islamic bank enters into a murabahah contract & sell the goods to customer at cost plus
mark-up profit.
(3)The customers pays the bank by installments/cash over the contract period.

Risk exposure to Islamic bank

●Risk of holding inventory of acquired goods, efforts put to purchase the goods and market
risks or price may drop. All these justify the mark- up or bank profit.

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 Application of Murabahah for Purchase Order

Order Purchase Order

Transactions description:
(1) Customer place an order with Islamic bank to purchase a car with the promise to buy from
bank (may be binding or non binding) but most cases binding.
(2) Islamic bank purchase and pays for the car from manufacturer or vendor
(3) Islamic bank executes a murabahah contract of sale with customer and delivers the car to the
customers. The price include cost of purchasing the car plus mark up profits.
(4) The customer pays for the car on installment/cash basis to the bank within agreed time period.

Risk exposure
●Holding the car in the event that the customer fails/cancel the purchases

Risk mitigation measure/ instruments

●Islamic bank accept Hamish Jiddiyyah (security deposit) or Urbun
 Bay’ al-Istisna’
Literally:
The word istisna’ derived from the arabic verb
“istasna’a” which is mean to request someone to
manufacture an asset.
Technically:
Bay’ al-istisna’ is defined as a contractual
agreement with manufacturer to produce items
with specified description at a determined price,
and manufacturer uses his own materials and
effort.
 Legality of Bay’ al-Istisna’
According to jurist, the legality of al- Istisna’ contract is
established from different legal sources such as the Sunnah, ijma’,
qiyas and Istihsan.
There is no differences of opinion on its permissibility. It clearly
can be seen from hadith:
Indeed that the Prophet s.a.w booked the making of a golden
ring.
The al-Istisna’ contract is legitimate on the basis of the people’s
customary practice of this contract in all periods of time without
any objection, which in turn constitutes a legal consensus.

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 FLOWS OF ISTISNA’
1) Ijab (Offer)

3)
Ra’s al-Mal (Price)

Mustasni’ Sani’
(Customer) (Manufacturer)

4)
Masnu’
(Product)

2) Qabul (Acceptance)

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 TYPES OF ISTISNA’ CONTRACT

There are two types of Istisna contracts

Classical Istisna
Traditional Istisna contract which involves two transacting
parties; the customer (mustasni’) and the manufacturer
(sani’). Example, request developer to build for you a house.
Parallel Istisna
Contractual agreement consists of two series of seperate
istisna’ contracts whereby the first istisna’ contract is between
the ultimate purchaser (customer) and the seller (bank), who
is responsible for delivering the specified asset to the
purchaser.
This is commonly used by Islamic financial institutions to
finance manufacturing and constructions. For instance, in first
Istisna contract, Islamic banks buy the goods to be
manufacture and in second istisna contract, Islamic bank sell
the goods under manufacturing to customers for high prices.
 CONDITION FOR VALIDITY OF ISTISNA’CONTRACT
 subject matters or object (masnu’)
 The object to be manufactured must be precisely determined in its type, kind,
quantity and quality.
 The object of an istisna’ contract should relates to manufacturing and
constructions
 If the subject matter does not conform to the contractual specifications at the
time of delivery, the purchaser has the right to either refuse or accept it.
 Price of Istisna Object
 Price of istisna may be in the form of money, commodity and usufruct.
 Price of istisna must be determined upfront & payment can either be on spot
or by installments.
 Installments may be tied up to different stage of manufacturing the products.
 Time of Delivery
 Delivery time should be fixed to avoid uncertainty and dispute even though it is
not a requirement.
 The customer permitted to penalize the manufacturer if the latter fails to
deliver the work on specified date.
 Application of Istisna’
In contemporary Islamic finance, an istisna’ contract is
applicable to various industrial productions which can be
constructed or manufactured and supervised by specification.
For example, an Istisna contract can be employed in housing
constructions, highways, advance technological industries,
equipment such as aircraft, automobile, ship and factory
equipment.

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 Bay’ Al-Salam Or Salaf ( Forward Sale)
 Literally salam means giving (‘ita’), advance (taslif) and leaving
 Technically:
 Sale contract whereby the seller undertakes to sell some specific
commodities to the buyer at an agreed future date in an
exchange for a price fully paid in advance on a spot basis.
 The seller undertakes to supply some specific goods to the buyer
at a future date in exchange of an advance price fully paid at the
time of contract. Example, Islamic bank pays a farmer full price
today for a rice that will be delivered in future.
 The forward (salam) contract is made an exception for the rule of
non - permissibility of the sale of non-existent items. This is a
special license (rukhsah) given to the people to meet their
economic needs and facilitate their daily lives.
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 Legality of Bay’ al-Salam
 Al-Quran

lbnu Abbas commented that: ‘I bears the witness that al-Salaf (Al-Salam)
stipulated for a stated term had been made legal by Allah in His holy book
and His permission is in it”. He then recites the above verse.

 Hadith
Narrated by lbn Abbas: The Messenger of Allah (s.a.w) came to Medina
and the society used to pay in advance the price of fruits to be delivered
within one or two years.
The Prophet S.A. said, “Whoever pays money in advance for dates (to be
delivered later) should pay it for known specified weight and measure (of
the
17 dates).
 FLOWS OF BAY’ AL-SALAM
1) Ijab (Offer)

3)
Ra’s al-Mal
(Price)

Rabb as-salam/
Muslam Ilaihi
Musallim
(Seller)
(Buyer)

Musallim Fihi
4)
(Product)

2) Qabul (Acceptance)
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 TYPES OF Al- SALAM CONTRACT
There are two types of Al-Salam contracts
Ordinary Salam
The normal salam contract that involves two transacting
parties; the buyer (musallim) and the seller (musllam
ilayh). Example, Islamic bank buys buy rice from a farmer
that will be delivered in 3 months time.
Parallel Salam
Parallel Salam is contractual agreement consists of two
different and independent contracts; one in which the
bank is a buyer, e.g. Rice from farmers for future deliver
and the other in which the bank as a seller, for example
sell the rice to be delivered to rice dealer.
This two Salam contracts cannot be tied up and
performance of one contract should not be contingent
upon the other.
 CONDITION FOR VALIDITY OF Al- SALAM CONTRACT
Price (Ra’s al-mal)
 The price must be clearly determined and fully paid in advance at
the time of signing the contract.
 Maliki jurist allowed the price to be paid within few days after
signing the contract as long as it is not stipulated as conditions.
Purchased commodity (Mussalam Fihi)
 Salam can be effected on commodity whose quality and quantity
can be clearly specified; commodities which quality and quantity
cannot be specified cannot be sold through salam.
 In salam contract, quality, weight and measurement of the
commodity must be agreed upon in equivocal terms at the time of
signing the contract.
 The commodity must be widely available and traded in the market.
Date and place of Delivery
 The exact date and place of delivery must be specified in the
contract
 Delivery time can either be a day, three days, 30 days or depend on
the date agreed upon by contracting parties.
 Application of bay al- Salam
Salam contract is typically used in short term financing and
could also be used in long time financing.
Salam and parallel salam are among the most effective
financing tools available for IFIs, particularly in providing
microcredit services for small and needy farmers.
Islamic banking product which are based on salam contract
include:
Parallel Salam Financing

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 Difference between Istisna and Salam
Subject matter. The subject of Istisna is always a thing that
needs manufacturing, while Salam can be effected on
anything, no matter whether it needs manufacturing or
not. 
Payment. It is necessary for Salam that the price is paid in
advance, while it is not necessary in Istisna. 
Cancellation. The contract of Salam, once effected, cannot
be cancelled unilaterally, while the contract of Istisna can
be cancelled before the manufacturer starts the work.
Delivery time. The time of delivery is an essential part of
the sale in Salam while it is not necessary in Istisna that the
time of the delivery is fixed.
 Bay’ al-Sarf
Literal:
Bay al-sarf is a trade of money for money including gold and
silver
Technical:
Bay al-sarf is a foreign exchange trade, where people buy and
sell foreign currencies at either spot rate or forward rate.
Example, trade of RM against USA $,
Maliki scholars considers money exchange only if the sale of gold-
for-gold or silver-for-silver but gold for silver does not belong to
such transactions.
It is known as “sale of absolute price for absolute price”.
(Mansuri,2007, p.196)

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 Legality of Bay al- sarf.
Bay’ al-sarf is legal based on both hadith and Ijma
‘Ubaidah Ibn al-Samit reported the messenger of Allah (s.a.w) said: “Gold for
gold, silver for silver, wheat for wheat barley for barley, dates for dates, salt
for salt. Like for like in equal weights, from hand to hand, if the species differ,
then sell as you like, as long as it is from hand to hand”.
Abu Sa’id al-khudri, reported “the Messenger of Allah (s.a.w) “do not sell gold
for gold, except when it is like for like, and do not misappropriate one
through other, and do not sell silver for silver except like for like and do not
misappropriate one through the other, and do not sell things absent from
those that are present.
All Islamic scholars unanimously agree on the permissibility of bay’ al-sarf as
it has been practice by the people since the time of Prophet (s.a.w) until now
without any objections.

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 Conditions for Bay’ al-Sarf
Taking possession( exchange currencies) before leaving one another
Exchange of currencies, gold or silver must be on spot, where for
e.g. buyer give RM & seller give USA $.
Equal for equal transaction
If exchange involve only RM, gold, silver it should be like for like.
No option clause to cancel the sale contract ( Khiyar al-Shart)
The exchange contract should not include option for either party
to cancel the contract as this condition may affect complete
transfer of ownership from seller to buyer.
Non-deferment
Forward forex exchange is prohibited, as Prophet ( p.b.u.h)
exchange of ribawi commodities which include currencies should
be hand to hand to avoid riba.
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 APPLICATION OF BAY’ AL-SARF IN SPOT FOREX
A consensus among Islamic jurists on the view that
currencies of different countries can be exchanged on
a spot basis at a rate different from unit, since
currencies of different countries are distinct entities
with different values or intrinsic worth, and
purchasing power.
Bay’ al-sarf is applicable to modern spot forex which
is based on the spot rate any exchange is expected to
be completed within two business days after the
contract has been executed.
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 Bay’ al-Tawarruq
Definition:
Bay al- Tawarruq is a sale contract whereby a buyer
buys a commodity on credit and sell it to another
person other than the buyer for a discount on cash
basis.
Technically it refers to a sale which involves two stages
of sale. The first stage the seller sells commodity on credit
to buyer whilst in the second stage the buyer sells the
commodity for a discount on cash basis to a third party.
Tawarruq is a term used exclusively by the Hanbaliss, as
for Hanafis, Shafi’i and Malikis discuss tawarruq as part of
bay27 al-‘inah.
 Types of Bay’ al-Tawarruq
There are three types of Tawarruq
1. Tawarruq on individual basis ( Tawarruq al-Fardi). In this type of
tawarruq, a buyer buy commodity on credit and sell the same
commodity to third party ( broker) for discount and on cash basis.
2. Organised Tawarruq ( Tawarruq Al-Munazzam). In this type,
commodity broker sell the commodity to the buyer on credit at
same time arrange for another buyer to buy the same commodity
from original buyer for cash on discount price.
3. Banking Tawarruq ( Al-Tawarruq Al-Masrafi). In this type, Islamic
banks organises the sale of commodity such as oil, palm oil
between international commodity market & buyers of commodity.
Islamic banks arrange for a buyer to buy commodity from
international market on credit & it also help to sale the same
commodity to broker for discount on cash basis.
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 Legality & Condition of al-Tawarruq
 Legality of Tawarruq
 Tawaruq al-fardi is accepted by majority of jurists (Hanafi, shafi and Hanbali)
and Majma’ al Fiqh al Islami. But they reject the are two types of Tawarruq.
 Umar ‘Abd al-aziz, Ibn Taymiyyah, Ibn Qayyim and Saybani disapproved this
contract & Sybani said : “I hate this sale so much and it is the invention of
those who eat ribā”.
 Imam Malik is rather strict in prohibiting not only ‘inah but also tawarruq.
 Contemporary scholars agrees that Islamic banks can use this contract.
 Conditions for validity of al- Tawarruq:
 Price & Payment schedule (installments) must be clearly specified.
 Specifications of the commodity must be clearly stated.
 Seller must owned the commodity before sales.
 The commodity should not be a ribawi commodity to avoid riba.
 Delivery of the commodity to the buyer should be immediate.

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 Application of Tawarruq
Tawarruq or commodity Murabahah as one of the
popularly used contract to structure various Islamic
financial instruments.
Below list of some common Islamic financial
instruments that are structured based on tawarruq:
Commodity Murabahah deposit facility and
placement
Personal financing
Asset financing

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Application of Tawarruq for Personal Financing
Islamic banks used contract of Tawarruq for personal
financing.
The method of operation includes, firstly the bank obtain
application for personal financing from the customer.
Secondly, bank buys commodity from broker and sells to the
customer for deferred payment at the price include cost plus
profit.
Thirdly, customer requests the bank as its sale agent to sell
the commodity in the market.
 Fourthly, bank sells the commodity and deposits the money
in the customer’s account.
Lastly, the customer settles the amount due that includes
cost plus profit by installment until maturity date.
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Application of Tawarruq for Islamic Credit Cards
 The basic modus operandi of Tawarruq-based Islamic credit cards
includes the following steps.
 Firstly, Islamic bank buys commodity e.g. oil from broker A.
 Secondly, the bank sell the commodity to customer for deferred
payment for a price equivalent to the credit limit plus the profit.
 Thirdly, the customer appoint Islamic bank as sale agent to sell the
commodity to broker.
 Fourthly, Islamic bank deposit the proceeds from the sale of the
commodity into the customer wadiah saving account.
 Fifthly, the customer buys the goods from shops or merchants using his
wadiah account and when cardholder purchases goods from merchant,
merchants are paid from the customer wadiah account.
 Lastly, customer will pay back bank its principal amount plus profit by
installment

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 Ijarah ( Lease Contract)
 Literally:
 Ijarah came from the root word ‫ أ(جر‬which means compensation or‫ع(وض‬. It
also means the sale of usufruct.
 Technically:
 A contract for the transfer of ownership of usufruct for compensation
( rent).
 It is used to express the sale (bay’) of a known service in return for its
known equivalent( wages).

 Usufruct:
The usage of shelter for house, transportation for vehicles and others

for a fee.
 Services:
 To work using physical energy or skills such as lifting goods, cleaning of
office, writing, lecturing, and others for a fee
 Prophet ( p.b.u.h) said: “Give a servant his fee before his sweat dries up”
(Al-Baihaqi)
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 Legality of Ijarah

Quran:
.

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 TYPES OF IJARAH

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 TYPES OF IJARAH
Lease Contract Based on Subject Matter of the Leased Asset

1. Tangible asset • To lease the usufruct from the specific goods or asset
(Ijarah ‘Ain)
• Comprises all tangible assets.

• E.g.: property, transport, facilities and factories, etc.

2. Labour • To lease out the works or self skills

(Ijarah ‘Amal)
• Two type of workers:
1. Employee : a person that work only for the interest of a particular employer or
independent contractor; does not have right to work for any other lessee during
contract.
2. Independent contractor: offer services to the general public

• E.g: consultant, lawyer, contractor

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 TYPES OF IJARAH
Lease contract Based on The Contractual Relationship
1. Operating • It is a lease contract conducted by firms & not tied up to sales
Lease • It is used for leasing aircraft, ships, heavy-duty industry and
agricultural equipment.
• In airline for example, due to high cost of buying aircrafts
companies tend to lease aircrafts, ships instead of buying them.
• In that respect, ownership, liabilities and major maintenance of
the assets are responsibility of the lessor

2. Financial • It is a lease contract conducted by Islamic banks and tied up to

Lease sale of the assets or or giving the assets as gift.
• Islamic banks purchase properties, car, machinery and
equipment and later lease to customers who wants to use these
assets. After certain period, IFIs will sell the asset to the
customer or give it as gift.
• Known as al-Ijarah Thumma al-Bay’, al-Ijarah wa al-Iqtina’ or al-
37 Ijarah Muntahiyah bi al-Tamlik.
 Conditions of Al-Ijarah Contract

i. Usufruct or service to be offered must be well defined & clearly

known to both parties.
ii. Ownership, liabilities & maintenance solely rest on the lessor.
iii. The lease contract is terminated as soon as the asset ceased to
provide usufruct or contract expired.
iv. The rental or wages must be clearly specified at initial signing of the
contract.
v. In a lease contract that end with sale of the asset to the lessee, the
selling price should be determined only after the expiry date of
leasing contract.
 Application of Ijarah
 Islamic financial institutions used Ijrara
contract for equity financing such as financing
properties using Musharakah mutanaqisah;
 It is also using for issuing Sukuk, car financing,
, and buying machinery and equipment for
banks clients.

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 Thank You

Wa Allah A’lam