A HANDBOOK FOR

ASSOCIATE QUALIFICATION
IN ISLAMIC FINANCE

ISLAMIC BANKING & FINANCE INSTITUTE MALAYSIA

Recommended learning material for

APPLICATION OF SHARIAH IN ISLAMIC FINANCE
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CON TENTS

PAGE

TOPIC 1
THE MAIN THEORIES OF MU‘AMALAT 1-12

TOPIC 2
APPLICATION OF MU‘AMALAT CONTRACTS & PRINCIPLES 13-103
IN ISLAMIC FINANCE

GLOSSARY 104-111

ABBREVIATION 112
Topic 1
The Main Theories of Mu'amalat

Learning Objectives
At the end of this topic, you will be able to:
• List out the main theories of mu‘amalat
• Describe the main theory of ownership and its attributes
• Describe the main theory of property and its attributes
• Describe the main theory of rights and its attributes
• Describe the main theory of contracts and its attributes

UNIT 1: INTRODUCTION TO THE MAIN THEORIES OF MU‘AMALAT

There are four (4) main theories of mu‘amalat which are the essential principles that intended by the Lawgiver
in achieving specific objectives of mu‘amalat.

Diagram 1: Theories of Mu‘amalat

Topic 1 The Main Theories of Mu'amalat 1

 UNIT 2: THEORY OF OWNERSHIP (MILKIYYAH)

Milkiyyah or milk is derived from an Arabic word 'malaka', which means to take possession of something. In
this context, malik refers to a person who has taken possession of an object or thing. The owned object is
called ‘mamluk’, which refers to ‘anything owned by a human being’, be it a specific property, or the usufruct
of a property while ‘milkiyyah’ signifies the authority, often exclusive, which is vested in the hands of the
malik in relation to the object owned.

Technically, there are several definitions of ownership advanced by jurists from various schools. For instance,
Ibn Humam (Hanafis) defines milkiyyah as “a legal authority that begins with the rights of disposal”. The
Malikis define it as “a legal authority that allows a person or his delegate to process the use of ownership
rights, and also to accept compensation in the case of transfer of owned properties or use rights to others”.
Ibn Taymiyyah defines it as “a legal authority justifying the right of disposal”.

From the above definitions, it can be concluded that ownership in Islamic law has three main attributes:
1. Legal authority.
2. Right to deal with the property including the right to disposal.
3. Exclusivity that refers to the right of the owner to exclude others from posting claims to similar use rights
on specific property.
Types of Ownership
Ownership in Islam can be broadly divided into two categories based on the perspective of which proprietary
rights and extent of use are concerned:

1. Full ownership: The absolute ownership of a property, of both physical and its benefit. This type of own-
ership gives the owner all possible legal rights associated with the owned property. The owner is entitled
to proprietary rights including the beneficial rights and the freedom to exercise whatever economic pre-
rogative which is favourable to him.
2. Part ownership: This type of ownership refers to the ownership of the property (corpus) but not its
usufruct. Vice versa, it may also refer to the ownership of the latter but not the former. It is also called as
incomplete ownership.

It can be divided into three types: ownership over rights assigned to land, ownership over property
only, and ownership over the benefit only.

Diagram 2: Classification of Part Ownership

2 Topic 1 The Main Theories of Mu'amalat

1. Ownership over Rights on Common Facilities

It is a right associated with an immovable property (‘aqar) and assigned to another immovable property
belonging to a different owner. It is defined as a right that is granted to anyone who owns an immovable
property where the position of the property is adjacent to other immovable property or because such
immovable property is owned together. According to Dr. Wahbah Zuhayli, it is a permanent right as long
as both immovable properties exist regardless of the multiplicity or succession of owners.

For example, the position of a land that belongs to A is located behind a piece of land belongs to B
which is facing a river. A has the right to create a water path on land B in order to get the water from
the river. The right that is given to A is not because he is the owner of the land but it is because his
land is adjacent to land B. Therefore, anyone who inhabits the land is automatically entitled to have
the same right as well.

2. Ownership over Property Only

In this case, the property (corpus) may be owned by one person whilst its usufruct is owned by another.
Hence, when the usufruct of the property is owned by another person, the owner of that property has no
right to use it. The property should be totally possessed by the one who is allowed to use it.

For example, A rents out his house to B. A only owns physicality of the house but B has its benefit as
the one who uses the house is B instead of A even though the house belongs to A.

3. Ownership over the Benefit/Usufruct Only

In this situation, a person is entitled to the right to use the usufruct of the property only without having
any proprietary rights over that entire property. Ownership over the usufruct can be obtained through
four means:

a. Borrowing (i‘arah)
b. Leasing (ijarah)
c. Endowment (waqaf)
d. Bequest (wasiyyah)

This right is different from the first one (i.e. the right to use common facilities) because this right is
only given to whom the owner allowed to use his property only.

Topic 1 The Main Theories of Mu'amalat 3

 Acquisition of Ownership

There are four methods of acquisition of ownership:

1. Original acquisition: This involves searching and collecting, exploiting or hunting of those natural
resources that have not been previously claimed as private property. It is a well-accepted principle of
Islamic law that who revives dead (mawat) land acquires ownership thereof.
2. Inheritance: A person may acquire ownership of a property through inheritance. This is an obligatory
means of establishing ownership ofthe deceased’s estate for his heirs, as prescribed by Islamic Law.
3. Contracts: This is the most prevalent means of transferring ownership. These transferable contracts are
like commutative or exchange contracts (sale, leasing, etc.), charitable contracts, endowments, grants,
etc.
4. Derivation from owned property (tawallud min al-mamluk): The owner of a property automatically
becomes the owner of all new properties that are derived from it, regardless whether this new thing
produced naturally (e.g. fruition) or by the act of the owner (e. g. cross-breeding).

4 Topic 1 The Main Theories of Mu'amalat

 UNIT 3: THEORY OF PROPERTY (MAL)

Literally the word mal means to lean or incline. In general, it refers to a thing that is capable of being acquired
and owned by human, regardless of the fact whether it is corporeal or abstract (such as usufruct).
However, jurists differ when it comes to the juristic meaning of the word mal as explained below:

Table 1: Different Views of Mal

Generally, mal is known as everything that has legal and material value in human perspective and it can be
tangible thing (corporeal) as well as intangible thing (non-corporeal/ghayr al-a’yan) such as benefit from an
asset (manafi’), the right (huquq) and others.

Topic 1 The Main Theories of Mu'amalat 5

 Categories of Mal
Mal can be classified into four categories as follows:

Categories of Mal Descrip�on

Valuable • Valuable is a thing that can be possessed physically and the benefit of
(Mutaqawwim) and which is permissible by the Shariah to be enjoyed.For example, a car that
non-valuable (Ghayr already has a valid owner.
Mutaqawwim)
• Non-valuable is a thing that may not be possessed or the benefit of which
is prohibited by the Shariah from being enjoyed. For example, fish in the
river or wine.
Fungible (Mithli) • Fungible property is item that its equivalent can be found in the
and non-fungible market and therefore, if perished can be replaced by an equal
(Qimmi) quan�ty of something similar to them. For example, books that are
printed in large numbers.

• Non-fungible items on the other hand are things which equivalent

cannot be found in the markets, or if it is found, there is difference in
the features which may lead to differences in price. They include all
things which cannot be exchanged by weight or measurement of
capacity such as land, houses, animals trees, precious stones, used
cars or books etc.

Moveable (manqul) • Moveable is something that can be moved from one place to another
or immovable (‘aqar) without causing any essen�al change to the nature and condi�on of
the property. Immovable is fixed property, which cannot be moved
from one place to another, or can be moved but certain damage will
be caused to the property because of that removal or it will change
the nature and condi�on of the property.

• Immovable property is a property that cannot be moved from one

place to another or if it is transferred, it will cause significant changes
to the nature and condi�on of the property.

Perishable (Istihlaki) • A perishable item is an item which perishes by consump�on, for

and non-perishable example food.
(Isti’mali)
• A non-perishable item is an item which will not destroy with repeated
use, like an ar�cle of clothing, a car or a house.

Table 2: Categories of Mal

6 Topic 1 The Main Theories of Mu'amalat

 UNIT 4: THEORY OF RIGHT (HAQ )

Literally, haq means just, proper, right, correct or true, authentic, genuine, sound, valid, substantial or real,
established, confirmed as a truth, binding, obligatory, incumbent or due, duty, prescription, equitable to the
requirement of wisdom and justice, a just claim, an obligation.

Right from Islamic perspective refers to “exclusivity (ikhtisas) given by Shariah to a person with regards to his
authority to a thing, or to require fulfilling the responsibility of others towards him in order to realise certain
benefits for himself.”

Other scholar defines right as “an interest (maslahah) established to an individual or society or both and this
maslahah is confirmed to them by the Lawgiver (Allah SWT).”

Salient Features of Ḥaq

Based on the definitions it can be concluded that:

1. The right shall be something recognized by Shariah. So, any right that is against Shariah, or ruled by
Shariah as illegal shall not be considered as a legal right even though people consider it to be a legal right.
2. The right shall confer the owner of the exclusive ownership over it. This means that only the owner has
the right to use it.
3. Ownership of the right shall come with the responsibility to take care of it.
4. It is realised that the right is not meant for itself. Rather, it is a mechanism for the owner of the right to
derive benefits from owning the right.

The Types of Haq

Under Islamic jurisprudence, there are two types of rights:

1. Rights Related to Property (Al-Haq al-Maliy)

These are rights that relate to property and its purpose is to regulate financial matters (related to that right)
between the owner of the right and others. The main feature of this right is that it is subjected to the
disposal of the owner. It is his full right to sell, give, waive or abate this right in favour of other people,
whichever the case may be, depending on the types of right.

2. Rights Related to Other than Property (Al-Haq ghair al-Maliy)

These are rights that are related to non-property matters. Examples of this type of right are right to Qisas,
right to all public freedom such as freedom of speech, right of women to request for divorce or separation for
various reasons, right of custody, etc.

Topic 1 The Main Theories of Mu'amalat 7

 UNIT 5: THEORIES OF ‘AQAD (CONTRACT)

The Arabic terminology for contract is 'aqd. The word ‘aqd literally means to join, to tie, to combine, to bind,
etc. Technically, 'aqd or contract refers to an agreement between two persons, which is legally binding and
has consequences upon the subject of contract.

Understanding of a Promise (Wa‘d)

Promise (wa’d) has no specific definition of its own. However, it can be explained as a commitment or promise
made by one person to another to undertake a certain actual or verbal disposal beneficial to the second
party or a verbal proposition made by someone to undertake something to the benefit of another person.
Traditionally, wa’d is unilateral in nature, and binds the promisor only.

The enforceability of a promise has also been confirmed by the International Islamic Fiqh Academy. The
Shariah scholars of International Islamic Fiqh Academy have concluded that a promise in commercial dealings
should be binding so long as it satisfies the following conditions:
1. The promise should be one-sided.
2. The promise must have caused the promise to incur a liability.
3. If the promise is to purchase something, then the actual sale must take place at the appointed time with
the exchange of offer and acceptance. The mere promise itself should not be taken as a sale.
4. If the promisor backs out of the promise, the court may force him to either fulfil it or pay the actual
damages to the promisee. Damages will include actual liabilities and not opportunity costs.

Essential Elements and Necessary Conditions of a Valid Contract

The pillars of a valid contract consist of offer and acceptance (Sighah), the contracting parties and the subject
of the contract.
1. Offer and Acceptance (Sighah)
The basic idea behind the formulation of sighah is to ensure that the contracting parties really understand,
agree and conclude the contract consciously. In fact, mutual consent of the parties is the basis for the
formation of a contract.

Allah SWT says:

“O ye who believe! Eat not up your property among yourselves in vanity,
but let there be among you trade by mutual consent”
(al-Nisa’ 4 : 29)

8 Topic 1 The Main Theories of Mu'amalat

Main Necessary Condition of Offer and Acceptance
a. Both offer and acceptance must be made in clear terms
The offer and acceptance must clearly indicate the intended motive of the contracting parties. This is
because the internal motive (iradah batinah) is hidden and the contract as well as its related particular
rulings is not binding and enforceable if the actual contract (al-‘aqd bi ‘aynih) intended by the contacting
parties is not known with certainty.
This can be realised by using the term that customarily and literally signifies the type of contract
intended by both parties. However, there is no prescribed form for a clear indication of the motive
because specific form (shakliyyah) is not necessary for contracts other than marriage contracts.
b. Conformity of the offer and acceptance
The subject (mawdu‘) accepted in the contract must correspond to what has been offered whereby the
acceptance of the subject is to be made in either actual or tacit conformance to what has been offered.
A contract is not validly concluded if the subject of acceptance contradicts with what has been offered
such as if the party accepted another subject matter or only half of the offered subject matter. This can
be illustrated in the following deal: “I sold my car to you” and the buyer replies, “I bought my friend’s
house."
c. Continuity between the offer and acceptance, actually or constructively
The offer and acceptance must be jointly connected in the same session of contract (majlis al-‘aqd) to
indicate the dual declaration of motive if both transacting parties are present at the time of contract or
in a session (majlis) in which the party may know the offer made to him even if he is not present.
Hence, a continuity of offer and acceptance is necessary as it forms the basis for the consistency of the
parties’ intention and consent by which the offeree knows the offer by listening and understanding it if the
contract is done in writing or by observing if it is done by gesture or conduct. Custom acknowledges
that the persistence of the session signifies the persistence of the motive of the party (offeror), and when
the session ends, the above said customary acknowledgement is no longer effective.

This is because the offer takes the form of several words and is over upon uttering it, and it is only
considered persistent if the session persists. Consequently, if the contracting parties departed one another
before the acceptance (qabul) is made; the contract is rendered void and not validly concluded.

Even uruf itself recognizes that the continuity of the ceremony shows the continuity of the offer by the
bidder. If the contract ceremony has ended, then the recognition by the uruf is no longer applicable. This
is because the wording of the offer consists of a few words and once expressed, it will be completed.
Therefore, this offer is considered to be still available as long as the contract ceremony is still ongoing.
This means that if the two parties part before the bidder states the acceptance of the offer (qabul), the
contract is considered void and invalid.

Topic 1 The Main Theories of Mu'amalat 9

 There are three conditions by which the continuity of offer and acceptance can be materialised :

i. The offer and acceptance must be held in one single session because the offer is not considered a
part of the contract by itself unless it is assembled with acceptance.
ii. There should be nothing arising from the contracting parties that indicate their objection to the contract.
This entails that the conversation should be effected on the subject of the contract, and free from unrelated
words that may be pronounced in between the offer and acceptance which is deemed as an indicator
(qarinah) of an objection to the contract.
iii. The offeror should not retract the offer before being accepted by the offeree. In this regard, the
offeror shall persist in his offer to the offeree and if he retracts from it, the contract is invalid.
However, the offeror assumes the right to retract his offer before an acceptance is made by the
other party after which the offer is deemed void.

2. Contracting Parties
The contract, to be valid, must be concluded by a qualified and competent person. Therefore, the
contracting parties are required to possess necessary legal capacity (ahliyyah) for this purpose.
Some jurists define ahliyyah as the ability or fitness to acquire rights and exercise them and to accept
duties and perform them. There are two types of legal capacity, namely, capacity for acquisition of rights
(ahliyyah al-wujub) and capacity for execution of rights (ahliyyah al-ada’).
Capacity for acquisition of rights (ahliyyah al-wujub) refers to the capacity of a person to receive rights
and responsibility due on him. All humans who are alive possess this capacity. Even a foetus in the womb
of his/her mother possesses this capacity though incomplete (ahliyyah al-wujub al-naqiṣah). Capacity for
execution of rights (ahliyyah al-ada’) on the other hand, refers to the eligibility of a person to execute or
discharge his rights and duties in a manner recognised by the law. The principle elements of this type of
capacity are the intellectual standard that the person has attained and the ability to distinguish between
useful and harmful, profitable or unprofitable.

Capacity of execution is divided into two:

a. Incomplete capacity which refers to the eligibility of a person to perform some duties only. This
eligibility begins from the age of seven (age of discernment) to the age of puberty.
b. Complete capacity of execution which refers to the eligibility of a person to exercise his rights and
undertake obligations in a manner recognized by law without being subjected to any other person’s
approval. This stage of legal capacity is established when a person has reached the age of puberty and
attained prudence.
Hindrance to Legal Capacity
There are several factors which impair the legal capacity of a person and prevent him from concluding
contracts and making dispositions in his property.
These legal hindrances can be divided into two:
a. Heavenly defects, natural defects - Any defect that are beyond a person’s power, or defects in which
no intervention from man but are given by Allah SWT, e.g. insanity, idiocy, imbecility etc.
b. Acquired defects - Defects that are within a person’s power and imposed by the act of the man
himself, such as intoxication and insolvency.

10 Topic 1 The Main Theories of Mu'amalat

3. Subject Matter of the Contract
There are several necessary conditions for the subject matter as prescribed by the Islamic law:
a. Existence of the subject matter
The subject matter must exist at the time of contract. It is not allowed to sell a subject matter that is
yet to be in existence as it involves the element of uncertainty and excessive risk which is forbidden
in Islam. This is based on the Hadith.

Prophet SAW said:

“Sell not what you do not have.”
(Sunan Abi Dawud)

Narrated by Bukhari and Muslim:

“Prophet SAW prohibits the selling of the unborn animal in
the womb of its mother.”
(Bukhari and Muslim)

Thus, the sale of an animal foetus which is yet to be born and the sale of milk whilst it is still within
the udder of an animal are prohibited.

b. Deliverability of the subject matter

It is unanimously agreed among the scholars that the delivery of the subject matter must be certain
at the time of the conclusion of the contract. Therefore, the contract is not validly concluded if the
contracting parties are not capable of delivering the subject matter even though the subject matter
exists at the time the contract is concluded and is legally owned by the seller. Jurists also agreed
unanimously that this condition must be fulfilled in financial contracts of exchange as well as in
gratuitous contracts. However, Imam Malik opines that it does not apply to gratuitous contracts.
Hence, it is not valid to undertake any financial contracts on undeliverable subject matters such as the
sale of runaway camels, the sale of birds in the air and the sale of fishes in the river.

c. Precise determination of the subject matter

The subject matter must be precisely determined and clearly known to the contracting parties to
the extent that a later dispute can be avoided. If the contracting party doesn't know, couldn't see,
or is unsure about the agreed goods, then the contract will be void. Civil law also subscribes to
this injunction as it provides that an agreement which is uncertain or is not capable of being made
certain is void. For example, Ali agrees to sell a car to Ahmad without specifying the type of car.
This agreement is considered void on the grounds of uncertainty. According to Shariah, the precise
determination of the subject matter can take place in its actuality through gesture or pointing out
(isharah) if it is in existence or through viewing (ru’yah) at the time of the contract or prior to it within
the duration in which it is not possible for the subject matter to change or through a description that
prevents from serious ignorance (jahalah) by way of giving a clear description of its type and quantity.

Topic 1 The Main Theories of Mu'amalat 11

 d. Legality of subject matter

It is an established principle that the subject matter of a contract must be legally permissible. The contract
is considered invalid if the subject matter is something acquired unlawfully, like a stolen property, or
has no commercial value according to Shariah such as pig, wine, etc. It is forbidden for a Muslim to
acquire or transfer through contract anything that the Shariah has declared as prohibited (haram).

The validity of contract also requires that the object and the underlying cause must be legal. In other
words, the intended objectives of the contract must not contrary to any Islamic principles. Thus, a
contract made for the use of a property in commission of an offence, when either party knows of this
fact, is unlawful.

Termination of Contract
Under Islamic law, a contract could be discharged or terminated in the following situations:

Table 3: Situations for Termination of Contract

12 Topic 1 The Main Theories of Mu'amalat

 PRACTICE QUESTIONS

1. Every exchange contract in Islamic finance must have these following essential elements:

A. Contracting parties, object of the contract, the contract, and price

B. Seller, buyer, asset and witnesses.
C. Bank, customer, profit margin and tenure.
D. Goods, price, payment schedule and agreement.

2. Aqad refers to an expression made by the contracting parties to declare their inner will to undertake a
contract and thereafter be bound by certain rights and responsibilities. It can take place via these forms
of expression.

I. Verbal
II. Written
III. Conduct
IV. Intention

A. I and II
B. I, II and III
C. II, III and IV
D. All of the above

Topic 1 The Main Theories of Mu'amalat 13

 Topic 2
Application of Mu'amalat Contracts & Principles in Islamic Finance

Learning Objective
At the end of the topic, you will be able to:
• List the types of Muamalat contracts.
• Explain the sale and purchase contract and its application in Islamic finance.
• Describe the gold and silver trade as well as the specific conditions.
• Explain the rental contract and its application in Islamic finance.
• Explain the partnership contract and its application in Islamic finance.
• Describe other contracts beside exchange contracts and partnership contracts and their application in
Islamic finance.

UNIT 1: INTRODUCTION TO MU‘AMALAT CONTRACTS

In general, any given Shariah contracts shall satisfy two main requirements namely, avoidance of prohibitions
and fulfilling of its essential requirements. Avoidance of prohibitions mainly refer to riba, gharar, maysir
and illegal (Shariah non-compliance) activities such as prostitution and pornography. Fulfilling the essential
requirement on the other hand involves meeting the basic requirements of a valid contract in respect of
asset, parties to contract, offer and acceptance, etc. It is strongly required that fulfilment of Shariah does not
stop at meeting the minimal requirement of Shariah, but instead it go further to give effect to the objective
of each and every nature of the contract.

Diagram 3: Shariah Requirements in Islamic Finance

14 Topic 2 Application of Mu'amalat Contracts & Principles in Islamic FInance

Mu‘amalat Contracts
Mu‘amalat contracts are broadly divided into several criteria, depending on the perspective in which we view
the contracts. At the outset, mu‘amalat contracts are divided into two, namely bilateral and unilateral contracts. A
unilateral contract is a form of gratuitous based contract that normally requires less stringent conditions as such
contracts are meant for the advantage of beneficiaries’ such as:

1. Gift (hadiyyah)
2. Rebate (ibra’)
3. Will (waṣiyyah)
4. Endowment (waqf)
5. Loan (qard)

Bilateral contract in the other hand represent the remaining segment of mu‘amalat contracts. It can be divided
into six classifications:

1. Contracts of exchange
2. Contracts of security
3. Contracts of partnership
4. Contract of safe custody
5. Contract pertaining to the utilisation of usufruct
6. Contracts pertaining to do work

Each and every type of these contracts serves different purposes and is subjected under different conditions.

Classification of Mu‘amalat Contracts

For clarity purposes in understanding the division and classification of contracts and its primary application
in our modern Islamic finance arrangement, it would be helpful to classify the contracts into the following:

1. Exchange Contract: Refers to a bilateral contract that involves consideration of counter values from two
or more parties. It involves the transfer of ownership of asset or usufruct in consideration of any counter
value. The counter values could be money, goods, services or any other form of agreed counter value.
2. Partnership Contract: It is an equity based contract that involves a joint venture of two or more parties.
Each and every party has their respective obligation in materialising the common understanding and
profit out of the contracts.
3. Other Contract: Refers to a contract that do not fall under exchange contract or participation contract.
Among the contracts fall under this category are contract of security such as rahn and kafalah, contract
for appointment and permission such as wakalah and contract for safe custody such as wadi‘ah.

Topic 2 Application of Mu'amalat Contracts & Principles in Islamic Finance 15

 /

Bay' Murabahah Ijarah Thumma

through Tawarruq Bai’

Diagram 4: Classification of Mu‘amalat Contracts in Islamic Finance

16 Topic 2 Application of Mu'amalat Contracts & Principles in Islamic FInance

 UNIT 2: EXCHANGE CONTRACTS: SALE AND LEASE CONTRACT

Exchange contracts can be broadly divided into sale and lease based contracts. While both involves transfer of
ownership, the former is related to asset while the latter is related to usufruct of the asset.

Exchange contracts can be divided into two:

1. Sale and Purchase Contract (Bay')

2. Lease Contract (Ijarah)
Sale and Purchase Contract (Bay')
The word bay‘ or sale originated from the word ba‘ which means for arm, because in a sale, one arm is extended
to either receive or give. Therefore, the word bay‘ originally means the clasping of hands during the conclusion of
contract. Bay‘ in its ordinary usage denotes the activity of either buying or selling. Such is also indicated in the
Quran, for example:

Allah SWT says:

“The (Brethren) sold him for a miserable price for a few dirhams counted
out”.
(Yusuf 12 : 20)

Sale contract forms the most important part of nominated contracts (‘uqud al-musamma) in Shariah. It can be
divided into several types of contracts. Each contract has its own features, conditions, effects, etc.
Technically, sale is defined as “the exchange of an owned commodity for another with the exchange of
ownership.”

“The general rule for all sales is permissibility as long as they are
concluded by consenting capable decision makers, except for what
the Prophet SAW has forbidden, or what is sufficiently similar to
that which the Prophet SAW has forbidden; and anything different
from those is permissible following the permissibility of sales
stated in the Qur'an.”
Imam al-Shafi‘i

Topic 2 Application of Mu'amalat Contracts & Principles in Islamic Finance 17

 Essential Elements of Sale Contracts

There are four essential elements of Sale Contracts, namely:

Sale
Price Contracts

Asset

Diagram 5: Essential Elements of Sale Contracts

Classification of Sale Contract

Sale contract can be further classified into several criteria, depending on the perspective of which we view
the sale contract:

1. Division of contract from type of exchange perspective:

a. Barter trading (Bay’ al-muqayadah)

b. Sale of money for money - currency exchange (Bay’ al-sarf)
c. Sale of goods for money (Bay’ al-mutlaq)

2. Division of contract from capital and profit perspective:

a. Bay’ al-Musawamah: Sale contract where there is no requirement of disclosure, neither on the capital
nor the profit
b. Bay’ al-Amanah: Sale contract where the disclosure of capital and profit is required. It can be divided
into three types, namely Murabahah, Tawliyyah and Wadhi'ah

3. Division of contract from mode of payment perspective:

a. Bay’ Bithaman Hal: Sale where the payment of price is made on spot basis
b. Bay’ Bithaman Ajil: Sale where the payment of the price is deferred
c. Bay’ Salam: Sale where the payment is made upfront in full and the commodity will be delivered later

18 Topic 2 Application of Mu'amalat Contracts & Principles in Islamic FInance

Types of Sale Contract

There are eight types of Contracts under Sale namely:

1. Trading of Gold and Silver

2. Bay’ Sarf
3. Bay’ Dayn
4. Bay' Murabahah (via Tawarruq arrangement)
5. Bay’ Murabahah
6. Bay’ Istiṣna'
7. Bay’ Salam
8. Bay' Inah

1. TRADING OF GOLD AND SILVER

Gold cannot be sold for a different quantity of gold. Silver cannot be exchanged for a different quantity of
silver. The Prophet SAW said:

“Gold for gold, silver for silver, like for like, hand to hand, and
whoever increases or ask for increasing he falls in usury”
Sahih Muslim

Though gold and silver are both monetary instruments, they may be freely purchased with other monetary
instruments. Gold may be purchased for silver. Silver may be purchased with gold. Both of these precious
metals may be purchased with paper currency.

Essential Elements of Gold and Silver Trading and its Necessary Conditions

1. Contracting Parties

The contracting parties consist of the seller and buyer. They shall have the legal capacity, which is
defined, from the Shariah perspective as the capacity to assume rights and responsibilities; and
capacity to give legal effect to his action. Among the important conditions are that the person must
possess sound mind and the capacity to distinguish between what is harmful or beneficial to one’s
interests. Legal capacity of a legal entity is defined as eligibility of an entity to acquire rights and
assume responsibilities.

2. Offer and Acceptance

a. Gold and silver trading shall be entered into by an offer and acceptance between the contracting parties.
b. The offer and acceptance may be expressed orally, in writing or any other methods which could be
evidenced by appropriate documentation or record.

3. Asset

The asset in a gold and silver trading shall be gold or silver which is known, in existence, deliverable and
owned by the contracting parties.

Topic 2 Application of Mu'amalat Contracts & Principles in Islamic Finance 19

 4. Price

The price (currencies) in gold and silver trading shall be determined and be mutually agreed by the contracting
parties at the time of entering into each of the respective sale and purchase contract.

Other Conditions

If the exchange transaction involves two ribawi items of the same type and effective cause (‘illah) such as
the exchange of gold for gold or wheat for wheat, the following requirements must be applied to avoid
riba:

1. The exchange must be for equal quantity of the counter-values; and

2. It must be an “on-the-spot” transaction in which both of the counter-values must be handed over at
the time of the contract.

If the exchange involves ribawi items with the same effective cause but of different type, such as the
exchange of gold for silver or wheat for dates, it must fulfil only one requirement; that it is done on-the-
spot where the exchange of counter values takes place at the time of the contract.

These requirements namely, spot and equal exchange, do not apply if the exchange involves different
ribawi items of different categories such as the exchange of a medium of exchange (for example gold or
money) with staple food (for example wheat).

Application of Gold Trading: Islamic Gold Investment Account

1 Customer
Bank

Diagram 6: Application of Gold Trading for Islamic Gold Investment Account

Explanation:

1. Bank sells 10 gram of gold to Customer at the agreed selling price.

2. As rightful owner, Customer may choose to take physical possession of the gold or to lend the gold to the
bank.

3. If the gold is on loan basis, Bank must ensure that the gold must be made available whenever demanded by
the Customer.

Products of Gold Trading

Example of gold trading based products is Islamic Gold Account -i

20 Topic 2 Application of Mu'amalat Contracts & Principles in Islamic FInance

2. BAY' SARF

Bay’ Sarf is a contract where an exchange of money for money of the same or a different type takes place.
Bay’ Sarf is an exchange contract that is binding in nature. Therefore, the contract shall not be terminated
unilaterally by either of the contracting parties.

Essential Elements of Bay’ Sarf and it Necessary Conditions

1. Contracting Parties

The conditions imposed on the contracting parties are the same as mentioned earlier.

2. Offer and Acceptance

All terms of offer and acceptance have been mentioned previously also applied in this Bay' Sarf
contract.

3. Asset

a. The asset in a Bay’ Sarf shall be money which is known, in existence, deliverable and owned by
the contracting parties
b. In the case where the Bay’ Sarf contract is executed by an agent, the money shall be owned by
the principal
c. Type of money in Bay’ Sarf shall be determined and mutually agreed by the contracting parties at
the time of the execution of the contract

4. Price

The price / consideration in Bay’ Sarf shall be determined and be mutually agreed by the contracting
parties at the time of entering into each of the respective sale and purchase contract.

Other Conditions

1. A Bay’ Sarf shall satisfy the following specific requirements:

a. The transfer of ownership of money takes place before the contract session ends.
b. The transaction is in effect on a spot basis.
c. The transaction is done at par (by equal unit of measurement) where the exchanged counter-val-
ues are the same type of money.
2. Possession of the transacted money shall be either in the form of physical possession (qabd Haqiqi)
or constructive possession (qabd Hukmi)

3. Possession of the money shall take effect by the seller delivering the money to the buyer through any
mechanism permitted by Shariah, including any customary business practice (`urf tijari), such that the
buyer would have access to the money and would have assumed its ownership risk.

Topic 2 Application of Mu'amalat Contracts & Principles in Islamic Finance 21

 Application of Bay’ Sarf

Foreign Currency Exchange

1
Customer
Bank 2

Diagram 7: Application of Bay’ Sarf

Explanation:

1. The Bank sells USD50 million to the customer on spot basis

2. The client purchases RM200 million from the bank on spot basis.

Products/Services of Bay’ Sarf

Example of Bay’ Sarf based products/services are as follows:

1. Foreign Current Account-i

2. Foreign exchange spot transaction (FX spot)

3. BAY' DAYN

Bay‘ Dayn can be defined as the sale of payable right or receivable debt either to the debtor himself or to a third
party.

This type of sale is for immediate payment. Shariah permits the selling of debt by its equivalent in quantity and
time of maturity by way of Hawalah. This form of debt-trading is accepted by all schools of Islamic law with the
condition that it is paid in full, hence gives no benefit to the purchaser. The rationale for this ruling is that the
financial transactions involving debt should not have deferred payment element, as this would amount to riba or
‘Bay’ al-kali bi al-kali' which is prohibited by the Prophet SAW.

While sale of debt to the debtor is permissible according to majority of jurists, sale of debt to a third party is
disputed. Hanafis and Ẓahiris uphold that the sale of debt to a non-debtor or a third party is not permissible.
However other schools of thought such as Shafi‘i and Maliki hold the view that sale of debt to a third party is
permissible.

The International Islamic Fiqh Academy in Jeddah, in one of its declarations, decrees that the sale of debt is
allowed to a debtor or to a third party provided that the rules of riba are followed. They maintain that a sale of
debt to a third party is allowed provided that the element of gharar and the regulation regarding the sale of one
ribawi item with another is observed.

Essential Elements of Bay’ Dayn and its Necessary Conditions

1. Contracting Parties

The conditions imposed on the contracting parties in Bay' Dayn contract are the same as mentioned earlier.

22 Topic 2 Application of Mu'amalat Contracts & Principles in Islamic FInance

2. Offer and Acceptance

All terms of offer and acceptance have been mentioned previously also applied in this Bay' Dayn.

3. Debt

a. The debt must be confirmed (mustaqir).

b. The debt is not created from the sale of currency (gold and silver) to be delivered in the future and the
payment is not of the same type as the debt, and if it is so, the rate should be the same in order to avoid
riba.

4. Price

The price / consideration in Bay’ Dayn shall be determined and be mutually agreed by the contracting parties
at the time of entering into each of the respective sale and purchase contract which shall be delivered at the
time of the contract.

Application of Bai' Dayn in Sukuk Product

Originator 1 Asset SPV

3 2

Sukuk Holder

Diagram 8: Application of Bai' Dayn in Sukuk Product

Explanation:

1. The originator sells his assets (receivable debt) to SPV/sukuk issuer.

2. SPV issues sukuk to investors/sukuk holders. Sukuk funds obtained from investors/sukuk holders are used to
pay the price of assets purchased from the originator.

3. This sukuk proves the rights and interests of the sukuk holders over the assets. This allows them to receive
cash payments generated through the asset. However, sukuk holders are also exposed to risks associated
with the performance of the asset.

Products of Bay’ Dayn

Example of Bay’ Dayn based products are as follows:

1. Accepted Bill-i (Sales) 3. Export Credit Refinancing-i (ECR-i)

2. Bills of Exchange Purchase-i (BEP-i) 4. Sukuk

Topic 2 Application of Mu'amalat Contracts & Principles in Islamic Finance 23

 4. BAY' MURABAHAH (via TAWARRUQ ARRANGEMENT)

Bay’ Tawarruq consists of two contracts of sale and purchase, where the first involves the sale of an asset
to a purchaser on a deferred basis and the subsequent sale involves the sale of the asset to a third party
on a cash basis.

Sale and purchase of assets to the buyer at a cost price and additional profit is known as Murabahah
contract. Meanwhile, the second sale and purchase contract with the cost price to get the cash is a
regular type of sale and purchase.

Essential Elements of Bay' Murabahah (via Tawarruq Arrangement) and its Necessary Conditions

1. Contracting Parties

In Bay' Murabahah (via Tawarruq arrangement), every first and second sale consists of seller and
buyer, but there is a third party involved similarly i.e. the original owner of the commodity known as
the supplier.

The conditions imposed on the contracting parties are the same as previously discussed. There is
only one special condition for the transaction involving Tawarruq which is the seller in the first sale
and purchase contract cannot be the buyer in the second sale and purchase contract in the same
Tawarruq.

The contracting parties in each sale and purchase contract of Bay’ Murabahah (via Tawarruq
arrangement) are allowed to enter into this sale and purchase contract by appointing an agent
(representative). Usually, the contracting parties in Bay’ Murabahah (via Tawarruq) become the
agents to the other party and this is allowable.

2. Offer and Acceptance

The conditions imposed on the offer and acceptance in Bay' Murabahah (via Tawarruq) are the same
as previously discussed.

3. Asset

The conditions imposed on the assets in Bay ’Murabahah (via Tawarruq arrangement) are the same
as the general conditions of other trading assets. Apart from that, there is a special condition which
is gold, silver, currency, construction asset and debt asset cannot be used as assets in this sale and
purchase if it involves the method of deferred payment as practiced in Islamic finance today.

4. Price

a. The price used in Bay' Murabahah (via Tawarruq arrangement) shall be determined and be
mutually agreed by the contracting parties at the time of entering into each of the respective sale
and purchase contract

b. Where the selling price for any sale contract in Bay' Murabahah (via Tawarruq arrangement)
basis, it shall comply with all requirements relating to the price such as the disclosure of cost and
profit under a Murabahah sale

24 Topic 2 Application of Mu'amalat Contracts & Principles in Islamic FInance

Other Conditions

1. All sale and purchase contracts in Bay' Murabahah (via Tawarruq arrangement) shall be executed by
entering into separate and independent sale and purchase contracts.

2. No sale and purchase contract in Bay' Murabahah (via Tawarruq arrangement) shall stipulate any
terms and conditions that restrict the purchaser from taking delivery of the asset or create an
obligation for the purchaser to sell the underlying asset to the third party.

Modern Application of Bay' Murabahah (via Tawarruq arrangement): Personal Financing-i

3 Customer
Bank

1 4

Commodity Commodity
Seller Buyer

Diagram 9: Application of Bay' Murabahah (via Tawarruq arrangement) for Personal Financing-i

Explanation:

1. Bank purchases commodity from Commodity Supplier at a price equivalent to financing amount on
spot basis payment.

2. Bank sells the commodity on deferred to Customer at Bank’s sale price (financing amount plus profit)
on deferred basis. Ownership of the commodity is now transferred to the customer.

3. Under the Wakalah contract, the customer appoints the Bank as his agent to sell the commodity on
spot-basis to a third party.

4. Acting as the appointed sale agent for the customer, Bank sells the commodity to Commodity Buyer
on spot-basis at a price equivalent to the financing amount

Products of Bay' Murabahah (via Tawarruq arrangement)

Example of Bay' Murabahah (via Tawarruq arrangement) based products are as follows:

1. Personal Financing-i

2. Cash Line-i (OD)

3. Credit Card-i

Topic 2 Application of Mu'amalat Contracts & Principles in Islamic Finance 25

 4. Term Financing-i

5. Home Financing-i

6. Property Financing-i

7. Revolving Credit-i

8. Islamic Interbank Money Market

9. Structured Product

10. Sukuk

5. BAY’ MURABAHAH

Murabahah refers to a sale and purchase of an asset where the acquisition cost and the mark-up are
disclosed to the purchaser. Murabahah is a sale and purchase contract which is binding in nature. Thus,
the contract shall not be terminated unilaterally by any of the contracting parties.

The specific inherent nature of the contract of Murabahah is the sale contract which is based on the
element of trust in disclosing the cost and mark-up.

Essential Elements of Murabahah and its Necessary Conditions

1. Contracting Parties

The conditions imposed on the contracting parties in Bay' Murabahah are the same as previously
discussed.

2. Offer and Acceptance

The conditions imposed on the offer and acceptance in Bay' Murabahah are the same as previously
discussed.

3. Asset

The conditions imposed on the assets traded in the Murabahah contract are the same as the conditions
of the assets in Bay’ Murabahah via Tawarruq.

4. Price

a. The price and the currency used shall be determined and mutually agreed at the time of entering
into the Murabahah contract.

b. The price shall be based on the disclosed acquisition cost and added mark-up at the time of
entering into the contract.

26 Topic 2 Application of Mu'amalat Contracts & Principles in Islamic FInance

 c. The direct expenses incurred to acquire the asset such transportation, storage, etc can be included
in the acquisition cost. Any direct expenses to be incurred after entering into the Murabahah
contract shall not form part of the acquisition cost.

d. Indirect expenses to a particular Murabahah transaction, such as premise rental, utility bills, staff
wages and labour charges, shall not be included in the acquisition cost.

Modern Application of Murabahah

Motor Vehicle Financing-i

1 Customer 2 Dealer
Bank

Diagram 10: Application of Murabahah for Motor Vehicle Financing-i

Explanation:

1. Bank appoints the customer as its purchasing agent to purchase the vehicle from the dealer

2. The customer purchases the vehicle from the dealer on behalf of the Bank

3. Bank sells the vehicle to the customer on Murabahah basis. Customer will pay the Bank on deferred
payment basis.

4. The customer pledged the vehicle as security/collateral.

Products of Bay’ Murabahah

Example of Murabahah based products are as follows:

1. Islamic Accepted Bill-i (Purchase)

2. Trust Receipt-i

3. Cash Line-i

4. Revolving Credit-i

5. Term Financing-i

6. Sukuk

Topic 2 Application of Mu'amalat Contracts & Principles in Islamic Finance 27

 6. BAY’ ISTISNA'

Istisna’ refers to a contract to sell to a purchaser a non-existent asset that is to be constructed, built or
manufactured according to the agreed specifications and delivered on a specified future date at a pre-
determined price.

Essential Elements of Istisna’ and its Necessary Conditions

1. Contracting Parties

The conditions imposed on the contracting parties in Istisna' contract are the same as previously
discussed.

2. Offer and Acceptance

The conditions imposed on the offer and acceptance in Istisna' contract are the same as previously
discussed.

3. Assets

a. The asset to be manufactured must be precisely determined in its type, kind, quantity and quality,
considering that Istisna’ contract is a form of sale of the non-existence.

b. The Istisna’ asset may either be a unique or homogeneous asset that can be constructed, built or
manufactured such as a house, vehicle, garment, aircraft or furniture.

c. The asset of an Istisna’ contract must be something that the people are familiar with, to contract
it on the basis of manufacture and construction process.

4. Price

a. Price of Istisna’ may be in the form of money, commodity and usufruct.

b. Price of Istisna’ can be paid in instalments. The instalments may be tied up with different stages
of projects.

28 Topic 2 Application of Mu'amalat Contracts & Principles in Islamic FInance

Application of Istisna’

Home Financing-i

1
Customer
Bank 2

4 3

Contractor

Diagram 11: Application of Parallel Istisna’

Explanation:

1. A customer wants to purchase a property and seeks financing from the Bank.

2. In order to facilitate the financing to the customer, the Bank enters into an Istisna’ contract with the
customer for the sale of the property for a price of RM500,000 payable in 35 years.

3. Subsequently, the Bank enters into another separate Istisna’ contract with the Contractor for a price of
RM400,000 with progress payments paid to the Contractor during the two year construction period.

4. Upon completion, the Developer delivers to the Bank and the Bank delivers to the customer.

Products of Istisna’

Example of Istisna’ based products are as follows:

1. Home Financing-i

2. Project Financing-i

3. Sukuk

Topic 2 Application of Mu'amalat Contracts & Principles in Islamic Finance 29

 7. BAY’ SALAM

Bay’ Salam refers to an agreement whereby payment is made immediately while the goods are due to be
delivered at an agreed later date.

The two terms ‘salam’ and ‘salaf’ have been used interchangeably in Hadith literature to describe the
contract for future delivery of specific goods with up-front payment of the price. The parties stipulate a
certain time for supply of the goods of specified quantity and quality.

Essential Elements of Bay’ Salam and its Necessary Conditions

1. Contracting Parties

The conditions imposed on the contracting parties in Bay' Salam contract are the same as previously
discussed.

2. Offer and Acceptance

The conditions imposed on the offer and acceptance in Bay' Salam contract are the same as previously
discussed.

3. Asset

a. The asset of Salam must be known in term of genus, characteristics and amount or quantity.

b. Salam can only be taken into effect for the commodities whereby the quality and quantity of the
said commodities can be specified exactly.

c. The genus of goods and commodities purchased must exist in the market continuously from the
contract being executed until the delivery time.

d. Salam cannot be taken into effect on a particular commodity or on a product of a particular field
or farm.

e. Salam cannot be taken into effect in respect of things which must be delivered at spot such as
gold.

f. The exact date and place of delivery of the asset must be specified in the contract.

4. Price

a. The price of the asset must be specified upfront during the initial stage of which the contract is
being concluded.

b. Buyer pays the price in full to the seller at the time of affecting the sale.

30 Topic 2 Application of Mu'amalat Contracts & Principles in Islamic FInance

Differences between Bay‘ Istisna‘ and Bay‘ Salam

The subject in which transac�on of Istiṣnā‘ is The subject can be anything that may need
based on, for most cases is a thing which manufacturing or not.
needs to be manufactured.

The price in Istiṣnā‘ does not necessarily The price has to be paid in full in advance.
need to be paid in full in advance.

Table 4 : Differences Between Bay‘ Istisna‘ and Bay‘ Salam

Application of Bay’ Salam

1
Farmer/
Bank 2 Customer

Supplier

Diagram 12: Application of Bay’ Salam

Explanation:

1. The farmer/customer requires a working capital financing. Bank and customer enter into a contract
of Bay‘ Salam.

2. The bank purchases the commodity from customer stating the predefined crops, delivery date, crop
quality etc.

3. The bank pays the commodity’s sale price in full on the spot basis.

4. The farmer deliver the crop to the bank on the agreed specification and pre-defined delivery date and
venue

5. The bank sells the crop/subject matter in the market at the selling price. Normally Bank already have
an arrangement with a third party (parallel salam)

Topic 2 Application of Mu'amalat Contracts & Principles in Islamic Finance 31

 Products of Bay’ Salam

Example of Bay’ Salam based products are as follows:

1. Personal Financing-i

2. Working Capital Financing-i

3. Sukuk

8. BAY’ 'INAH

Bay’ ’Inah refers to an arrangement that involves sale of an asset to the purchaser on a deferred basis and
subsequent purchase of the asset at a cash price lower than the deferred sale price. Each sale contract
in a Bay’ ’Inah arrangement is binding in nature. Thus, neither of the sale contracts shall be terminated
unilaterally by any of the contracting parties.

The inherent nature of each sale contract in a Bay’ ’Inah arrangement is the transfer of ownership of the
asset from the seller to the purchaser in two separate and independent sale contracts.

Essential Element of Bay’ ’Inah and its Necessary Condition

1. Contracting Parties

The conditions imposed on the contracting parties in Bay' Inah contract are the same as previously
discussed.

2. Offer and Acceptance

The conditions imposed on the offer and acceptance in Bay' Inah contract are the same as previously
discussed.

3. Asset

a. The asset must be recognised by the Shariah, valuable, identifiable and deliverable.

b. The asset is already in existence and owned by the seller.

c. Trading of ribawi items shall strictly follow the exchange of ribawi items rule.

4. Price

The price and the currency used shall be determined and mutually agreed at the time of execution of
each of the two independent sale contracts.

32 Topic 2 Application of Mu'amalat Contracts & Principles in Islamic FInance

Other Conditions

1. Both sale contracts must be concluded in two clear and separate agreements and comply with the
following:

a. Both sales and purchase agreements must satisfy all necessary conditions of a valid sale and
purchase contract under Shariah.

b. The sale and purchase agreements may be developed based on generally accepted market
practices (‘urf) mechanism, which include written documentation or verbal recording.

c. Written documentations of both sale and purchase agreements must be prepared and represented
by two separate set of documents.

2. Both sale contracts must not stipulate any terms and conditions or create an obligation for both
transacting parties to repurchase or resell the assets of sale.

3. Execution or signing of both sale contracts must be executed at different interval.

4. Both sale contracts must be executed in proper sequence, the seller must completely execute the first
sale contract. Subsequently, both parties may agree to enter into another sale contract.

5. Ownership of the asset must be effectively transferred from the seller to the purchaser. The transfer
of ownership shall result in the purchaser having absolute rights and control on the asset.

Application of Bay’ ’Inah

Personal Financing-i

1st Sale

2
Customer
Bank 1

2st Sale

1
Customer
Bank 2

Diagram 13: Application of Bay’ ’Inah for Personal Financing-i

Topic 2 Application of Mu'amalat Contracts & Principles in Islamic Finance 33

 Explanation:

1st Sale:

1. Bank sells an asset at a price equivalent to the financing amount plus profit margin (Asset Sale
Agreement).
2. Customer makes periodic payments (Principal + profit) in monthly installment over a specified period
of time.

2nd Sale:

1. Bank purchases the same asset (Asset Purchase Agreement) at a price equivalent to the financing
amount.
2. Bank makes a payment (disbursement).

Products of Bay’ ’Inah

Example of Bay’ ’Inah based products are as follows:

1. Personal Financing-i

2. Credit Card-i

3. Cash Line-i

4. Term Financing-i

5. Revolving Credit-i

6. Sukuk

Lease (Ijarah) Contract

Ijarah derives from the root word ajara which means to recompense, compensate or give a consideration
and return. Literally, Ijarah means ‘to give something on rent.’

Technically Ijarah refers to a contract that transfers ownership of a permitted usufruct and/or service for
a specified period in exchange for a specified consideration. AAOIFI Shariah Standard defines Ijarah in the
broaden term to mean “leasing of property pursuant to a contract under which a specified permissible
benefit in the form of usufruct is obtained for a specified period in return for a specified permissible
consideration”.

34 Topic 2 Application of Mu'amalat Contracts & Principles in Islamic FInance

Essential Elements of Ijarah and its Necessary Conditions

There are four essential elements of Ijarah, namely:

Diagram 14: Essential Elements of Ijarah

1. Contracting Parties (Lessor and Lessee)

The conditions imposed on the contracting parties in Ijarah contract are the same as previously
discussed.

2. Offer and Acceptance

The conditions imposed on the offer and acceptance in Ijarah contract are the same as previously
discussed.

3. Asset and Usufruct

a. The asset and usufruct in Ijarah contract shall be those recognised by Shariah, valuable, in
existence, identifiable, accessible and deliverable.

b. The asset and usufruct shall be owned by the lessor.

c. If the usufruct is inaccessible within lease period, the Ijarah contract is voidable.

d. The leased asset shall be non-perishable.

Topic 2 Application of Mu'amalat Contracts & Principles in Islamic Finance 35

 4. Rental

a. The rental shall be determined and agreed at the point of execution of the Ijarah contract.
b. In the case where rental is determined by a specified benchmark or formula, the amount of rental
for the first period shall be specified and the rental for the following period may be determined
based on the agreed benchmark or formula and the determination of rental based on the agreed
benchmark or formula shall be subject to minimum and maximum limit.
c. The lessor shall not increase the rental unilaterally.
d. The lessee shall ensure the payment of rental be made timely, promptly and in accordance with
the agreed method. Any outstanding rental arising from non-payment shall be deemed as debt
due from the lessee.

Other Conditions

1. It is necessary for a valid contract of lease that the corpus of the leased property remains in the
ownership of the lessor, and only its usufruct is transferred to the lessee. Thus, anything which cannot
be used without consuming cannot be leased out. Therefore, the lease cannot be effected in respect
of money, eatables, fuel and ammunition.

2. The ownership of the leased property remains with the lessor. Thus, all the liabilities emerging from
the ownership shall be borne by the lessor. However the liabilities emerging from the use of the
property shall be borne by the lessee.

3. Lessor may appoint lessee as his agent to settle the expenses with reimbursement later via Service
Agency Agreement.

4. Defect to the asset for reasons attributable to the lessee must be repaired and borne by the lessee.

5. Lessor may demand lessee to provide security deposit (hamish jiddiyyah) to guarantee lessee’s
commitment to lease the asset after lessor has purchased the required asset. Compensation can
be claimed from the security deposit in the event of refusal by lessee to fulfil his commitment. The
excess must be returned.

Types of Lease Contract (Based on Type of Usufruct)

The term Ijarah is used for two different situations.

a. Ijarah al-‘Amal

It is referred to a contract to employ the services of a person on wages given to him as a consideration
for his hired services. In this context, the employer is called musta’jir, while the employee is called ajir
and the wages paid to the ajir are called ujrah. This type of Ijarah includes every transaction where
the services of a person are hired by someone else and the compensation is for the effort expended
of skilled used.

b. Ijarah Al- A'yan or Ijarah al-Manafi’

It is a contract to transfer the usufruct of a particular asset to another person in exchange for a rent.
Under this contract, the ownership of the asset remains with the owner (the lessor), but the asset will
be transferred to the lessee for him to derive the usufruct of the asset of which shall be returned back
upon the expiry of the Ijarah period.
36 Topic 2 Application of Mu'amalat Contracts & Principles in Islamic FInance
Types of Leasing (Based on Transferring of Ownership)

1. Operating Lease

A lease contract without option of asset ownership transfer from lessor to lessee i.e. (the ownership
of leased asset will remain with the lessor even after the lease period).

2. Finance Lease

A form of rental contract in which the asset owner is given the option to transfer the ownership of the
asset to the lessee at the end of the rental period, either by sale or gift.

Application of Ijarah

1 Leasing
Customer
2 Company

Asset

Diagram 15: Application of Ijarah

Explanation:

1. The customer approaches the leasing company and identify the leased asset.

2. The leasing company leases the asset to the customer with agreed rental amount and specified lease
period.

Products of Leasing

Example of Ijarah based products are as follows:

1. Equipment Financing

2. Fleet Leasing

Application of Ijarah in Islamic Financial Institutions

There are several forms of Ijarah used by Islamic Financial Instutions such as:

1. Ijarah Mausufah fi Dhimmah

2. Ijarah Muntahiyah bi al-Tamlik / Kira’ wa Iqtina’

3. Ijarah thumma Bay’

Topic 2 Application of Mu'amalat Contracts & Principles in Islamic Finance 37

 1. IJARAH MAUSUFAH FI DHIMMAH

Ijarah Mausufah fi Dhimmah (forward lease) means a leasing contract that is executed for an asset
undertaken by the lessor to be delivered to the lessee according to accurate specifications, even if the
asset is not owned by the lessor.

During the period that the leased asset/property is under construction, the lessor may ask the lessee to
pay a certain portion of pre agreed lease rental as a forward lease.

The forward lease rental payment will be considered as a debt to the lessor until the delivery of the
leased asset to the customer.

Essential Elements of Ijarah Mausufah fi Dhimmah and it Necessary Conditions

1. Contracting Parties (Lessor and Lessee)

The conditions imposed on the contracting parties are the same as previously discussed.

2. Offer and Acceptance

The conditions imposed on the offer and acceptance are the same as previously discussed.

3. Asset and Usufruct

a. The asset and usufruct in Ijarah Mausufah fi Dhimmah contract shall be those recognised by the
Shariah, valuable, identifiable.

b. The requirements for the leased asset to being existence at the time of execution of contract shall
not be applicable for Ijarah Mausufah fi Dhimmah.

c. The leased asset shall be non-perishable.

4. Rental

The conditions imposed on the rental payment are the same as explained earlier.

Other Conditions

In general, Ijarah Mausufah fi Dhimmah is subject to the generic conditions of Ijarah. However there are
distinctive conditions peculiar to Ijarah Mausufah fi Dhimmah as follows:

1. The leased asset shall be delivered to the lessee on the specified date for a specified duration as
agreed in the contract

2. In the event that the asset is not delivered within the agreed time, the lessee shall have the option to
terminate or to continue the contract with or without new terms

38 Topic 2 Application of Mu'amalat Contracts & Principles in Islamic FInance

3. In the event that the delivered asset does not meet the specification, the lessee shall have the option
to terminate or continue the contract

4. In the event that the asset is not delivered and the lessee decided to terminate the contract, the
advance rental shall be returned to the lessee.

Application of Ijarah Mausufah fi Dhimmah

4 Project 1

3
Customer
Bank 2

Diagram 16: Application of Ijarah Mausufah fi Dhimmah

Explanation:

1. A customer wants to purchase a property and identifies the project to develop the property.

2. Customer seeks the financing from the bank. In order to facilitate the financing to the customer,
the Bank enters into an Istisna’ contract with the customer for the sale of the property for a price of
RM500,000 payable in 35 years.

3. During construction period, bank receives the rental from customer based on Ijarah Mausufah fi
Dhimmah.

4. Subsequently, the Bank enters into another separate Istisna’ contract with the Contractor for a price of
RM400,000 with progress payments paid to the Contractor during the two year construction period.

5. After completion of the project, the Bank deliver the property to the customer.

Products of Ijarah Mausufah fi Dhimmah

Example of Ijarah Mausufah fi Dhimmah based products are as follows:

1. Project Financing-i (during construction period)

2. Home Financing-i (during construction period)

Topic 2 Application of Mu'amalat Contracts & Principles in Islamic Finance 39

 2. IJARAH MUNTAHIYAH BI AL-TAMLIK / KIRA’ WA IQTINA'

Ijarah Muntahiyah bi al-Tamlik is an Ijarah contract that is accompanied with an option to transfer the
ownership of the leased asset to the lessee at the end of the lease period. If the transfer of ownership
takes place by sale then it is called Ijarah thumma al-bay'. If the transfer of property takes place by grant
or gift, it is called Ijarah wa iqtina'.

Essential Elements of Ijarah Muntahiyah bi al-Tamlik and it Necessary Conditions

1. Contracting Parties (Lessor and Lessee)

The conditions imposed on the contracting parties are the same as previously discussed.

2. Offer and Acceptance

The conditions imposed on the offer and acceptance are the same as previously discussed.

3. Asset and Usufruct

The conditions imposed are the same as the terms of assets and benefits in the Ijarah contract.

4. Rental

The condition imposed for the rental are the same as the terms of rental in general.

Transfer of Ownership

The transfer of ownership of the leased asset shall take place as follows:

1. For no consideration through a gift

2. For token consideration

3. For price specified in the lease

4. For remaining amount (if lease is terminated before period)

5. Gradual transfer

40 Topic 2 Application of Mu'amalat Contracts & Principles in Islamic FInance

The transfer of ownership by sale as stated in number 2 to 4 is a rental type of purchase or Ijarah Thumma
Bai' as stated in the Diagram 18.

Application of Ijarah Muntahiyah bi al-Tamlik

3 1

2
Customer
Bank 4

Diagram 17: Application of Ijarah Muntahiyah bi al-Tamlik for Vehicle Financing

Explanation:

1. Customer identifies vehicle from the seller.

2. Customer applies financing facility from the bank.

3. Bank purchase the identified vehicle from the seller.

4. Bank leases the vehicle to the customer on the Ijarah contract.

5. At end of Ijarah period, Bank sells the vehicle to the customer at the agreed price.

Products of Ijarah Muntahiyah bi al-Tamlik

Example of Ijarah Muntahiyah bi al-Tamlik based products are as follows:

1. Vehicle Financing-i

2. Property Financing-i

Topic 2 Application of Mu'amalat Contracts & Principles in Islamic Finance 41

 3. IJARAH THUMMA BAY'

Ijarah thumma Bay‘ (AITAB) is one of the categories of lease, which ends with the sale of the asset,
whereby the legal title of the leased asset will be transferred to the customer upon full settlement or
early settlement. AITAB consists of two different contracts, Ijarah and Bay‘.

Essential Elements of Ijarah thumma Bay‘ and it Necessary Conditions

1. Contracting Parties (Lessor and Lessee)

The condition imposed for the contracting parties are the same as mentioned earlier.

2. Offer and Acceptance

The conditions imposed for the offer and acceptance are the same as mentioned earlier.

3. Asset and Usufruct

The conditions imposed are the same as mentioned earlier.

4. Rental

The condition imposed for the rental are the same as the terms of rental in general.

Other Conditions

1. The lessor leases the asset to the lessee for an agreed period and amount, and the lessee promises to
buy the asset at the end of the leasing period.

2. At the end of leasing period, the lessor sells the asset to the lessee for an agreed price.

42 Topic 2 Application of Mu'amalat Contracts & Principles in Islamic FInance

Application of Ijarah thumma Bay‘

2
Customer
Bank 4

3 Car Dealer

Diagram 18: Application of Ijarah thumma Bay‘ for Vehicle Financing-i

Explanation:

1. Customer identified a vehicle and pays the 10% deposit.

2. Customer approaches Bank and request for AITAB financing facility.

3. The Bank purchases the car from the Car Dealer and pays the remaining purchase price of the car
(90%).

4. Bank leases the car to the Customer at certain rental price with an option for customer to purchase
the car by the end of the financing period or early settlement.

Products of Ijarah thumma Bay‘

Example of Ijarah thumma Bay‘ based products are as follows:

1. Vehicle Financing-i

2. Home Financing-i

Topic 2 Application of Mu'amalat Contracts & Principles in Islamic Finance 43

 UNIT 3: PARTNERSHIP CONTRACT

Partnership is another mode of Islamic commercial contract that significantly differs from sale-based
contracts. It reflects the essence of Islamic commercial activities that require profit and loss sharing.

The equity proposition of partnership does not confine itself to joint ownership of any given venture, more
importantly it establishes the proportionate duties and responsibilities of all related parties to the contract
and profit shall be commensurate with level of risk undertaken.

Definition and Elements

The term musharakah is a word of Arabic origin which has limited usage in Islamic jurisprudence. Instead, the
classical jurists had used a more general term known as al-shirkah which connotes a wider scope compared
to musharakah. The term shirkah is derived from the root word syaraka.

Musharakah means ‘sharing’ or ‘intermingling’ or the conjunction of two or more estates, in such a manner
that one of them is not distinguishable from the other. It refers to a partnership between two or more
parties, whereby all parties will share the profit and bear the loss from the partnership.

Types of Shirkah

The terms of shirkah, sharikah and sharkah are synonymous to musharakah. Generally, there are two types
of shirkah, namely:

1. Shirkah al-Milk (Partnership in joint ownership): Refers to possession of an asset by two or more persons
with or without prior arrangement to enter into a sharing in joint ownership. Under shirkah al-milk, each
partner’s ownership is mutually exclusive. In this regard, one partner cannot deal with the other partner’s
asset without the latter’s consent.

2. Shirkah al-‘Aqd (Contractual Partnership): Refers to a contract executed between two or more partners
to venture into business activities to generate profit. Under shirkah al-`aqd, a partner is an agent for the
other partners. In this regard, the conduct of one partner in the ordinary course of business represents
the partnership.

Types of Partnership Contract

There are four types of Partnership Contract namely:

1. Musharakah

2. Mudarabah

3. Musaqah

4. Muzara’ah

However, only Musharakah, Mudarabah, and Muzara'ah so far have been applied in Islamic finance contract.
Therefore, the focus is only on these three contracts only.

44 Topic 2 Application of Mu'amalat Contracts & Principles in Islamic FInance

The types of partnership contracts are as follow:

Diagram 19: Types of Partnership Contract

1. MUSHARAKAH

One of the most important equity participation financial instruments used by Islamic Banks is based on
a Musharakah contract. It establishes a partnership or joint venture for an economic activity between a
Bank and one or more clients.

In this joint venture, all parties may contribute some (not necessarily equal) percentage of all three factors
of economic production (capital, labour, and entrepreneurship).

Essential Elements of Musharakah and its Necessary Conditions

There are five essential elements of Musharakah, namely:

Diagram 20: Essential Elements of Musharakah

Topic 2 Application of Mu'amalat Contracts & Principles in Islamic Finance 45

 1. Contracting Parties (Partners)

The conditions imposed are the same as mentioned earlier.

2. Capital

a. The capital of a Musharakah shall be identifiable, readily available and accessible

b. The capital may be in the form of cash or in-kind, including intangible assets

c. Where the capital is in-kind, it shall be valued in monetary terms either by agreement between
the partners or by a third party, which may include experts, valuers, or any other qualified person,
at the time of entering into the Musharakah contract

d. In cases where the capital is denominated in a different currency, it shall be valued based on a
specific currency as agreed by the partners at the time of entering into the Musharakah contract

e. All forms of debts shall not qualify as capital, including all account receivables and payments due
from other partners or third parties

f. The total amount of capital to be contributed by each partner shall be known and determined at
the time of entering into the Musharakah contract

g. The capital invested shall not be guaranteed by any of the partners and/or the managers

3. Offer and Acceptance

The conditions imposed are the same as mentioned earlier.

4. Business

a. A Musharakah venture may be managed by:

i. a single partner, certain partners or all partners in the Musharakah contract (managing
partner); or

ii. a third party appointed by the Musharakah (third party manager).

b. Halal

5. Profit and Loss

a. The profit sharing ratio (PSR) in the musharakah shall be proportionate to the capital contribution
of each partner unless mutually agreed otherwise at the time of entering into the Musharakah
contract

b. The Musharakah contract shall not stipulate a pre-determined fixed amount of profit to any
partners which may deprive the profit share of the other partners

46 Topic 2 Application of Mu'amalat Contracts & Principles in Islamic FInance

 c. Any loss incurred by the Musharakah shall be borne by the partners in proportion to the capital
contribution to the Musharakah

d. A managing partner shall be liable for any loss incurred by the Musharakah as a result of his
misconduct (ta`addi), negligence (taqsir) or breach of specified terms (mukhalafah al-shurut).

Application of Musharakah

3 3

Business

Customer/
Bank/Partner 1 Managing
Partner
Diagram 21: Application of Musharakah

Explanation:

1. Bank and customer enter into a partnership agreement to contribute certain amount of capital to a
business/project venture.

2. As mutually agreed by all partners, the customer acts as a managing partner to run the business/
project.

3. Profits arising from the business/project is to be shared in accordance with the agreed Profit Sharing
Ratio (PSR) and loss shall be borne in proposition to the capital contribution.

Products of Musharakah

Example of musharakah based products are as follows:

1. Project Financing-i

2. Venture Capital

3. Home Financing-i

4. Term Financing-i

5. Sukuk

Topic 2 Application of Mu'amalat Contracts & Principles in Islamic Finance 47

 Musharakah Mutanaqiṣah

Musharakah Mutanaqiṣah is a form of partnership in which one of the partners promises (wa’d) to buy
the equity share of the partner gradually until the title of the equity is completely transferred to him.
This transactions start with the formations of a partnership after which buying and selling of the equity
takes place between the two partners. It is therefore necessary that this buying and selling should not
be stipulated in the partnership contract. In other words, the buying partner is allowed to give only the
promise (wa’d) to buy. This promise should be independent of the partnership contract.

Types of Musharakah Mutanaqiṣah

1. Musharakah Mutanaqiṣah Asset Financing

2. Musharakah Mutanaqiṣah Equity Financing

Other Conditions of Musharakah Mutanaqiṣah

1. The agreement of joint purchase, leasing and selling different units of the share owned by the financier
should not be tied-up together in one single contract

2. At the time of the purchase of each unit, sale must be effected by the exchange of offer and acceptance.

Application of Musharakah Mutanaqiṣah

Musharakah Mutanaqiṣah is subject to the conditions of shirkah, Ijarah and bay’.

Home Financing-i

5
4
Customer
Bank 2

Seller

Diagram 22: Application of Musharakah Mutanaqiṣah for Home Financing-i

Explanation:

1. Customer purchases a house from Vendor/Developer.

2. The customer then applies for financing from the bank where the purpose is to jointly acquire the
house.

48 Topic 2 Application of Mu'amalat Contracts & Principles in Islamic FInance

 3. The bank approves the application and enters into a musharakah agreement with the customer .
The initial down payment or deposit made by the customer is his/her contribution towards the MM
Venture while the bank’s contribution is equal to the financing amount. The house is jointly owned
by bank and customer.

4. The bank subsequently leases the acquired property to the customer.

5. Throughout the lease tenure, based on agreed time intervals, the customer purchases the bank’s
equity of the jointly acquired property. Over the financing tenure, therefore, the bank’s shares are
redeemed and reduced by the purchase made by the customer. It will be preferable that the purchase
of different units by the client is affected on the basis of the market value of the house as prevalent
on the date of purchase of that unit, but it is also permissible that a particular price is agreed in the
promise of purchase signed by the client

Products of Musharakah Mutanaqisah

Example of Musharakah Mutanaqisah based products are as follows:

1. Project Financing

2. Maintenance Financing

3. Property financing

2. MUDARABAH

Mudarabah is a contract between a capital provider (rabbul mal) and an entrepreneur (mudarib) under
which the rabbul mal provides capital to be managed by the mudarib and any profit generated from the
capital is shared between the rabbul mal and the mudarib according to a mutually agreed profit sharing
ratio (PSR) whilst financial losses are borne by the rabbul mal provided that such losses are not due to the
mudarib’s misconduct (ta`addi), negligence (taqsir) or breach of specified terms (mukhalafah al-shurut).

Types of Mudarabah

Diagram 23: Types of Mudarabah

Topic 2 Application of Mu'amalat Contracts & Principles in Islamic Finance 49

 1. Unrestricted Mudarabah (Mudarabah Mutlaqah)

Whereby the capital provider allows mudarib to administer the venture without restrictions

2. Restricted Mudarabah (Mudarabah Muqayyadah)

a. Whereby the capital provider imposes restrictions to mudarib in order to administer the venture
e.g. location, type of business.

b. Restrictions are in manners that would not provide unreasonable or unnecessary constrain to the
mudarib.

3. Two-tier Mudarabah (Mudarib Yudarib)

Whereby a mudarib appoints other mudarib for the venture

Essential Elements of Mudarabah and its Necessary Conditions

There are four essential elements of Mudarabah, namely:

Diagram 24: Essential Elements of Mudarabah

1. Contracting Parties (Capital Provider and Entrepreneur)

The conditions imposed are the same as mentioned earlier.

2. Offer and Acceptance

The conditions imposed are the same as mentioned earlier.

50 Topic 2 Application of Mu'amalat Contracts & Principles in Islamic FInance

3. Capital

a. The capital of Mudarabah shall be provided by the rabbul mal and managed by the mudarib.
It shall be identifiable, readily available and accessible for the mudarib to commence business
activities

b. Where the capital is in-kind, it shall be valued in monetary terms either by agreement between
the contracting parties or by a third party, which may include experts, valuers, or any qualified
person, at the time of entering into a Mudarabah contract

c. The mudarib shall not guarantee the capital except in the case of his misconduct (ta`addi),
negligence (taqsir) or breach of specified terms (mukhalafah al-shurut)

4. Profit and Loss

a. A mudarib shall not guarantee any profit

b. A rabbul mal and a mudarib shall share profit based on a ratio mutually agreed between them.
The PSR shall be determined at the time of entering into a Mudarabah contract

c. The Mudarabah contract shall not stipulate a pre-determined fixed amount of profit to one
contracting party which deprives the profit share of the other contracting party

d. The profit shall not be fixed in the form of a certain percentage of the capital such as 10% of the
capital contribution.

e. Loss shall be borne by a rabbul mal up to the capital value and a mudarib shall not be liable for
any impairment of asset unless such loss is due to the mudarib’s misconduct (ta`addi), negligence
(taqsir) or breach of specified terms (mukhalafah al-shurut) of the contract

Topic 2 Application of Mu'amalat Contracts & Principles in Islamic Finance 51

 Application of Mudarabah

Investment Account-i

Business

Bank 1 Customer

Diagram 25: Application of Mudarabah for Investment Account-i

Explanation:

1. Customer as a capital provider (rabbul mal) agrees to participate in the financial/business activities
carried out by the Bank as the manager/entrepreneur (mudarib). Both parties agree to share the
profit generated from the financing and/or business activities based on an agreed profit-sharing ratio

2. The Bank acts as a managing partner to run the business

3. Profits arising from the business/project are to be shared in accordance with the pre-determined
profit sharing ratio. However, the losses according to this contract are wholly associated with the
capital. Hence, in case of losses incurred, the capital provider will be responsible, thus bear the losses
except for the losses due to misconduct, negligence and/or violation of conditions by the manager.

Products of Mudarabah

Example of Mudarabah based products are as follows:

1. General Investment Account-i

2. Special Investment Account-i

3. Islamic Negotiable Instrument of Deposit (INID)

4. Islamic InterBank Money Market

5. Sukuk

6. Private Equity

52 Topic 2 Application of Mu'amalat Contracts & Principles in Islamic FInance

3. MUZARA’AH

Muzara’ah refers to a contract whereby one party agrees to cultivate a land owned by another party in
consideration for an agreed share of the produce from the land.

Muzara’ah can be classified into four categories which are as follow:

Party A Party B
Categories
(Landlord) (Farmer)
Supply labour, livestock and
Category 1 Land and seeds
other equipment

Category 2 Land Labour, animals and seeds

Category 3 Land, animals, and seeds Labour only

Category 4 Land and animals Labour and seeds

Table 5: Category of Muzara’ah

Essential Elements of Muzara’ah and its Necessary Conditions

There are four essential elements of Muzara’ah, namely:

Diagram 26: Essential Elements of Muzara’ah

1. Contracting Parties (Landlord and Farmer)

The conditions imposed are the same as mentioned earlier.

2. Offer and Acceptance

The conditions imposed are the same as mentioned earlier.

Topic 2 Application of Mu'amalat Contracts & Principles in Islamic Finance 53

 3. Subject Matter (Land, Animal, Labor and Seeds)

a. the land must be available for growth in standard agricultural conditions and the landlord must
move out of the land so that the farmer can work without hindrance

b. the labor must have the capability to do his work and to take the responsibility

c. the crop to be cultivated and the kind of seeds to be sown must be specified. The seeds may be
provided by the landlord according to the prevailing norm/practice and all parties must know that
different seeds affect the land differently

d. the Muzara’ah period must be known and sufficient for the cultivation of the land and harvesting
the crop

4. Produce / Output

a. the contracting parties share the produce and the share of each partner is based on agreed ratio.
It is invalid to stipulate a specific amount of the produce to either partner, because that may
hinder the realization of partnership

b. the produce is divided according to the ratios that the contracting parties stipulate and agree
upon. In case of crop failure, neither party will get anything. The farmer loses the effort and the
landlord loses the utility of the land

c. nature of the produce must be specified in the contract

d. the transaction shall be invalid if the share of either partner is something other than the produce,
because Muzara’ah is not an absolute lease; it can be considered as a kind of land lease in exchange
of the produce

54 Topic 2 Application of Mu'amalat Contracts & Principles in Islamic FInance

Application of Muzara’ah

Owner of
3 Farmer

2 2

Venture

Diagram 27: Application of Muzara’ah

Explanation:

1. Both farmer and landlord enter into Muzara’ah contract

2. Landlord provide the land and farmer provide the labour

(cultivation)

3. Produce out of Muzara’ah venture is distributed to both farmer

and landlord as per the agreed ratio

Products of Muzara’ah

Example of Muzara'ah based product is Micro-financing in agriculture.

Topic 2 Application of Mu'amalat Contracts & Principles in Islamic Finance 55

 UNIT 4 : OTHER CONTRACTS

Other contracts refers to the contract whose existence depends on the main contract. The contract is not
intended to stand by itself but rather to complement the main contract.

Contracts under this category are

a. Rahn
b. Kafalah
c. Wakalah
d. Wadi'ah
e. Qard
f. Tabarru'
g. Hibah
h. Ibra'
i. Muqasah

Rahn

Other
Contracts
Tabarru'

Hibah

Diagram 28: Other Contracts in Mu‘amalat

56 Topic 2 Application of Mu'amalat Contracts & Principles in Islamic FInance

1. RAHN

Rahn is a contract between a pledgor and a pledgee whereby an asset is pledged as collateral to the
pledgee to provide assurance that the liability or obligation against the pledgee will be fulfilled.

In the event of a default by the debtor, sale of the said asset is permitted as the full payment of the debt.
Rahn also refers to pawning, collateral, charge, lien and pledge.

Essential Elements of Rahn and Its Necessary Conditions

There are four essential elements of Rahn, namely:

Rahn

Pledged
Property

Diagram 29: Essential Elements of Rahn

1. Contracting Parties (Pledgor and Pledgee)

The conditions imposed for the contracting parties are the same as mentioned earlier.

2. Offer and Acceptance

The conditions imposed are the same as mentioned earlier.

3. Obligation or Right to a Claim (Debt)

a. A debt must have been established

b. The debt must be known

4. Pledged Property

a. Asset to be traded must be recognised by Shariah, valuable, identifiable and deliverable

b. The asset must be owned by the pawnbroker. However, the borrowed assets can be used as collateral
(with permission / permission from the owner).

Topic 2 Application of Mu'amalat Contracts & Principles in Islamic Finance 57

 Other Conditions

1. A pledge may be exchanged for another

2. It is lawful to increase the debt that is secured by the pledge

3. A pledge can be taken as a security for two different debts from two different creditors

4. The pledgee has a right to possess the pledge until its redemption

5. A pledge does not necessarily 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

6. It is invalid for the pledgor or pledgee to sell or pledge a pledged property without the consent of the
other

7. The pledgor is forbidden from uplifting the pledge

8. The pledgee may on his own accord, release the property from the pledge

9. Upon maturity of the debt and if the pledgor refuses to make payment, the pledgee may apply to the
court to compel the pledgor to sell the pledge in order to pay the debt. If the pledgor still refuses to
make payment, the court may sell the pledge to pay the debt.

10. All te benefits, usufruct, income generated or growth of the pledged property shall belong to the
owner(s) of the asset.

11. In the event that the pledgee has physical possession on the pledged property, the pledger may utilize
the pledged property with the consent of the pledgee.

12. In the event of pledgee has constructive possession on the pledged property, the pledger may utilize
the pledged property with our without the consent of the pledgee provided that utilization does not
affect the rights of the pledgee on the pledged property.

13. The pledgee shall not utilize the pledged property except with the consent of the pledgor.

14. In the event the financial liability or obligation arises from a loan (qard) contract, the pledgee shall not
utilize the pledged property, even with the consent of the pledgor.

58 Topic 2 Application of Mu'amalat Contracts & Principles in Islamic FInance

Application of Rahn

1
Customer
Bank 2

Diagram 30: Application of Rahn

Explanation:

1. The bank provides financing of RM 5,000 to customer A.

2. Customer A pledges the asset he owns to the Bank as collateral to the financing given to him.

3. Customer A pays his debt to the Bank.

4. The Bank returns the collateral assets to Customer A.

Products of Rahn

Example of Rahn based products are as follows:

1. Pawnbroking -i

2. Adopted for pledged assets / collateral under various financing arrangement

Topic 2 Application of Mu'amalat Contracts & Principles in Islamic Finance 59

 2. Kafalah

Kafalah refers to a contract where the guarantor conjoins the guaranteed party in assuming the latter’s
specified liability.

Kafalah is a type of assurance contract which is binding on the guarantor. The specific inherent nature of
kafalah is to provide assurance on the fulfilment of an obligation as the guaranteed party’s liability.

Essential Elements of Kafalah and Its Necessary Conditions

There are three essential elements of Kafalah, namely:

Diagram 31: Essential Elements of Kafalah

1. Contracting Parties (Guarantor, Beneficiary and Guaranteed Party )

The conditions imposed are the same as described earlier. Another additional condition is that the
guarantor must be the one who is agreed by the creditor. A secured party can be secured by more
than one guarantor.

2. Subject Matter

a. The subject matter of kafalah is categorised into:

i. Kafalah al-Dayn (Guarantee of a debt liability)

ii. Kafalah al-`Ayn (Guarantee to deliver a physical asset)

b. The subject matter of kafalah shall not be any obligation arising from Shariah non-compliant
contracts

3. Offer and Acceptance

A Kafalah contract shall be entered by an offer and acceptance between the guarantor and the
beneficiary

60 Topic 2 Application of Mu'amalat Contracts & Principles in Islamic FInance

Other Conditions

1. The subject matter must be Shariah compliant

2. The subject matter can be current or future obligation

3. The subject matter can be debt liability or performance liability

4. For guarantee with multiple guarantors, sequence and obligation of each guarantor shall be
determined in the contract

5. No recourse against guaranteed party if guarantee is given on a voluntary basis, without request/
consent from the guaranteed party.

Application of Kafalah

Bank Guarantee-i

2
Customer
Bank 4

Diagram 32: Application of Kafalah for Bank Guarantee-i

Explanation:

1. Customer obliges to make a payment to the beneficiary

2. The customer approaches and requests a Bank to issue the Bank Guarantee-i in favour of the
beneficiary on his behalf. The customer may place a deposit for the full amount of the Bank guarantee
or apply a blanket line for the facility

3. Subsequently, the Bank will issue the Bank Guarantee-i under the Kafalah, which will then be
forwarded to the beneficiary

4. The Bank will then charge the customer certain amount of fee for its service. Upon receipt of claim
(if any), the Bank will pay the beneficiary the guaranteed amount and claim from the customer the
amount paid

Topic 2 Application of Mu'amalat Contracts & Principles in Islamic Finance 61

 Products of Kafalah

Example of Kafalah based products are as follows:

1. Bank Guarantee-i

2. Shipping Guarantee-i

3. Corporate Guarantee-i

3. WAKALAH

Wakalah refers to a contract in which a party, as principal (muwakkil) authorises another party as his
agent (wakil) to perform a particular task in matters that may be delegated, with or without imposition
of a fee.

The inherent nature of wakalah is based on delegation or authorisation of the agent by the principal
resulting in the agent having fiduciary duties (amanah) towards the principal within the scope of wakalah.

The wakalah contract may take the following forms:

1. Unrestricted agency (wakalah mutlaqah)

It is an agency contract in which the muwakkil appoints a person as wakil to perform a particular task
without any specific restriction or condition; or

2. Restricted agency (wakalah muqayyadah)

It is an agency contract in which the muwakkil appoints a person as wakil to perform a particular task
with specific restrictions or conditions.

Essential Elements of Wakalah and Its Necessary Conditions

There are Three essential elements of Wakalah, namely:

Diagram 33: Essential Elements of Wakalah

62 Topic 2 Application of Mu'amalat Contracts & Principles in Islamic FInance
1. Contracting Parties (Principal and Agent)

The conditions imposed are the same as mentioned earlier.

2. Subject Matter

a. The subject matter of the Wakalah contract must be determined upfront by the pricipal and
made known to the agent

b. The business or work of the Wakalah contract must be Shariah compliant and can be represented
or delegated

3. Offer and Acceptance

The conditions imposed are the same as mentioned earlier.

Other conditions

1. The agent shall not be held liable in the event of loss or damage to the interest of the principal except
if the loss or damage occurs due to misconduct (ta'addi), negligence (taqsir), or breach of specified
terms (mukhalafah al-shurut).

2. The agent shall not appoint another person as a second agent except with consent of the principal.

Wakalah bi al-Istihmar

Wakalah bi al-Istihmar is a wakalah contract that entered for the purpose of investment. The agent
as trustee, shall not be held liable to compensate losses of the capital except if the loss is due to his
misconduct, negligence, or breach of specified terms.

Application of Wakalah

Investment Account-i

Diagram 34: Application of Wakalah for Investment Account-i

Topic 2 Application of Mu'amalat Contracts & Principles in Islamic Finance 63

 Explanation:

1. Investor appoint the bank to be his/her agent for investment and specify the investment mandate
and in return the agent will receive a fee (ujr) for the service.

2. The bank as the agent invests the Customer’s money in any Shariah compliant evenue.

3. The return of the investment will depend on the performance of the underlying asset. The profit (if
any) to be paid to the customer will be based on the following conditions:

a. If the actual return is above the Expected Return, the Bank will only pay the Expected Return to
the Customer. Any excess profit will be retained by the Bank as a performance incentive.

b. If the actual return is below the Expected Return, the Bank is obliged to pay the actual return to
the customer.

Products of Wakalah

Example of Wakalah based products are as follows:

1. Letter of Credit-i

2. Shariah-compliant Unit Trust

3. Takaful

4. Islamic InterBank Money Market

5. Investment Account-i

64 Topic 2 Application of Mu'amalat Contracts & Principles in Islamic FInance

4. WADI‘AH

Wadi‘ah refers to a contract where an asset is placed with another party for safekeeping. Wadi‘ah is
based on concept of trusteeship and referred to as Wadi‘ah Yad Amanah in which any contracting parties
may terminate the contract unilaterally.

Essential Elements of Wadi‘ah and Its Necessary Conditions;

There are three essential elements of Wadi‘ah, namely:

Contrac�ng
Par�es
(Trustee and
Trustee)

Wadi‘ah

Offer &
Deposit
Acceptance

Diagram 35: Essential Elements of Wadi‘ah

1. Contracting Parties (Depositor and Custodian)

Depositor and Custodian must be capable of taking the responsibility

2. Subject Matter (Asset Placed in Custody)

a. It must be capable of being managed by the custodian

b. It must be capable of being stored; not perishable

3. Offer and Acceptance

The conditions imposed are the same as previously explained.

Other Conditions

1. The asset placed in custody is a trust given to the custodian for safekeeping. The custodian shall
return the asset placed in custody to the safekeeping depositor upon the request of the safekeeping
depositor or according to the agreed terms of the contract

2. The custodian shall ensure proper management and protection of the asset placed in custody and
shall act in the interest of the safekeeping depositor of the asset

Topic 2 Application of Mu'amalat Contracts & Principles in Islamic Finance 65

 3. Methods of safekeeping may be determined by the contracting parties or may be based on customary
business practice and the nature of the asset placed in custody

4. The custodian shall not be entitled to any revenue or any income from the asset placed in custody.
Any benefits accrued from the asset placed in custody belong to the asset owner

5. In the case of loss or damage to the asset placed in custody, the custodian shall not be held liable
except for the loss or damage which is a result of custodian’s misconduct, negligence, or breach of
specified terms

6. The custodian shall not entrust the asset placed in his custody to a third party without the permission
of the safekeeping depositor. Without the permission, the custodian shall be held liable for the asset
placed in custody.

Wadi‘ah Yad Damanah

Originally, safe custody is Wadi‘ah Yad Amanah, i.e. Trustee custody where according to the Shariah the
trustee custodian has the duty to safeguard the property held in trust. Wadi‘ah Yad Amanah would changes
to Wadi‘ah Yad Damanah (guaranteed custody) when the trustee custodian violates the conditions to
safeguard the property. He then has to guarantee the property.

Application of Wadi‘ah

Customer 1
Bank

4
2
3

Banking
business

Diagram 36: Application of Wadi'ah in Savings Account-i

Explanation:

1. Customer deposit money with the bank on Wadi‘ah Yad Damanah

2. Bank normally utilise the money for other banking business

3. Any profit or return out of the banking business is solely belong to the bank

4. As and when requested by the customer the bank will made available the money deposited.

Note: The bank may at its sole discretion give hibah to the customer.

66 Topic 2 Application of Mu'amalat Contracts & Principles in Islamic FInance

 Products of Wadi‘ah

Example of Wadi‘ah based products are as follows:

1. Savings / Current Account-i

2. InterBank Placement

3. Foreign Currency Account-i (FCA-i).

5. QARD

Qard refers to a contract of lending money by a lender to a borrower where the latter is bound to return
an equivalent replacement amount to the lender.

Essential Elements of Qard and Its Necessary Conditions

There are three essential elements of Qard, namely:

Contrac�ng
Par�es
(Lender and
Borower)

Qard

Offer &
Subject Ma�er
Acceptance

Diagram 37: Essential Elements of Qard

1. Contracting Parties -Lender(muqrid) and Borrower(muqtarid)

The conditions imposed are the same as mentioned earlier.

2. Subject Matter

The subject of the Qard contract should consist of something in the form of mithli property (property
with similarities) such as currency.

3. Offer and Acceptance

a. The offer and acceptance must be definite and decisive language

b. The acceptance offer must be agreed upon
c. The offer and acceptance must be made at the same meeting

Topic 2 Application of Mu'amalat Contracts & Principles in Islamic Finance 67

 The Law of Overpayment in Qard Contract

1. Rules for Excess Benefit Stipulated in the Qard Contract

The stipulation of an excess for the lender in loan is prohibited, and is tantamount to riba:
(i) whether the excess is in terms of quality or quantity, (ii) whether the excess is a tangible thing or
a benefit, (iii) whether the excess is stipulated at the time of the contract or while determining the
period of delay for satisfaction or during the period of delay; or (iv) whether the stipulation is in
writing or is part of customary practice.

2. Rules for Excess Benefit Not Stipulated in the Qard Contract

a. The borrower can pay the excess as it is not required in the contract.

b. Any overpayment is at the sole discretion of the borrower.

Application of Qard

Deposit-i

Customer 1
Bank

4
2
3

Banking
business

Diagram 38: Application of Qard for Deposit-i

Explanation:

1. A customer deposits some money into a Bank on Qard basis

2. The Bank utilises the customer deposits for other banking business. Hence, it is held as Qard from
Shariah perspective

3. Any profit or return out of the banking business solely belongs to the Bank

4. As and when requested by the customer, the Bank will repay the deposited money.

Note: The Bank may at its sole discretion gives hibah to the customer

68 Topic 2 Application of Mu'amalat Contracts & Principles in Islamic FInance

 Products of Qard

Example of Qard based products are as follows:

1. Temporary overdraft- i (excess over limit)

2. Deposit-i

3. Takaful (Qard from Takaful Operator to cover shortfall in Risk Fund)

6. TABARRU’

Tabarru’ is the act of helping others and being benevolent. Based on the perspective, tabarru’ encompasses
all contracts where the intention is to help, like, qard and any others. This is why in the jurists always refer
to this contract as ‘Uqud al-Tabarru‘at, i. e. gratuitous contracts.

Another perspective of tabarru’ is where its definition is made more specific to cover only contracts
where the asset is disposed to someone else, without any consideration. From this perspective, tabarru’
can be seen as a term that denotes a contract like hibah, ṣadaqah, hadiyyah, waqaf and waṣiyyah. All
these contracts require no counter value for its disposal.Another approach to define tabarru’ is as a
donation or a gift for the purpose of which is not commercial but done to seek the pleasure of Allah SWT.
In general, we can deduce that both hibah and tabarru’ share the same characteristics, that is, donation
or gift voluntarily are made for the sake of Allah SWT. However, specifically, all hibah is tabarru’ and not
vice versa.

Under the Islamic laws of transactions (fiqh mu‘amalat), the existence of ambiguity (gharar) which,
normally nullify a contract of exchange (mu’awadah) is tolerated in a contract of donation (tabarru’). This
is mainly due to the fact that parties who enter into a tabarru’ contract do not aim to make profit out of
the contribution, and hence the potential dispute which normally arises in a profit-making transaction is
deemed to be negligible in a gratuitous-based transaction.

Essential Elements of Tabarru’ and Its Necessary Conditions

There are three essential elements of Tabarru’, namely:

Tabarru’

Subject Ma�er

Diagram 39: Essential Elements of Tabarru’

Topic 2 Application of Mu'amalat Contracts & Principles in Islamic Finance 69
 1. Contracting Parties (Donor and Donee)

The conditions imposed are the same as described earlier.

2. Subject Matter

a. Should exist at the time of the contract

b. Must be legally owned

c. Should bring benefit or significant result for the contracting parties

d. Should have commercial value in the light of Shariah principles.

3. Offer and Acceptance

Tabarru’ transaction shall be entered into by an offer and acceptance between the contracting parties

Application of Tabarru‘

Par�cipants Surplus

Contribu�on 1
Claims
2 Retakaful
Reserve
Par�cipants Par�cipants
Investment Fund Risk Fund
(Saving) (Tabarru’)
5 Takaful
Company
3 Investment

Profit
4

Diagram 40: Application of Tabarru‘ for Family Takaful

Explanation

1. Participants pay Takaful contributions.

2. The participants’ contribution will be apportioned into:

a. Participants’ Investment Fund (PIF) which is meant for saving; and

b. Participants’ Risk Fund (PRF) which is based on the tabarru’ concept.

70 Topic 2 Application of Mu'amalat Contracts & Principles in Islamic FInance

 3. The fund will be invested in Shariah-Compliant investments such as Government Islamic Instruments
(GII), sukuk, equities, fixed assets and General Investment Account (GIA).

4. Investment profit, if any will be shared among participants and the Takaful Operator based on the
pre-agreed ratio.

5. Participants’ Risk Fund will be used for claims, Retakaful and reserve.

6. At year's end, the surplus will be distributed to the participants only.

Products of Tabarru‘

Example of Tabarru‘ based products are as follows:

1. Takaful products

2. Retakaful products

7. HIBAH

Hibah refers to a transfer of ownership of an asset from the donor to the donee during the lifetime of
the donor without any consideration or reward. Hibah covers both gifts and ṣadaqah, which have similar
meanings. However, they are differentiated based on its purpose. Ṣadaqah are grants with the intention
for reward in the hereafter, and usually given by the rich to the poor. A gift is a contribution to honour
someone and is usually related to a specific matter or event.

Hibah according to Islamic term is a contract (‘aqad) that entails granting ownership of a property to
someone else during his lifetime without any reprisal (‘iwad).

Essential Elements of Hibah and Its Necessary Conditions

There are three essential elements of Hibah, namely:

Hibah

Subject Ma�er

Diagram 41: Essential Elements of Hibah

Topic 2 Application of Mu'amalat Contracts & Principles in Islamic Finance 71

 1. Contracting Parties (Donor and Donee)

The conditions imposed are the same as described earlier. Other additional condition is if the recipient
is a person who is not yet eligible to exercise the rights; parents or guardian may assist in receiving
and keeping the asset on behalf of the recipient.

2. Subject Matter

a. The general rule that whatever can be sold can also be given as a gift.

b. Asset in a hibah contract shall meet the following conditions:

i. the asset is recognised by the Shariah, valuable, identifiable and deliverable; and
ii. the asset is already in existence and owned by the donor.

3. Offer and Acceptance

The conditions imposed are the same as described earlier.

Application of Hibah

Deposit-i

Customer 1
Bank

4
2
3

Banking
business

Diagram 42: Application of Hibah for Deposit-i

Explanation:

1. A customer deposits some money to the Bank on Wadi‘ah yad Damanah basis

2. The Bank will utilise the money for other banking business

3. Any profits generated from the banking business solely belongs to the Bank

4. As and when requested by the customer, the Bank will make available the deposited money.

Note: The Bank may at its sole discretion give hibah to the customer.

72 Topic 2 Application of Mu'amalat Contracts & Principles in Islamic FInance

 Products of Hibah

Example of Hibah based product is deposit product based on wadi‘ah yad Damanah/Qard.

8. IBRA’

Ibra’ represents the ‘waiver on right of claim’ accorded by a person to another person that has an
obligation (zimmah) which is due to him. Ibra’ or ‘rebate’ refers to an act by a person relinquishing his
rights to collect payment due from another person.

In the context of Islamic finance, an Islamic financial institution (IFI) may grant ibra’ to its customers who
settled their debt prior to the agreed settlement period as stipulated in the agreement concluded by both
parties.

Later, the issue on discretion to grant ibra’ was resolved by incorporating such clause on promise to give
ibra’ to customers in the agreement, after taking into account of public interest (maslahah).BNM has
issued a guideline on ibra’ for sale-based financing (effective 1 Nov 2011) governing the implementation
of ibra’ in order to promote transparency and equitable mechanism. The conditions as stipulated in the
guidline are, among others:-

1. IFIs are required to grant ibra’ for the following cases:

a. early settlement/redemption

b. restructuring exercise

c. settlement in case of default

d. for variable/floating rate product, if effective rate < ceiling rate

2. Incorporation of ibra’ and its formula in legal documents:

a. Ibra’ = deferred profit ( not accrued profit) – early settlement charge

b. Settlement amount = outstanding sale price – ibra’

3. Early settlement charge may include:

a. Costs that have not been recovered because a financing contract has discount elements at the
initial period of financing

b. Initial costs that have not been recovered (e.g. for zero moving cost)

4. IFIs cannot include:

a. Loss of profit expected if financing continues till maturity

b. Marketing cost or other cost associated with obtaining new customer

Topic 2 Application of Mu'amalat Contracts & Principles in Islamic Finance 73

 On 4 February 2013, BNM published Guidelines on Ibra' (rebate) for updated Sales-Based Financing.

The SAC of BNM, in its 101st meeting dated 20 May 2010, has resolved that Bank Negara Malaysia as the
authority may require Islamic financial institutions to accord ibra’ to their customer who settled their
debt obligation arising from the sale-based contract (such as bai` bithaman ajil or murabahah) prior to
the agreed settlement period. Bank Negara Malaysia may also require the terms and conditions on ibra’
to be incorporated in the financing agreement to eliminate any uncertainty with respect to customer’s
entitlement to receive ibra’ from Islamic financial institution. The ibra’ formula will be determined and
standardised by Bank Negara Malaysia.

Prior to that, the SAC, in its 32nd meeting dated 27 February 2003, has resolved that both methods of
ibra’ (namely ibra’ for early settlement and monthly ibra’ to match the effective profit rate with current
market rate) in a financing agreement are permissible.

Essential Elements of Ibra’ and Its Necessary Conditions

There are three essential elements of Ibra’ , namely:

Diagram 43: Essential Elements of Ibra’

1. Contracting parties (Creditor and Debtor)

The conditions imposed are the same as described earlier.

2. Subject Matter (Absolved Debt)

a. The absolved debt need to be known and certain.

b. The absolved debt must be fungible.

c. The object must be in existence at the time of absolution.

3. Offer and Acceptance

The conditions imposed are the same as described earlier.

74 Topic 2 Application of Mu'amalat Contracts & Principles in Islamic FInance

9. MUQASAH

Muqasah (set-off) is defined as a settlement of debt by a contra transaction. It also means the discharge
of a debt receivable against a debt payable.

It is divided into two main forms:

1. Mandatory set-off

2. Contractual set-off

Essential Elements of Muqasah and Its Necessary Conditions

There are three essential elements of Muqasah, namely:

Diagram 47: Essential Elements of Muqasah

1. Contracting parties (Creditor and Debtor)

The conditions imposed are the same as described earlier.

2. Subject Matter (Debt)

a. Both debts should be equal in terms of types, descriptions/characteristic

b. In case of the different amount between the two debts, the discharge will have effect on the same
amount of both debts, thus the party who holds the larger sum of the debt will be a creditor for
the outstanding balance.

3. Offer and Acceptance

The conditions imposed are the same as described earlier.

Topic 2 Application of Mu'amalat Contracts & Principles in Islamic Finance 75

 Muqasah is applicable between the Banks which accept a cheque and the drawer of the cheque via the
clearing house. The participating Banks will enter into agreement aiming for settlement and they will
respectively maintain an account with the Central Bank. Such set-off could take form in mandatory or
contractual set-off depending on the conditions thereof. There will be an exchange of debit and credit
items. The net balance will be credited into the nominated Bank and debited to the other Bank at their
respective settlement accounts with the Central Bank.

Application of Muqasah

‘Ali Ahmad

Diagram 45: Application of Muqasah

Explanation:-

1. Ali lends Ahmad RM2,000

2. Then, Ahmad lends ‘Ali the same amount RM2,000. The set-off concept is implemented because
implicit settlement takes place between ‘Ali and Ahmad to discharge of a debt receivable against a
debt payable.

Products/Practices of Muqasah

Muqasah is commonly used in:

1. Payment between transacting parties - net amount shall be transferred at the end of the period/
business day

2. Depositor with financing facility - any amount due from financing facility will be settled by debiting
the deposit account

76 Topic 2 Application of Mu'amalat Contracts & Principles in Islamic FInance

 PRACTICE QUESTIONS

1. Sale-based contracts are contracts which are entered into by two transacting parties to acquire ownership
of an asset. Which of the followings are sale-based contracts?

I. Istiṣna‘ (order to manufacture)

II. MurabaHah (cost-plus)
III. Salam (forward contract)
IV. ‘Inah (buy-back agreement)

A. I and III
B. II and IV
C. II, III and IV
D. All of the above

2. Which contracts that could be employed by a person in need of liquidity, without resorting to borrow on
interest?

I. Tawarruq ((Monetization))
II. Bay’ ‘Inah (sale and buy-back agreement)
III. Mudarabah (profit sharing)
IV. Rahn (pledge)

A. I and II
B. II and III
C. II, III and IV
D. I, II and III

3. ___________ is an exception to the general rule, namely that the object of sale should beavailable to the
contracting parties at the time the contract is concluded.

A. MurabaHah (cost-plus)
B. Salam (forward contract)
C. Tawliyyah (sale at cost)
D. Wadhiah (sale at loss)

4. ___________ is an act of absolving or dropping one’s financial right from a person who has the obligation
to repay the amount borrowed from him.

A. Ibra’(rebate)
B. Kafalah (guarantee)
C. Rahn (pledge)
D. Wadi‘ah (safekeeping)

Topic 2 Application of Mu'amalat Contracts & Principles in Islamic Finance 77

 5. ________________ is a partnership in profit whereby one party provides capital and the other party
provides labor.

A. Kafalah (guarantee)
B. Mudarabah (profit sharing)
C. MurabaHah (cost-plus)
D. Musharakah (partnership)

6. A bank use this particular sale-based contract to structure its financing product and the Bank is required
to comply with the requirement of the disclosure of cost and profit. Which the following Shariah contract
that possibly been used by the bank?

A. Bay’ Bithaman Ajil (BBA)

B. Bay’ ‘Inah
C. Tawarruq
D. Murabahah

78 Topic 2 Application of Mu'amalat Contracts & Principles in Islamic FInance

GLOSSARY

‘Ahliyyah Legal capacity

Ahliyyah al- Ada’ A legal capacity of a person which enables him or her to
execute duties in a way that is recognised by SharI'ah

Ahliyyah al- Wujub The legal competency of a person that establishes rights
for himself/ herself and imposes obligations on him or her

‘Aqad An agreement between two persons, which is legally

binding and has consequences upon the subject of
contract

Bay‘ Sale

Bay’ Bithaman Ajil Mode of payment where the manner of payment is on

deferred basis

Bay’ Dayn The sale of payable right or receivable debt either to the
debtor himself or to a third party

Bay’ Inah An arrangement that involves sale of an asset to the

purchaser on a deferred basis and subsequent purchase
of the asset at a cash price lower than the deferred sale
price or vice versa

Bay‘ Istisna‘ A contractual agreement with manufacturer to produce /

construct items with specified description at a determined
price, and manufactured from his own materials with his
own effort

Bay’ al- Muqayyadah Barter trading

Bay’ Murabahah Sale and purchase of an asset where the acquisition cost
and the mark-up are disclosed to the purchaser

Bay’ al- Musawamah Sale contract where there is no requirement of disclosure,

neither on the cost nor the profit

Bay’ al- Mutlaq Sale of good for money

Bay’ Salam Sale where the payment is made upfront in full and the
commodity will be delivered later

Bay’ al- Sarf Currency exchange

Glossary 79
 Bay' Murabahah via Consists of sale and purchase contracts where the first
Tawarruq arrangement involves the sale of an asset to a purchaser on a deferred
basis and the subsequent sale involves sale of the asset to
a third party on a cash basis

Bay’ Tawliyah Sale at cost price without any profit for the seller

Bay’ Wadi'ah Sale takes place when the seller agrees to sell commodities
at lowest price than the cost price

Gharar Uncertainty that might lead to destruction and loss

Ghayr al- A’yan Non corporeal

Ghayr mutaqawwim Not valuable

Halal Lawful, permissible

Hamish jiddiyyah Security deposit

Al- Haq al- Maliy Rights related to property

Al-Haq ghair al- Maliy Rights related other than property

Haram Prohibited

Hawalah Transfer of funds or debt from the depositor's or debtor's

account to the receiver's or creditor's account

Hibah Gifts award voluntarily in return for any transactions given

or provided

Huquq The rights

I‘arah Borrowing / Letting

Ibra’ Rebate / An act by a person relinquishing his rights to

collect payment due from another person

Ijab Offer

Ijarah A contract that transfers ownership of a permitted

usufruct and/or service for a specified period in exchange
for a specified consideration

Ijarah ‘Ain or Ijarah al- A contract to transfer the usufruct of a particular asset to
Manafi’ another person in exchange for a rent claimed from him

80 Glossary
Ijarah al-‘Amal A contract to employ the services of a person on wages
given to him as a consideration for his hired services

Ijarah Mausufah fI A leasing contract which is executed for an asset

Dhimmah undertaken by the lessor to be delivered to the lessee
according to accurate specifications, even if the asset is
not owned by the lessor

Ijarah Muntahiyah bi al- An ijarah contract that ends up with the transfer of
Tamlik ownership of leased properties/assets from the lessor to
the lessee at the end of the contract tenor

Ijarah Thumma Bay‘ An ijarah contract to be followed by a sale contract

Ikhtisas An exclusivity

Isharah Pointing out

‘IwaD Reprisal

Kafalah A contract where the guarantor conjoins the guaranteed

party in assuming the latter's specified liability

Kafalah al-`Ayn Guarantee to deliver a physical asset

Kafalah al- Dayn Guarantee of a debt liability

Madhahib Islamic school of thought

Majlis al-‘Aqd Same session of contract

Mal A thing that is capable of being acquired and owned by

human

Manafi’ The benefits

Manqul Moveable

Maslahah ammah Public interest

Mawat land Dead land

Mawdu' The subject

Maysir Gambling

Milkiyyah Take possession of something

Glossary 81
 Mu‘amalat Any form of mutual dealing held between man to solve
their everyday needs, especially in the matters relating to
trade and commerce

Mudarabah An agreement made between a capital provider and

another party who acts as the entrepreneur. This
arrangement will enable the entrepreneur to carry out
business projects and profits are distributed based on a
pre-agreed profit sharing ratio. In the case of losses, the
losses are borne by the provider of the funds

Mudarabah Muqayyadah Whereby the capital provider impose restrictions to

muDarib in order to administer the venture e.g. location,
type of business

Mudarabah Mutlaqah Whereby the capital provider allow muDarib to administer

the venture without restrictions

Mudarib An entrepreneur

Mukhalafah al-Shurut Breach of specified terms

Muqasah Debt settlement by a contra transaction

Musharakah A partnership or joint venture for a specific business,

whereby the distribution of profits will be apportioned
according to an agreed ratio. In the event of losses, both
parties will share the losses on the basis of their equity
participation

Musharakah A form of partnership contract whereby the financier

Mutanaqisah allows his partner to buy assets in one payment or in
instalments based on terms agreed by both parties. It is a
contract of partnership with declining ownership

Mustaqir Confirmed

Muzara’ah Sharecropping contract whereby one party agrees to

cultivate the land owned by the other party in consideration
for an agreed share in the produce of the land

Qabd Taking possession in the contracts

Qabd Haqiqi Physical possession

Qabd Hukmi Constructive possession

Qabul Acceptance

82 Glossary
Qard A loan extended on a goodwill basis and the borrower is
only required to repay the principal amount borrowed

Qardhul Hasan Benevolent loan

QarInah Indicator

Qirad Synonymous to MuDarabah

Rabbul mal A capital provider

Rahn An arrangement whereby a valuable asset is placed as

collateral for debt or right of claim. The collateral may be
disposed in the event of default

Riba Interest, increase, addition or growth, though it is usually

translated as 'usury'

Ribawi item Ribawi items can be classified into two main categories
namely (i) as a measure of value (al-thaman) e.g gols,
silver and modern currency, (ii) staple and storable food,
e.g wheat, barley, rice, etc.

Ru’yah Viewing

Sadd Dharai‘ Blocking the means to harmful result

Salaf Also known Bay’ Salam

Shakliyyah Specific form

Shariah The sum total of Islamic teaching and system, which was
revealed to Prophet Muhammad SAW recorded in the
Quran and the Prophetic tradition of Muhammad SAW

Sighah Offer and Acceptance

Sukuk Certificater of equal value representing undivided shares

in the ownership of tangible assets, usafracts and services
on (in the ownership) of the assets of particular projects
on special investment activity

Ta`addi Misconduct

Tabarru’ Act which is to help and benevolent

Taqsir Negligence

Glossary 83
 Tawallud min al-Mamluk The emergence from owner to result in ownership

Ujr Fee or wages

'Uqud Musammah Nominated contracts

‘Urf Customary practice

‘Urf tijari Customary business practices

Wa‘d Promise

WadI'ah A contract by which an asset is placed with another party

for safekeeping

WadI‘ah yad Amanah A contract by which an owned asset is placed with another
party on the basis of trusteeship (amanah) for safekeeping
purposes

WadI‘ah yad Damanah A safekeeping contract whereby permission to utilize the

asset placed in custody is granted by the safekeeping
depositor and/or a fee may be charged by the custodian
for the safekeeping service

Wakalah A person nominates another person to act on his behalf

Waqf Endowment

Wasiyyah Will

84 Glossary
ABBREVIATION

AAOIFI Accounting and Auditing Organization for Islamic Financial

Institutions

AITAB Ijarah Thumma Bay‘

APA Asset Purchase Agreement

ASA Asset Sell Agreement

BBA Bay’ Bithaman Ajil

BNM Bank Negara Malaysia / Central Bank of Malaysia

IB Islamic Banking

INID Islamic Negotiable Instrument of Deposit

LC Letter of Credit

OD Overdraft

PSR Profit sharing ratio

S&P Sale and purchase

SAC Shariah Advisory Council

Abbreviation 85
ISLAMIC BANKING & FINANCE INSTITUTE MALAYSIA