- Published on
Islamic Contract -Islamic Finance Institutions’ Views on Organised Tawarruq
Introduction
Several major Islamic financial institutions and Sharī‘ah boards have discussed:
the permissibility of organised tawarruq in Islamic banking.
Although many institutions permit it:
avoiding prohibited Bay‘ al-‘Īnah and fictitious transactions.
1. Dallah Albaraka Symposium (2002)
Position
Dallah Albaraka resolved that:
the current practice of tawarruq in Islamic banking is permissible.
Main Reason for Permissibility
The symposium stated:
Meaning:
✅ tawarruq may remain legally valid.
Important Sharī‘ah Condition
The arrangement must:
❌ not result in prohibited ‘īnah.
Particularly:
Critical Analysis
The symposium adopted:
a form-based Sharī‘ah approach.
Meaning:
✅ presumptively valid.
Main Concern
The concern is:
whether intermediary involvement creates hidden Bay‘ al-‘Īnah.
2. Al Rajhi Bank Sharī‘ah Board (2010)
Position
Al Rajhi Bank approved:
organised tawarruq practised through Bursa Suq Al-Sila’ (BSAS).
Reason for Approval
The Sharī‘ah Board stated that:
✅ customer possesses genuine freedom regarding the commodity.
The customer may:
Why This Is Important
According to the Sharī‘ah Board:
Important Restriction
Despite approving tawarruq,
the Sharī‘ah Board stressed:
tawarruq should only be used when no better Sharī‘ah alternatives exist.
Critical Analysis
This reflects:
cautious permissibility.
Meaning:
Main Sharī‘ah Concern
Even Al Rajhi recognised:
3. Kuwait Finance House (2011)
Position
Kuwait Finance House permitted:
tawarruq structures for banking products.
Important Recommendation
However:
Why?
Because:
Critical Analysis
This demonstrates concern regarding:
Main Sharī‘ah Concern
The concern is:
when IFI controls too much of transaction process,
the arrangement may become:
Example of Problematic Structure
Step 1
IFI sells commodity to customer.
Step 2
Customer immediately appoints IFI:
Step 3
IFI arranges instant resale through pre-arranged broker.
Critics’ Concern
Commodity may merely circulate:
❌ symbolically;
❌ temporarily;
❌ without genuine market intention.
4. Dubai Islamic Bank (2005)
Position
Dubai Islamic Bank adopted:
similar position to Kuwait Finance House and Al Rajhi Bank.
Conditions for Permissibility
Dubai Islamic Bank permitted tawarruq provided:
✅ arrangement remains free from prohibited ‘īnah.
Main Concern
The concern particularly arises when:
Critical Analysis
Dubai Islamic Bank recognised:
Overall Comparative Notes
Common Similarities Among IFIs
Most IFIs:
✅ conditionally permit tawarruq;
✅ require genuine ownership transfer;
✅ require customer freedom over commodity;
✅ prohibit direct ‘īnah structures.
Common Concerns
All institutions express concern regarding:
❌ fictitious trading;
❌ artificial resale;
❌ excessive agency involvement;
❌ disguised Bay‘ al-‘Īnah.
Agency (
Wakālah
) as Major Sharī‘ah Issue
The major debate concerns:
whether IFI involvement as agent weakens genuine commercial independence.
Supporters’ View
Supporters argue:
✅ operational necessity requires agency;
✅ modern banking needs efficiency;
✅ ownership and sale still legally occur.
Critics’ View
Critics argue:
❌ excessive agency creates synthetic liquidity structures;
❌ resale becomes pre-arranged and artificial;
❌ commodity merely acts as legal intermediary.
Main Regulatory Trend
Even institutions permitting tawarruq generally:
✅ encourage minimisation of tawarruq use;
✅ prefer alternative Sharī‘ah contracts where possible;
✅ caution against overdependence on debt-based structures.
Overall Conclusion
Major Islamic financial institutions generally:
permit organised tawarruq conditionally,
provided:
Introduction
Several major Islamic financial institutions and Sharī‘ah boards have discussed:
the permissibility of organised tawarruq in Islamic banking.
Although many institutions permit it:
- their approvals are usually:
- conditional;
- restrictive;
- accompanied by warnings against excessive use.
avoiding prohibited Bay‘ al-‘Īnah and fictitious transactions.
1. Dallah Albaraka Symposium (2002)
Position
Dallah Albaraka resolved that:
the current practice of tawarruq in Islamic banking is permissible.
Main Reason for Permissibility
The symposium stated:
- there is:
Meaning:
- outwardly:
- ownership transfer exists;
- sale contracts exist;
- commodity transactions occur.
✅ tawarruq may remain legally valid.
Important Sharī‘ah Condition
The arrangement must:
❌ not result in prohibited ‘īnah.
Particularly:
- third-party involvement must not merely disguise:
Critical Analysis
The symposium adopted:
a form-based Sharī‘ah approach.
Meaning:
- unless clear evidence proves:
- artificiality;
- collusion;
- fictitious trading,
✅ presumptively valid.
Main Concern
The concern is:
whether intermediary involvement creates hidden Bay‘ al-‘Īnah.
2. Al Rajhi Bank Sharī‘ah Board (2010)
Position
Al Rajhi Bank approved:
organised tawarruq practised through Bursa Suq Al-Sila’ (BSAS).
Reason for Approval
The Sharī‘ah Board stated that:
✅ customer possesses genuine freedom regarding the commodity.
The customer may:
- keep commodity;
- take physical delivery;
- leave commodity on platform;
- appoint bank to sell commodity.
Why This Is Important
According to the Sharī‘ah Board:
- genuine customer choice indicates:
✅ real ownership;
✅ real rights over commodity.
- transaction avoids becoming:
Important Restriction
Despite approving tawarruq,
the Sharī‘ah Board stressed:
tawarruq should only be used when no better Sharī‘ah alternatives exist.
Critical Analysis
This reflects:
cautious permissibility.
Meaning:
- tawarruq accepted because of:
- commercial necessity;
- practical banking needs.
- it should not dominate Islamic finance.
Main Sharī‘ah Concern
Even Al Rajhi recognised:
- excessive tawarruq usage may:
❌ weaken genuine Islamic finance objectives.
3. Kuwait Finance House (2011)
Position
Kuwait Finance House permitted:
tawarruq structures for banking products.
Important Recommendation
However:
- Kuwait Finance House suggested:
Why?
Because:
- agency arrangements may:
Critical Analysis
This demonstrates concern regarding:
- excessive IFI involvement;
- pre-arranged resale;
- artificial transaction flow.
Main Sharī‘ah Concern
The concern is:
when IFI controls too much of transaction process,
the arrangement may become:
- economically circular;
- commercially artificial.
Example of Problematic Structure
Step 1
IFI sells commodity to customer.
Step 2
Customer immediately appoints IFI:
- to resell commodity.
Step 3
IFI arranges instant resale through pre-arranged broker.
Critics’ Concern
Commodity may merely circulate:
❌ symbolically;
❌ temporarily;
❌ without genuine market intention.
4. Dubai Islamic Bank (2005)
Position
Dubai Islamic Bank adopted:
similar position to Kuwait Finance House and Al Rajhi Bank.
Conditions for Permissibility
Dubai Islamic Bank permitted tawarruq provided:
✅ arrangement remains free from prohibited ‘īnah.
Main Concern
The concern particularly arises when:
- intermediary or agent involvement:
Critical Analysis
Dubai Islamic Bank recognised:
- agency structures may blur distinction between:
- tawarruq;
- Bay‘ al-‘Īnah.
- strong safeguards required.
Overall Comparative Notes
Common Similarities Among IFIs
Most IFIs:
✅ conditionally permit tawarruq;
✅ require genuine ownership transfer;
✅ require customer freedom over commodity;
✅ prohibit direct ‘īnah structures.
Common Concerns
All institutions express concern regarding:
❌ fictitious trading;
❌ artificial resale;
❌ excessive agency involvement;
❌ disguised Bay‘ al-‘Īnah.
Agency (
Wakālah
) as Major Sharī‘ah Issue
The major debate concerns:
whether IFI involvement as agent weakens genuine commercial independence.
Supporters’ View
Supporters argue:
✅ operational necessity requires agency;
✅ modern banking needs efficiency;
✅ ownership and sale still legally occur.
Critics’ View
Critics argue:
❌ excessive agency creates synthetic liquidity structures;
❌ resale becomes pre-arranged and artificial;
❌ commodity merely acts as legal intermediary.
Main Regulatory Trend
Even institutions permitting tawarruq generally:
✅ encourage minimisation of tawarruq use;
✅ prefer alternative Sharī‘ah contracts where possible;
✅ caution against overdependence on debt-based structures.
Overall Conclusion
Major Islamic financial institutions generally:
permit organised tawarruq conditionally,
provided:
- genuine ownership exists;
- customer retains real rights over commodity;
- prohibited Bay‘ al-‘Īnah avoided;
- fictitious transactions absent.
- most institutions also recognise:
- Published on
Islamic Contract -Comparison of the Types of Tawarruq
Introduction
Generally, tawarruq is divided into:
1. Tawarruq Fiqhī (Classical Tawarruq)
Definition
Nature of Arrangement
Parties Involved
Usually involves:
Role of Original Seller
Agency
Receipt of Cash
Flow of Transaction
Step 1
Customer buys commodity:
Step 2
Customer independently searches for buyer.
Step 3
Customer sells commodity:
Example
Deferred Purchase Price
RM120,000.
Spot Cash Resale
RM100,000.
Difference
120{,}000 - 100{,}000 = 20{,}000
120{,}000 - 100{,}000 = 20{,}000
Sharī‘ah Position
Application
2. Tawarruq Munazzam (Organised Tawarruq)
Definition
Nature of Arrangement
Parties Involved
Usually involves:
Role of IFI
Important Sharī‘ah Clarification
❌ IFI should not repurchase commodity for itself.
Why?
Thus:
✅ resale must involve third party.
Agency
Receipt of Cash
Flow of Transaction
Step 1
IFI purchases commodity.
Step 2
IFI sells commodity to customer:
✅ customer owns commodity.
Step 3
Customer appoints IFI:
Step 4
IFI sells commodity:
Step 5
Cash transferred to customer.
Example
Deferred Sale Price
RM120,000.
Spot Cash Resale
RM100,000.
Difference
120{,}000 - 100{,}000 = 20{,}000
120{,}000 - 100{,}000 = 20{,}000
Sharī‘ah Position
Main Criticism
Critics argue:
Application
3. Tawarruq Maṣrafī (Banking or Inverse Tawarruq)
Definition
Nature of Arrangement
Parties Involved
Usually involves:
Role of IFI
Agency
Receipt of Cash
Flow of Transaction
Step 1
Customer deposits money with IFI.
Step 2
IFI purchases commodity.
Step 3
IFI sells commodity:
Step 4
Commodity resold for spot cash.
Example
Spot Commodity Price
RM200,000.
Deferred Sale Price
RM220,000.
Difference
220{,}000 - 200{,}000 = 20{,}000
220{,}000 - 200{,}000 = 20{,}000
Sharī‘ah Position
Application
Main Differences Between the Types
Tawarruq Fiqhī
Tawarruq Munazzam
Tawarruq Maṣrafī
Main Sharī‘ah Debate
The major issue is:
whether organised tawarruq preserves genuine trade substance or merely replicates conventional cash financing through formal sale contracts.
This remains one of the most debated issues in contemporary Islamic finance.
Introduction
Generally, tawarruq is divided into:
- Tawarruq Fiqhī (Classical Tawarruq);
- Tawarruq Munazzam (Organised Tawarruq);
- Tawarruq Maṣrafī (Banking or Inverse Tawarruq).
- provide liquidity or cash;
- avoid direct ribā-based lending.
- structure;
- level of organisation;
- role of the Islamic financial institution (IFI);
- Sharī‘ah acceptance.
1. Tawarruq Fiqhī (Classical Tawarruq)
Definition
- Classical form discussed in fiqh books.
- Customer buys commodity on deferred payment and independently resells it to third party for spot cash.
Nature of Arrangement
- Free from pre-arrangement.
- Independent transaction.
- Genuine market participation exists.
Parties Involved
Usually involves:
- original seller;
- customer (mutawarriq);
- independent third-party buyer.
Role of Original Seller
- Original seller has:
- no role in resale;
- no connection with final buyer.
Agency
- No agency arrangement.
- Customer personally resells commodity.
Receipt of Cash
- Customer directly receives cash from third-party buyer.
Flow of Transaction
Step 1
Customer buys commodity:
- on deferred payment.
Step 2
Customer independently searches for buyer.
Step 3
Customer sells commodity:
- to third party
for spot cash.
Example
Deferred Purchase Price
RM120,000.
Spot Cash Resale
RM100,000.
Difference
120{,}000 - 100{,}000 = 20{,}000
120{,}000 - 100{,}000 = 20{,}000
Sharī‘ah Position
- Accepted by majority of classical jurists.
- Less controversial.
- Viewed as closer to genuine trade.
Application
- Traditional marketplace.
- Individual liquidity transactions.
2. Tawarruq Munazzam (Organised Tawarruq)
Definition
- Structured tawarruq organised by Islamic financial institutions.
- Resale process arranged beforehand.
Nature of Arrangement
- Fully organised and pre-arranged.
- Highly structured transaction.
- Often automated in banking operations.
Parties Involved
Usually involves:
- IFI;
- customer;
- brokers;
- commodity traders;
- agents.
- more than three parties usually involved.
Role of IFI
- IFI structures and coordinates transaction.
- IFI may act as agent (wakīl) for customer.
Important Sharī‘ah Clarification
❌ IFI should not repurchase commodity for itself.
Why?
- Because it may become:
Thus:
✅ resale must involve third party.
Agency
- Customer often appoints IFI:
- as agent
to resell commodity.
- as agent
Receipt of Cash
- Customer receives cash through arrangement organised by IFI.
Flow of Transaction
Step 1
IFI purchases commodity.
Step 2
IFI sells commodity to customer:
- on deferred payment.
✅ customer owns commodity.
Step 3
Customer appoints IFI:
- as agent (wakīl)
to resell commodity.
Step 4
IFI sells commodity:
- to third-party buyer
for spot cash.
Step 5
Cash transferred to customer.
Example
Deferred Sale Price
RM120,000.
Spot Cash Resale
RM100,000.
Difference
120{,}000 - 100{,}000 = 20{,}000
120{,}000 - 100{,}000 = 20{,}000
Sharī‘ah Position
- Highly disputed among contemporary scholars.
- Criticised by many international Sharī‘ah councils.
- Permitted in Malaysia subject to strict conditions.
Main Criticism
Critics argue:
- commodity acts merely as intermediary;
- process highly artificial;
- resembles conventional financing;
- lacks genuine trading substance.
Application
- Islamic banking financing;
- deposits;
- liquidity management;
- treasury operations.
3. Tawarruq Maṣrafī (Banking or Inverse Tawarruq)
Definition
- Reverse version of organised tawarruq.
- IFI becomes liquidity seeker (mutawarriq).
- Customer becomes liquidity provider/depositor.
Nature of Arrangement
- Organised banking structure.
- Mainly used for deposits and liquidity mobilisation.
Parties Involved
Usually involves:
- IFI;
- depositor/customer;
- brokers;
- commodity traders.
Role of IFI
- IFI seeks funding from customer.
- IFI manages transaction structure.
Agency
- Agency arrangements commonly used.
Receipt of Cash
- IFI obtains liquidity/funding.
- Customer receives investment return or profit.
Flow of Transaction
Step 1
Customer deposits money with IFI.
Step 2
IFI purchases commodity.
Step 3
IFI sells commodity:
- on deferred basis.
Step 4
Commodity resold for spot cash.
Example
Spot Commodity Price
RM200,000.
Deferred Sale Price
RM220,000.
Difference
220{,}000 - 200{,}000 = 20{,}000
220{,}000 - 200{,}000 = 20{,}000
Sharī‘ah Position
- Used extensively in Islamic banking.
- Still subject to contemporary Sharī‘ah criticism regarding substance.
Application
- Islamic deposit products;
- interbank liquidity management;
- treasury funding.
Main Differences Between the Types
Tawarruq Fiqhī
- Independent resale.
- No pre-arrangement.
- Customer personally sells commodity.
Tawarruq Munazzam
- Fully organised.
- IFI arranges resale.
- Customer often appoints IFI as agent.
Tawarruq Maṣrafī
- Reverse structure.
- IFI seeks liquidity from customer deposits.
Main Sharī‘ah Debate
The major issue is:
whether organised tawarruq preserves genuine trade substance or merely replicates conventional cash financing through formal sale contracts.
This remains one of the most debated issues in contemporary Islamic finance.
- Published on
Islamic Contract – Basic Rules and Conditions of Bay‘ al-‘Īnah
Q1: Is Bay‘ al-‘Īnah absolutely permissible in Islamic finance?
Answer
No.
The permissibility of Bay‘ al-‘Īnah is:
limited and conditional.
Its application is only allowed if:
✅ strict Sharī‘ah rules and operational requirements are fulfilled.
This is because:
if improperly structured.
Therefore:
Q2: What is the first condition of Bay‘ al-‘Īnah?
1. Offer and Acceptance (
Ijāb and Qabūl
)
Rule
Each sale contract in the ‘īnah arrangement must:
✅ contain its own offer and acceptance.
The transactions must occur:
sequentially,
not simultaneously.
Meaning:
Case Scenario 1 – Valid Sequential Execution
An Islamic bank sells:
Profit Difference
120{,}000 - 100{,}000 = 20{,}000
120{,}000 - 100{,}000 = 20{,}000
Analysis
The:
Result
✅ Sharī‘ah requirement satisfied.
Invalid Scenario
The bank says:
“We will only sell to you if you immediately promise to sell it back.”
Problem
The contracts become:
❌ contractually tied together.
This creates:
❌ Invalid or highly problematic.
Critical Analysis
The purpose of requiring:
separate offer and acceptance
is to ensure:
Q3: What are the requirements regarding execution of the contract?
2. Execution of the Contract
Rule
The contracting parties must observe:
✅ proper execution procedure.
Main Requirements
(a) Each Seller Must Initiate Its Own Sale
In each contract:
(b) No Pre-Signing of Contracts
The parties:
❌ cannot pre-sign both contracts in advance.
(c) No Promise to Repurchase or Resell
Neither party may:
❌ promise beforehand to:
Case Scenario 2 – Improper Pre-Signing
A customer signs:
Problem
The arrangement appears:
❌ Sharī‘ah non-compliance risk.
Practical Application
Modern Islamic banks therefore:
✅ independent execution.
Critical Analysis
The prohibition against:
pre-signing and binding promises
aims to prevent:
Q4: Why must the contracts be independent?
3. Independent Contract Execution
Rule
The ‘īnah arrangement must consist of:
✅ two separate and independent sale contracts.
The contracts:
Case Scenario 3 – Improper Dependency
A financing agreement states:
“The second sale automatically takes effect once the first sale is signed.”
Problem
The second sale:
❌ is no longer independent.
This undermines:
❌ Invalid or highly questionable.
Correct Practical Application
Islamic banks usually:
Critical Analysis
This requirement attempts to preserve:
✅ genuine commercial substance.
Without independence:
Q5: Why is the right of delivery important?
4. Right of Delivery
Rule
The purchaser in the first sale contract must:
✅ genuinely possess the right to take delivery of the asset.
Why Is This Important?
Because:
Case Scenario 4 – No Real Delivery Right
The bank sells:
Problem
The customer never obtains:
❌ real ownership rights.
The transaction becomes:
❌ Sharī‘ah concern.
Valid Scenario
The customer:
✅ may take delivery;
✅ may retain asset;
✅ may choose not to resell.
This indicates:
Critical Analysis
This condition prevents:
fictitious ownership transfer.
Islamic law requires:
Q6: Why is proper legal documentation necessary?
5. Proper Legal Documentation
Rule
Both sale contracts must:
✅ have separate documentation.
There must be:
Documentation Must NOT:
(a)
❌ require compulsory repurchase or resale.
(b)
❌ describe the arrangement as creating automatic buy-back obligation.
Case Scenario 5 – Problematic Documentation
A financing agreement states:
“The customer is obligated to resell the asset back to the bank immediately.”
Problem
The documentation itself proves:
❌ Sharī‘ah non-compliance concern.
Correct Practical Application
Islamic banks therefore:
✅ prepare separate contracts;
✅ separate execution timing;
✅ avoid mandatory repurchase clauses.
Critical Analysis
Documentation is extremely important because:
Overall Practical Case Study
Full Valid ‘Īnah Structure
Step 1
Islamic bank sells commodity to customer:
Step 2
Customer obtains:
✅ ownership rights;
✅ right of delivery.
Step 3
After first contract completed,
customer separately sells commodity back to bank:
Step 4
Separate documentation used.
No:
❌ binding buy-back promise;
❌ pre-signing;
❌ automatic linkage.
Result
The structure:
✅ better satisfies Malaysian Sharī‘ah regulatory requirements.
Overall Critical Analysis of Bay‘ al-‘Īnah
Main Sharī‘ah Concern
Critics argue:
The concern is:
legal form may hide ribā substance.
Why Malaysia Still Allows It
Malaysia adopts:
✅ strict sequencing;
✅ ownership transfer;
✅ independent contracts;
✅ proper documentation;
✅ genuine delivery rights.
Modern Trend in Islamic Finance
Despite permissibility:
➡ tawarruq;
➡ trade-based financing;
➡ asset-backed structures.
This is because:
Q1: Is Bay‘ al-‘Īnah absolutely permissible in Islamic finance?
Answer
No.
The permissibility of Bay‘ al-‘Īnah is:
limited and conditional.
Its application is only allowed if:
✅ strict Sharī‘ah rules and operational requirements are fulfilled.
This is because:
- ‘īnah may resemble:
if improperly structured.
Therefore:
- regulators such as SAC-BNM impose strict safeguards to ensure:
- genuine sale contracts;
- proper ownership transfer;
- independent execution of contracts.
Q2: What is the first condition of Bay‘ al-‘Īnah?
1. Offer and Acceptance (
Ijāb and Qabūl
)
Rule
Each sale contract in the ‘īnah arrangement must:
✅ contain its own offer and acceptance.
The transactions must occur:
sequentially,
not simultaneously.
Meaning:
- first sale must genuinely occur first;
- second sale can only occur afterwards.
Case Scenario 1 – Valid Sequential Execution
An Islamic bank sells:
- a commodity to customer
for: - RM120,000 deferred payment.
- first contract completed,
- the same commodity back to bank
for: - RM100,000 cash.
Profit Difference
120{,}000 - 100{,}000 = 20{,}000
120{,}000 - 100{,}000 = 20{,}000
Analysis
The:
- first sale;
- second sale
Result
✅ Sharī‘ah requirement satisfied.
Invalid Scenario
The bank says:
“We will only sell to you if you immediately promise to sell it back.”
Problem
The contracts become:
❌ contractually tied together.
This creates:
- artificiality;
- possible ribā resemblance.
❌ Invalid or highly problematic.
Critical Analysis
The purpose of requiring:
separate offer and acceptance
is to ensure:
- each sale is genuine;
- ownership truly transfers;
- parties freely consent.
- the arrangement may merely disguise:
Q3: What are the requirements regarding execution of the contract?
2. Execution of the Contract
Rule
The contracting parties must observe:
✅ proper execution procedure.
Main Requirements
(a) Each Seller Must Initiate Its Own Sale
In each contract:
- the seller initiates the sale;
- the purchaser accepts.
(b) No Pre-Signing of Contracts
The parties:
❌ cannot pre-sign both contracts in advance.
(c) No Promise to Repurchase or Resell
Neither party may:
❌ promise beforehand to:
- repurchase;
- resell the asset.
Case Scenario 2 – Improper Pre-Signing
A customer signs:
- both sale contracts simultaneously before execution.
- automatic buy-back documentation.
Problem
The arrangement appears:
- artificial;
- predetermined;
- lacking genuine sale intention.
❌ Sharī‘ah non-compliance risk.
Practical Application
Modern Islamic banks therefore:
- separate documentation;
- separate signing sessions;
- separate timestamps.
✅ independent execution.
Critical Analysis
The prohibition against:
pre-signing and binding promises
aims to prevent:
- legal tricks (ḥiyal);
- hidden lending arrangements;
- sham transactions.
Q4: Why must the contracts be independent?
3. Independent Contract Execution
Rule
The ‘īnah arrangement must consist of:
✅ two separate and independent sale contracts.
The contracts:
- cannot be merged;
- cannot be legally dependent upon each other.
Case Scenario 3 – Improper Dependency
A financing agreement states:
“The second sale automatically takes effect once the first sale is signed.”
Problem
The second sale:
❌ is no longer independent.
This undermines:
- genuine ownership transfer;
- contractual autonomy.
❌ Invalid or highly questionable.
Correct Practical Application
Islamic banks usually:
- conduct first sale first;
- allow interval between contracts;
- execute second sale separately.
Critical Analysis
This requirement attempts to preserve:
✅ genuine commercial substance.
Without independence:
- the transaction may collapse into:
Q5: Why is the right of delivery important?
4. Right of Delivery
Rule
The purchaser in the first sale contract must:
✅ genuinely possess the right to take delivery of the asset.
Why Is This Important?
Because:
- ownership in Islamic law requires:
- ability to possess;
- right to control;
- assumption of ownership risk.
Case Scenario 4 – No Real Delivery Right
The bank sells:
- an asset to customer.
- customer is contractually prohibited from taking delivery.
Problem
The customer never obtains:
❌ real ownership rights.
The transaction becomes:
- purely paper-based.
❌ Sharī‘ah concern.
Valid Scenario
The customer:
✅ may take delivery;
✅ may retain asset;
✅ may choose not to resell.
This indicates:
- genuine ownership exists.
Critical Analysis
This condition prevents:
fictitious ownership transfer.
Islamic law requires:
- real ownership consequences;
- real transfer of risk and control.
Q6: Why is proper legal documentation necessary?
5. Proper Legal Documentation
Rule
Both sale contracts must:
✅ have separate documentation.
There must be:
- two independent sets of legal documents.
Documentation Must NOT:
(a)
❌ require compulsory repurchase or resale.
(b)
❌ describe the arrangement as creating automatic buy-back obligation.
Case Scenario 5 – Problematic Documentation
A financing agreement states:
“The customer is obligated to resell the asset back to the bank immediately.”
Problem
The documentation itself proves:
- pre-arranged circular transaction.
- independence of contracts;
- genuineness of sale.
❌ Sharī‘ah non-compliance concern.
Correct Practical Application
Islamic banks therefore:
✅ prepare separate contracts;
✅ separate execution timing;
✅ avoid mandatory repurchase clauses.
Critical Analysis
Documentation is extremely important because:
- courts;
- regulators;
- Sharī‘ah auditors
- whether transaction is genuine;
- whether ownership actually transferred.
Overall Practical Case Study
Full Valid ‘Īnah Structure
Step 1
Islamic bank sells commodity to customer:
- RM120,000 deferred.
Step 2
Customer obtains:
✅ ownership rights;
✅ right of delivery.
Step 3
After first contract completed,
customer separately sells commodity back to bank:
- RM100,000 cash.
Step 4
Separate documentation used.
No:
❌ binding buy-back promise;
❌ pre-signing;
❌ automatic linkage.
Result
The structure:
✅ better satisfies Malaysian Sharī‘ah regulatory requirements.
Overall Critical Analysis of Bay‘ al-‘Īnah
Main Sharī‘ah Concern
Critics argue:
- many ‘īnah structures may merely replicate:
The concern is:
legal form may hide ribā substance.
Why Malaysia Still Allows It
Malaysia adopts:
- a more pragmatic and regulated approach.
✅ strict sequencing;
✅ ownership transfer;
✅ independent contracts;
✅ proper documentation;
✅ genuine delivery rights.
Modern Trend in Islamic Finance
Despite permissibility:
- reliance on ‘īnah has declined.
➡ tawarruq;
➡ trade-based financing;
➡ asset-backed structures.
This is because:
- they are generally viewed as:
- more commercially robust;
- less controversial internationally.
- Published on
Islamic Contract – Application of Bay‘ al-‘Īnah in Islamic Finance
1. Application of Bay‘ al-‘Īnah in Islamic Finance
Explanation
Although Bay‘ al-‘Īnah is:
not prohibited in Malaysia,
its application has never been allowed:
without strict Sharī‘ah conditions and regulatory requirements.
Over time:
As a result:
2. Why Has the Use of ‘Īnah Reduced?
Main Reasons
1. Stricter SAC-BNM Requirements
SAC-BNM introduced:
2. Emergence of Tawarruq
The widespread adoption of:
tawarruq financing
provided:
3. Current Application of ‘Īnah
Today:
✅ certain liquidity management instruments;
✅ selected Islamic financial products.
4. Example of Bay‘ al-‘Īnah Structure
Step 1 — Bank Sells Asset to Customer
Islamic bank sells:
Example
Deferred Selling Price
RM120,000
Payable over:
Step 2 — Customer Sells Asset Back to Bank
The customer immediately sells:
Example
Spot Selling Price
RM100,000
Customer receives:
✅ RM100,000 cash immediately.
Difference
120{,}000 - 100{,}000 = 20{,}000
120{,}000 - 100{,}000 = 20{,}000
Result
The customer:
5. Sharī‘ah Concerns Regarding ‘Īnah
Many jurists criticise ‘īnah because:
Particularly when:
Main Concern
The concern is:
legal form may conceal ribā in substance.
Thus:
6. Malaysian Position on ‘Īnah
Malaysia adopts:
a more flexible approach,
subject to:
✅ strict conditions;
✅ proper sequencing;
✅ genuine sale contracts;
✅ transfer of ownership and possession.
Example of Regulatory Tightening
SAC-BNM increasingly requires:
7. Relationship Between ‘Īnah and Tawarruq
Bay‘ al-‘Īnah
Usually involves:
Tawarruq
Usually involves:
Why Tawarruq Became More Popular
Tawarruq is generally viewed as:
8. Application in Liquidity Management
Despite reduced usage,
‘īnah may still appear in:
Important Sharī‘ah Principle
Malaysia does not:
completely prohibit bay‘ al-‘īnah,
but:
➡ reducing reliance on ‘īnah;
➡ increasing reliance on tawarruq and genuine trade-based financing structures.
1. Application of Bay‘ al-‘Īnah in Islamic Finance
Explanation
Although Bay‘ al-‘Īnah is:
not prohibited in Malaysia,
its application has never been allowed:
without strict Sharī‘ah conditions and regulatory requirements.
Over time:
- the Sharī‘ah Advisory Council of Bank Negara Malaysia (SAC-BNM)
has progressively: - tightened;
- clarified;
- specified
As a result:
- the use of ‘īnah has significantly reduced in Malaysian Islamic finance.
2. Why Has the Use of ‘Īnah Reduced?
Main Reasons
1. Stricter SAC-BNM Requirements
SAC-BNM introduced:
- stricter Sharī‘ah requirements;
- clearer operational conditions;
- tighter documentation standards.
- misuse of ‘īnah structures;
- resemblance to ribā-based financing.
2. Emergence of Tawarruq
The widespread adoption of:
tawarruq financing
provided:
- a more commercially acceptable alternative.
- many Islamic banks shifted from:
- ‘īnah;
- to tawarruq structures.
3. Current Application of ‘Īnah
Today:
- the application of ‘īnah is relatively limited.
✅ certain liquidity management instruments;
✅ selected Islamic financial products.
4. Example of Bay‘ al-‘Īnah Structure
Step 1 — Bank Sells Asset to Customer
Islamic bank sells:
- an asset to customer
on deferred payment basis.
Example
Deferred Selling Price
RM120,000
Payable over:
- 5 years.
Step 2 — Customer Sells Asset Back to Bank
The customer immediately sells:
- the same asset
back to bank
for: - spot cash price.
Example
Spot Selling Price
RM100,000
Customer receives:
✅ RM100,000 cash immediately.
Difference
120{,}000 - 100{,}000 = 20{,}000
120{,}000 - 100{,}000 = 20{,}000
Result
The customer:
- obtains liquidity/cash financing.
- earns deferred profit.
5. Sharī‘ah Concerns Regarding ‘Īnah
Many jurists criticise ‘īnah because:
- the arrangement may closely resemble:
Particularly when:
- transactions are merely paper-based;
- no genuine trading intention exists.
Main Concern
The concern is:
legal form may conceal ribā in substance.
Thus:
- many Middle Eastern jurists and standards are stricter regarding ‘īnah.
6. Malaysian Position on ‘Īnah
Malaysia adopts:
a more flexible approach,
subject to:
✅ strict conditions;
✅ proper sequencing;
✅ genuine sale contracts;
✅ transfer of ownership and possession.
Example of Regulatory Tightening
SAC-BNM increasingly requires:
- clearer ownership transfer;
- proper documentation;
- actual execution of sale contracts;
- separation of contracts;
- avoidance of artificial arrangements.
7. Relationship Between ‘Īnah and Tawarruq
Bay‘ al-‘Īnah
Usually involves:
- only two parties;
- buy-back of same asset.
Tawarruq
Usually involves:
- three parties;
- sale to third party;
- less direct buy-back concern.
Why Tawarruq Became More Popular
Tawarruq is generally viewed as:
- less controversial;
- more acceptable internationally.
- many Islamic banks replaced ‘īnah with tawarruq.
8. Application in Liquidity Management
Despite reduced usage,
‘īnah may still appear in:
- Islamic interbank liquidity instruments;
- short-term liquidity management facilities.
- liquidity management requires practical and fast financing mechanisms.
Important Sharī‘ah Principle
Malaysia does not:
completely prohibit bay‘ al-‘īnah,
but:
- its application is heavily regulated;
- stricter Sharī‘ah governance applies.
➡ reducing reliance on ‘īnah;
➡ increasing reliance on tawarruq and genuine trade-based financing structures.
- Published on
Islamic Contract – Bay’ al-Istijrār (Supply or Wholesale Sale)
1. Definition of Bay’ al-Istijrār
Literal Meaning
The word istijrār is derived from the Arabic verb:
istajarra
which means:
deferral,
particularly in relation to deferred debt or payment.
2. Technical Definition of Bay’ al-Istijrār
Technically, Bay’ al-Istijrār (hereinafter, istijrār) refers to:
a sale arrangement in which the buyer continuously takes merchandise from the seller in instalments or on a regular basis, while payment may be made either later or in advance.
Earlier Definition
Some jurists earlier defined istijrār as:
taking goods continuously from a vendor and paying later.
This definition focused mainly on:
More Accurate Definition
However, some scholars argue:
this definition is incomplete,
because:
Definition by al-Ashqar
Al-Ashqar defines istijrār as:
taking merchandise from the vendor in instalments on a regular basis while payment may be made in advance or deferred.
Definition by Securities Commission Malaysia
The Securities Commission Malaysia defines istijrār as:
“a contract whereby the supplier agrees to supply a particular product on an ongoing basis, e.g., monthly, at an agreed price and an agreed mode of payment.”
Main Features of Istijrār
1. Continuous Supply Relationship
Goods are supplied:
2. Goods Taken in Stages
The buyer:
3. Payment Flexibility
Payment may be:
✅ upfront;
✅ deferred;
✅ periodic;
✅ instalment-based.
4. Common in Commercial Supply Chains
Istijrār is commonly used in:
Example 1 – Istijrār With Deferred Payment
A restaurant regularly purchases:
Supply Arrangement
Week 1
100 kg chicken
Week 2
120 kg chicken
Week 3
90 kg chicken
The restaurant:
Analysis
The goods are:
✅ Istijrār with deferred payment.
Example 2 – Istijrār With Upfront Payment
A factory prepays:
Analysis
Payment:
✅ made upfront.
Goods:
✅ supplied gradually.
Result
✅ Istijrār with upfront payment.
Example 3 – Modern Commercial Example
A supermarket signs agreement with beverage company.
The beverage company agrees:
Features Present
✅ continuous supply
✅ repeated withdrawals
✅ agreed payment mechanism
Result
✅ Contemporary istijrār arrangement.
Importance of Istijrār in Islamic Finance
Istijrār is important because:
Application in Islamic Finance
Istijrār may be used in:
an alternative to murābahah or tawarruq-based trade financing.
Sharī‘ah Issues in Istijrār
The major Sharī‘ah issues concern:
Important Sharī‘ah Principle
Istijrār is generally permissible because:
the original rule in commercial transactions is permissibility,
provided:
✅ mutual consent exists;
✅ contractual obligations are clear;
✅ excessive uncertainty is avoided;
✅ Sharī‘ah requirements of sale are fulfilled.
1. Definition of Bay’ al-Istijrār
Literal Meaning
The word istijrār is derived from the Arabic verb:
istajarra
which means:
- to pull;
- to drag;
- to draw along.
deferral,
particularly in relation to deferred debt or payment.
2. Technical Definition of Bay’ al-Istijrār
Technically, Bay’ al-Istijrār (hereinafter, istijrār) refers to:
a sale arrangement in which the buyer continuously takes merchandise from the seller in instalments or on a regular basis, while payment may be made either later or in advance.
Earlier Definition
Some jurists earlier defined istijrār as:
taking goods continuously from a vendor and paying later.
This definition focused mainly on:
- deferred payment arrangements.
More Accurate Definition
However, some scholars argue:
this definition is incomplete,
because:
- payment in istijrār may be:
- deferred; or
- upfront.
- the concept is broader than merely deferred payment.
Definition by al-Ashqar
Al-Ashqar defines istijrār as:
taking merchandise from the vendor in instalments on a regular basis while payment may be made in advance or deferred.
Definition by Securities Commission Malaysia
The Securities Commission Malaysia defines istijrār as:
“a contract whereby the supplier agrees to supply a particular product on an ongoing basis, e.g., monthly, at an agreed price and an agreed mode of payment.”
Main Features of Istijrār
1. Continuous Supply Relationship
Goods are supplied:
- continuously;
- periodically;
- regularly.
- daily;
- weekly;
- monthly.
2. Goods Taken in Stages
The buyer:
- does not necessarily take all goods at once.
- goods are withdrawn progressively.
3. Payment Flexibility
Payment may be:
✅ upfront;
✅ deferred;
✅ periodic;
✅ instalment-based.
4. Common in Commercial Supply Chains
Istijrār is commonly used in:
- wholesale trade;
- supermarkets;
- restaurants;
- manufacturing supply chains;
- trade finance.
Example 1 – Istijrār With Deferred Payment
A restaurant regularly purchases:
- chicken supplies from wholesaler.
Supply Arrangement
Week 1
100 kg chicken
Week 2
120 kg chicken
Week 3
90 kg chicken
The restaurant:
- takes goods continuously;
- pays supplier at month-end.
Analysis
The goods are:
- supplied regularly;
- taken in stages;
- paid later.
✅ Istijrār with deferred payment.
Example 2 – Istijrār With Upfront Payment
A factory prepays:
- RM500,000
to steel supplier.
- delivers steel monthly over one year.
Analysis
Payment:
✅ made upfront.
Goods:
✅ supplied gradually.
Result
✅ Istijrār with upfront payment.
Example 3 – Modern Commercial Example
A supermarket signs agreement with beverage company.
The beverage company agrees:
- to supply drinks weekly.
- to pay every 30 days.
Features Present
✅ continuous supply
✅ repeated withdrawals
✅ agreed payment mechanism
Result
✅ Contemporary istijrār arrangement.
Importance of Istijrār in Islamic Finance
Istijrār is important because:
- modern businesses require continuous supply arrangements;
- repeated contracting for every transaction may be impractical;
- it facilitates trade and commercial efficiency.
Application in Islamic Finance
Istijrār may be used in:
- Islamic trade finance;
- import financing;
- wholesale supply arrangements;
- Islamic letter of credit facilities.
an alternative to murābahah or tawarruq-based trade financing.
Sharī‘ah Issues in Istijrār
The major Sharī‘ah issues concern:
- certainty of price;
- contractual formation;
- deferred payment;
- ownership and possession;
- uncertainty (gharar).
- pricing methods;
- sale by conduct (bay‘ al-mu‘āṭāh);
- unknown pricing structures.
Important Sharī‘ah Principle
Istijrār is generally permissible because:
the original rule in commercial transactions is permissibility,
provided:
✅ mutual consent exists;
✅ contractual obligations are clear;
✅ excessive uncertainty is avoided;
✅ Sharī‘ah requirements of sale are fulfilled.
- Published on
Islamic Contract – Legality of Bay’ al-Istijrār
1. General Legality of Istijrār
Explanation
In general:
Muslim jurists agree on the permissibility of istijrār,
based on:
✅ the price is known to both contracting parties.
What Is Istijrār?
Istijrār refers to:
a continuous supply arrangement where a buyer repeatedly takes goods from a seller over time with periodic settlement of payment.
It is commonly used in:
Example of Permissible Istijrār
A restaurant regularly purchases:
Example With Figures
Week 1
50 bags rice at RM80 each
50 \times 80 = 4{,}000
50 \times 80 = 4{,}000
Week 2
60 bags rice at RM82 each
60 \times 82 = 4{,}920
60 \times 82 = 4{,}920
Total Month-End Payment
4{,}000 + 4{,}920 = 8{,}920
4{,}000 + 4{,}920 = 8{,}920
Result
✅ Permissible because:
2. Position of the Shāfi‘ī School
Majority Shāfi‘ī View
The majority of the Shāfi‘ī School:
❌ do not generally recognise:
sale by conduct (bay‘ al-mu‘āṭāh)
without:
What Does This Mean?
According to the majority Shāfi‘īs:
Example
A customer enters grocery shop:
Majority Shāfi‘ī Concern
Because:
Some Shāfi‘ī Scholars Were More Flexible
Certain Shāfi‘ī scholars such as:
sale by conduct (bay‘ al-mu‘āṭāh).
Especially where:
3. Position of the Mālikī School
Mālikī View
The Mālikī School generally:
✅ allows istijrār.
However:
Thus:
Example
A bakery regularly takes:
Mālikī Analysis
The act of:
✅ contractual formation.
4. Unknown Price Issue in Istijrār
Main Sharī‘ah Concern
Jurists differ regarding:
permissibility of istijrār when the price is unknown at the time goods are taken.
Why Is This Important?
Islamic commercial law generally requires:
✅ certainty of price (thaman).
Uncertainty regarding price may create:
❌ gharar (excessive uncertainty).
Example of Problematic Situation
A retailer continuously takes:
Only later:
Juristic Concern
At the time goods are taken:
❌ price remains uncertain.
This may lead to:
Majority Position
Most jurists:
❌ do not allow sales with unknown prices.
They rely on:
Minority Position
Some Hanafi and Hanbali jurists:
✅ allow reliance on:
Example of Permissible Market-Based Practice
A petrol station continuously receives:
5. Important Sharī‘ah Principles in Istijrār
Principle 1
Sale Contracts Are Generally Permissible
Based on:
Principle 2
Mutual Consent Is Required
Contracting parties must genuinely consent.
Principle 3
Price Certainty Is Important
Islamic law generally requires:
✅ known price;
✅ known obligations.
Principle 4
Excessive Uncertainty (
Gharar
) Must Be Avoided
Unknown prices may invalidate sales.
Principle 5
Commercial Custom (
‘Urf
) May Be Considered
Some jurists allow flexibility where:
Overall Conclusion
Istijrār is generally:
✅ permissible in Islamic law,
particularly when:
avoiding uncertainty and ensuring fairness in commercial transactions.
1. General Legality of Istijrār
Explanation
In general:
Muslim jurists agree on the permissibility of istijrār,
based on:
- the general permissibility of sale contracts in Islamic law.
✅ the price is known to both contracting parties.
What Is Istijrār?
Istijrār refers to:
a continuous supply arrangement where a buyer repeatedly takes goods from a seller over time with periodic settlement of payment.
It is commonly used in:
- wholesale supply;
- retail supply;
- trade financing;
- import-export transactions.
Example of Permissible Istijrār
A restaurant regularly purchases:
- rice from supplier.
- quantity and price are specified.
- payment is settled collectively.
Example With Figures
Week 1
50 bags rice at RM80 each
50 \times 80 = 4{,}000
50 \times 80 = 4{,}000
Week 2
60 bags rice at RM82 each
60 \times 82 = 4{,}920
60 \times 82 = 4{,}920
Total Month-End Payment
4{,}000 + 4{,}920 = 8{,}920
4{,}000 + 4{,}920 = 8{,}920
Result
✅ Permissible because:
- goods known;
- prices known;
- obligations clear.
2. Position of the Shāfi‘ī School
Majority Shāfi‘ī View
The majority of the Shāfi‘ī School:
❌ do not generally recognise:
sale by conduct (bay‘ al-mu‘āṭāh)
without:
- explicit offer (ijāb);
- explicit acceptance (qabūl).
What Does This Mean?
According to the majority Shāfi‘īs:
- every sale transaction should contain:
- expressed offer;
- expressed acceptance.
- merely taking goods and paying later without verbal/formal contract may be insufficient.
Example
A customer enters grocery shop:
- takes bread daily;
- no formal agreement;
- pays at month-end.
Majority Shāfi‘ī Concern
Because:
- no explicit sale contract formed each time,
they may regard:
❌ the transaction as problematic.
Some Shāfi‘ī Scholars Were More Flexible
Certain Shāfi‘ī scholars such as:
- al-Ghazālī;
- Ibn Surayj
sale by conduct (bay‘ al-mu‘āṭāh).
Especially where:
- customary practice clearly indicates mutual consent.
3. Position of the Mālikī School
Mālikī View
The Mālikī School generally:
✅ allows istijrār.
However:
- the contract begins:
Thus:
- taking possession itself signifies contractual consent.
Example
A bakery regularly takes:
- flour supplies from wholesaler.
- simply collects flour;
- records quantities;
- pays later.
Mālikī Analysis
The act of:
- taking the flour
✅ contractual formation.
4. Unknown Price Issue in Istijrār
Main Sharī‘ah Concern
Jurists differ regarding:
permissibility of istijrār when the price is unknown at the time goods are taken.
Why Is This Important?
Islamic commercial law generally requires:
✅ certainty of price (thaman).
Uncertainty regarding price may create:
❌ gharar (excessive uncertainty).
Example of Problematic Situation
A retailer continuously takes:
- beverages from supplier.
- exact price;
- pricing formula;
- market benchmark
Only later:
- parties negotiate total amount.
Juristic Concern
At the time goods are taken:
❌ price remains uncertain.
This may lead to:
- disputes;
- unfairness;
- unlawful consumption of wealth.
Majority Position
Most jurists:
❌ do not allow sales with unknown prices.
They rely on:
- Qur’ānic prohibition against unlawful appropriation of wealth;
- prohibition of gharar;
- requirement of certainty in contracts.
Minority Position
Some Hanafi and Hanbali jurists:
✅ allow reliance on:
- prevailing market price;
- commercial custom (‘urf);
- public need.
- market prices are stable and commonly known.
Example of Permissible Market-Based Practice
A petrol station continuously receives:
- fuel supply.
- publicly displayed;
- commercially standardised.
- some jurists tolerate deferred reconciliation using prevailing market rates.
5. Important Sharī‘ah Principles in Istijrār
Principle 1
Sale Contracts Are Generally Permissible
Based on:
- general permissibility of trade in Islam.
Principle 2
Mutual Consent Is Required
Contracting parties must genuinely consent.
Principle 3
Price Certainty Is Important
Islamic law generally requires:
✅ known price;
✅ known obligations.
Principle 4
Excessive Uncertainty (
Gharar
) Must Be Avoided
Unknown prices may invalidate sales.
Principle 5
Commercial Custom (
‘Urf
) May Be Considered
Some jurists allow flexibility where:
- stable market practices exist;
- public need is widespread.
Overall Conclusion
Istijrār is generally:
✅ permissible in Islamic law,
particularly when:
- goods are known;
- prices are known;
- contractual obligations are clear.
- jurists differ regarding:
- sale by conduct (bay‘ al-mu‘āṭāh);
- unknown pricing;
- deferred settlement structures.
avoiding uncertainty and ensuring fairness in commercial transactions.
- Published on
Islamic Contract – Bay’ al-Istijrār: Istijrār With Deferred Payment
1. Definition of Istijrār With Deferred Payment
Explanation
Istijrār with deferred payment refers to:
a continuous supply arrangement where the buyer takes goods gradually over time and payment is deferred until a later date or settlement period.
Instead of:
2. Types of Istijrār With Deferred Payment
Scholars discuss several forms of deferred-payment istijrār.
A. Price Specified in Every Transaction
Structure
In this form:
the parties know:
✅ exact quantity
✅ exact price
during each transaction.
Scholarly View
This form is generally:
✅ permissible.
It is accepted by scholars who allow:
sale by conduct (bay‘ al-mu‘āṭāh).
Schools Allowing It
✅ Hanafis
✅ Mālikis
✅ Hanbalis
✅ Some Shāfi‘ī scholars
(such as al-Ghazālī and Ibn Surayj)
Majority Shāfi‘ī Position
The majority of Shāfi‘ī jurists:
❌ do not allow it.
Example
A restaurant regularly purchases:
Week 1
100 \times 15 = 1{,}500
100 \times 15 = 1{,}500
Week 2
120 \times 16 = 1{,}920
120 \times 16 = 1{,}920
End of Month
Restaurant pays:
1{,}500 + 1{,}920 = 3{,}420
1{,}500 + 1{,}920 = 3{,}420
Analysis
Every withdrawal:
Result
✅ Generally permissible according to majority non-Shāfi‘ī schools.
B. Price Not Specified Each Time But Determined by Market Price on Day Goods Are Taken
Structure
In this form:
Majority Juristic View
The famous opinion among the four schools:
❌ generally does NOT allow this arrangement.
Why?
Because:
Basis of Prohibition
The jurists rely upon:
Example
A supermarket continuously takes:
Parties merely agree:
“Price will follow market price each day.”
Problem
At the moment goods are taken:
❌ exact price unknown.
This may lead to:
❌ Invalid according to majority view.
Minority Hanafi and Hanbali View
Some Hanafi and Hanbali jurists:
✅ allow this arrangement
if:
Basis of Their Opinion
They rely on:
Example
A petrol station regularly takes:
✅ Permissible according to some Hanafi and Hanbali jurists.
C. Price Not Specified and No Agreed Pricing Mechanism
Structure
In this form:
Majority Juristic View
Most jurists:
❌ prohibit this arrangement.
Why?
Because:
Example
A retailer continuously takes:
At month-end:
Problem
At time goods are taken:
❌ no binding sale price exists.
Thus:
❌ Invalid according to majority.
Later Hanafi Position
Some later Hanafi scholars:
✅ allowed this arrangement
if:
Example
A grocery store continuously receives:
At month-end:
✅ tolerated it.
3. Comparative Summary
Type A
Price Specified in Every Transaction
Majority View
✅ Permissible.
Reason
Price known at every withdrawal.
Type B
Market Price Used But Not Expressly Stated
Majority View
❌ Not permissible.
Minority Hanafi/Hanbali View
✅ Permissible if market price stable.
Type C
No Price and No Pricing Mechanism Initially
Majority View
❌ Not permissible.
Later Hanafi View
✅ Permissible after reconciliation based on custom.
4. Important Sharī‘ah Principle
The major concern in deferred-payment istijrār is:
uncertainty regarding price (jahālah al-thaman).
Islamic commercial law generally requires:
✅ certainty of price;
✅ certainty of obligations;
✅ avoidance of excessive gharar.
However:
1. Definition of Istijrār With Deferred Payment
Explanation
Istijrār with deferred payment refers to:
a continuous supply arrangement where the buyer takes goods gradually over time and payment is deferred until a later date or settlement period.
Instead of:
- paying immediately upon each withdrawal,
- receives goods continuously;
- settles payment later.
- the permissibility of various forms of this arrangement,
particularly: - price determination.
2. Types of Istijrār With Deferred Payment
Scholars discuss several forms of deferred-payment istijrār.
A. Price Specified in Every Transaction
Structure
In this form:
- every time goods are taken,
- the price is clearly specified.
the parties know:
✅ exact quantity
✅ exact price
during each transaction.
Scholarly View
This form is generally:
✅ permissible.
It is accepted by scholars who allow:
sale by conduct (bay‘ al-mu‘āṭāh).
Schools Allowing It
✅ Hanafis
✅ Mālikis
✅ Hanbalis
✅ Some Shāfi‘ī scholars
(such as al-Ghazālī and Ibn Surayj)
Majority Shāfi‘ī Position
The majority of Shāfi‘ī jurists:
❌ do not allow it.
Example
A restaurant regularly purchases:
- chicken supplies from wholesaler.
Week 1
- 100 kg chicken
- RM15 per kg
100 \times 15 = 1{,}500
100 \times 15 = 1{,}500
Week 2
- 120 kg chicken
- RM16 per kg
120 \times 16 = 1{,}920
120 \times 16 = 1{,}920
End of Month
Restaurant pays:
1{,}500 + 1{,}920 = 3{,}420
1{,}500 + 1{,}920 = 3{,}420
Analysis
Every withdrawal:
- has known price;
- has known quantity.
Result
✅ Generally permissible according to majority non-Shāfi‘ī schools.
B. Price Not Specified Each Time But Determined by Market Price on Day Goods Are Taken
Structure
In this form:
- goods are taken continuously;
- price not expressly stated during each withdrawal.
- parties initially agree that:
Majority Juristic View
The famous opinion among the four schools:
❌ generally does NOT allow this arrangement.
Why?
Because:
- price is unknown during contract session;
- uncertainty (gharar) exists.
Basis of Prohibition
The jurists rely upon:
- Qur’ānic prohibition against unlawful consumption of wealth;
- prohibition of uncertainty in contracts;
- scholarly consensus requiring known price.
Example
A supermarket continuously takes:
- vegetables from supplier.
Parties merely agree:
“Price will follow market price each day.”
Problem
At the moment goods are taken:
❌ exact price unknown.
This may lead to:
- disputes;
- uncertainty.
❌ Invalid according to majority view.
Minority Hanafi and Hanbali View
Some Hanafi and Hanbali jurists:
✅ allow this arrangement
if:
- market price is stable and commonly known.
Basis of Their Opinion
They rely on:
- customary market practice (‘urf);
- prevailing market value (thaman al-mithl);
- practical commercial necessity.
Example
A petrol station regularly takes:
- fuel supplies.
- publicly known and stable.
- parties rely on prevailing market rate.
✅ Permissible according to some Hanafi and Hanbali jurists.
C. Price Not Specified and No Agreed Pricing Mechanism
Structure
In this form:
- goods are continuously taken;
- no exact price stated;
- no agreed pricing formula;
- final payment determined only during later account reconciliation.
Majority Juristic View
Most jurists:
❌ prohibit this arrangement.
Why?
Because:
- contract lacks certainty regarding price;
- excessive gharar exists.
Example
A retailer continuously takes:
- beverages from supplier.
- price;
- pricing formula;
- market benchmark
At month-end:
- parties negotiate final amount.
Problem
At time goods are taken:
❌ no binding sale price exists.
Thus:
- contract remains incomplete.
❌ Invalid according to majority.
Later Hanafi Position
Some later Hanafi scholars:
✅ allowed this arrangement
if:
- parties finally agree on price during reconciliation stage.
- juristic preference (istihsān);
- commercial custom (‘urf);
- widespread public need (‘umūm al-balwā).
Example
A grocery store continuously receives:
- bread supplies daily.
At month-end:
- parties reconcile account using accepted market rates.
- became widespread commercial custom,
✅ tolerated it.
3. Comparative Summary
Type A
Price Specified in Every Transaction
Majority View
✅ Permissible.
Reason
Price known at every withdrawal.
Type B
Market Price Used But Not Expressly Stated
Majority View
❌ Not permissible.
Minority Hanafi/Hanbali View
✅ Permissible if market price stable.
Type C
No Price and No Pricing Mechanism Initially
Majority View
❌ Not permissible.
Later Hanafi View
✅ Permissible after reconciliation based on custom.
4. Important Sharī‘ah Principle
The major concern in deferred-payment istijrār is:
uncertainty regarding price (jahālah al-thaman).
Islamic commercial law generally requires:
✅ certainty of price;
✅ certainty of obligations;
✅ avoidance of excessive gharar.
However:
- some jurists allow flexibility where:
- strong commercial custom exists;
- public need is widespread;
- market prices are stable and commonly known.
- Published on
Islamic Contract – Application of Istijrār in Islamic Finance
Q1: What is istijrār?
Answer
Istijrār refers to:
a contractual arrangement where a buyer continuously purchases goods from a seller over a period of time, usually with periodic settlement of payment.
Instead of:
Q2: How is istijrār applied in Islamic finance?
Answer
In contemporary Islamic finance, istijrār can be used to structure:
Islamic trade financing facilities,
particularly:
Q3: What is the role of the Islamic bank in istijrār import financing?
Answer
The Islamic bank facilitates:
Two Types of Delivery Arrangement in Istijrār
1. Bill of Lading Controlled by the Bank
Explanation
The Islamic bank:
Case Study 1: Bank Controls Goods
A Malaysian importer wishes to import:
Transaction Structure
Step 1
Islamic bank issues:
Step 2
Exporter ships goods.
The:
Step 3
Bank finances importer through istijrār arrangement.
Importer gradually purchases goods from bank.
Financing Amount
Bank’s Profit
2{,}300{,}000 - 2{,}000{,}000 = 300{,}000
2{,}300{,}000 - 2{,}000{,}000 = 300{,}000
Analysis
The bank:
✅ Sharī‘ah-compliant istijrār trade financing.
2. Bill of Lading Not Controlled by the Bank
Explanation
In this structure:
Case Study 2: Direct Delivery to Importer
A food importer purchases:
Transaction Structure
Step 1
Islamic bank issues:
Step 2
Exporter ships goods directly to importer.
The:
Step 3
Importer settles financing progressively with bank under istijrār arrangement.
Financing Details
Bank’s Profit
1{,}700{,}000 - 1{,}500{,}000 = 200{,}000
1{,}700{,}000 - 1{,}500{,}000 = 200{,}000
Analysis
✅ Permissible istijrār-based financing arrangement.
Q4: Why is istijrār useful in Islamic trade finance?
Answer
Istijrār is beneficial because:
Q5: How does istijrār differ from murābahah and tawarruq?
Istijrār
Murābahah
Tawarruq
Important Principle
Istijrār supports:
Q1: What is istijrār?
Answer
Istijrār refers to:
a contractual arrangement where a buyer continuously purchases goods from a seller over a period of time, usually with periodic settlement of payment.
Instead of:
- concluding a separate contract for every individual purchase,
- establish an ongoing supply arrangement.
- repetitive supply transactions;
- trade financing;
- import-export businesses.
Q2: How is istijrār applied in Islamic finance?
Answer
In contemporary Islamic finance, istijrār can be used to structure:
Islamic trade financing facilities,
particularly:
- import financing under a letter of credit (LC).
- the importer obtains financing from an Islamic bank;
- goods are purchased from exporter/supplier;
- financing is arranged through continuous supply mechanism.
- murābahah financing;
- tawarruq financing.
Q3: What is the role of the Islamic bank in istijrār import financing?
Answer
The Islamic bank facilitates:
- payment to exporter;
- issuance of letter of credit;
- trade financing for importer.
- bank controlling goods; or
- direct delivery to importer.
Two Types of Delivery Arrangement in Istijrār
1. Bill of Lading Controlled by the Bank
Explanation
The Islamic bank:
- retains control over shipping documents;
- controls ownership/title of goods during shipment.
- in the bank’s name.
- the bank has constructive possession (qabd hukmī) over goods.
Case Study 1: Bank Controls Goods
A Malaysian importer wishes to import:
- electronic equipment from Japan.
Transaction Structure
Step 1
Islamic bank issues:
- letter of credit to Japanese exporter.
Step 2
Exporter ships goods.
The:
- bill of lading is issued in bank’s name.
- the bank controls goods during shipment.
Step 3
Bank finances importer through istijrār arrangement.
Importer gradually purchases goods from bank.
Financing Amount
- Import cost = RM2,000,000
- Selling price to importer = RM2,300,000
Bank’s Profit
2{,}300{,}000 - 2{,}000{,}000 = 300{,}000
2{,}300{,}000 - 2{,}000{,}000 = 300{,}000
Analysis
The bank:
- obtains constructive possession through bill of lading;
- assumes ownership risk during shipment.
✅ Sharī‘ah-compliant istijrār trade financing.
2. Bill of Lading Not Controlled by the Bank
Explanation
In this structure:
- goods are shipped directly to importer;
- the bank does not control shipping documents.
- receives goods directly from exporter.
- still finances the trade arrangement through agreed istijrār facility.
Case Study 2: Direct Delivery to Importer
A food importer purchases:
- frozen meat products from Australia.
Transaction Structure
Step 1
Islamic bank issues:
- letter of credit.
Step 2
Exporter ships goods directly to importer.
The:
- bill of lading names importer directly.
- bank does not physically or constructively control goods.
Step 3
Importer settles financing progressively with bank under istijrār arrangement.
Financing Details
- Import value = RM1,500,000
- Payment by importer over 12 months = RM1,700,000
Bank’s Profit
1{,}700{,}000 - 1{,}500{,}000 = 200{,}000
1{,}700{,}000 - 1{,}500{,}000 = 200{,}000
Analysis
- Goods move directly to importer.
- Bank provides financing facility.
- Continuous supply relationship exists.
✅ Permissible istijrār-based financing arrangement.
Q4: Why is istijrār useful in Islamic trade finance?
Answer
Istijrār is beneficial because:
- it facilitates repeated trade transactions;
- reduces need for repeated separate contracts;
- supports import-export financing;
- simplifies ongoing commercial supply arrangements.
- wholesalers;
- importers;
- manufacturers;
- commodity traders.
Q5: How does istijrār differ from murābahah and tawarruq?
Istijrār
- Continuous supply arrangement.
- Suitable for repetitive transactions.
- Trade-oriented structure.
Murābahah
- Single cost-plus sale transaction.
- Common in asset financing.
Tawarruq
- Cash liquidity arrangement through commodity trading.
- Mainly financing-oriented rather than supply-oriented.
Important Principle
Istijrār supports:
- genuine commercial activity;
- trade financing;
- continuous supply relationships.
- a Sharī‘ah-compliant alternative to conventional trade financing,
while avoiding: - ribā-based lending structures.
- Published on
Islamic Contract – Chronological Flow of Letter of Credit (LC) and Bill of Lading (B/L)
Example Scenario
A Malaysian customer wants to import:
RM200,000
The customer asks:
STEP 1 — Customer Requests Financing
The customer approaches the Islamic bank and says:
“I want to import a car from Japan but I need financing.”
The Islamic bank agrees to finance the transaction.
STEP 2 — Islamic Bank Issues Letter of Credit (LC)
The Islamic bank sends:
a Letter of Credit (LC)
to the Japanese exporter.
What Is the LC?
The LC is:
the bank’s promise to pay the exporter
provided:
Important LC Instruction
The LC states:
the Bill of Lading (B/L) must be issued:
Why Does the Bank Want This?
Because:
STEP 3 — Exporter Ships the Car
The Japanese exporter:
STEP 4 — Shipping Company Issues Bill of Lading (B/L)
After receiving the car,
the shipping company prepares:
the Bill of Lading.
What Is the Bill of Lading?
The B/L is:
IMPORTANT PART
The B/L says:
Consignee
➡ Islamic bank
or
➡ “to the order of Islamic bank.”
Meaning:
the shipping company will only release the car to whoever lawfully holds the endorsed original B/L.
Why Does the B/L Give Control Over Goods?
Because:
whoever controls the original B/L effectively controls access to the goods.
STEP 5 — Exporter Receives Original B/L
The shipping company physically gives:
Important Clarification
Although:
to submit documents to the bank and obtain payment.
STEP 6 — Exporter Submits Documents to Bank
The exporter sends:
This happens:
STEP 7 — Bank Checks Documents
The Islamic bank examines whether:
✅ bank pays exporter.
STEP 8 — Bank Now Controls the Goods
Now the bank possesses:
✅ the bank controls release of the car.
Why?
Because:
STEP 9 — Ship Arrives in Malaysia
The ship reaches:
❌ customer still cannot collect the car yet.
Why?
Because customer still does not possess:
STEP 10 — Bank Releases/Endorses B/L to Customer
After:
the bank transfers the right to claim the goods.
STEP 11 — Customer Presents B/L at Port
The customer now presents:
STEP 12 — Shipping Company Releases the Car
Once verification completed:
✅ shipping company releases the car to customer.
Now:
✅ customer obtains possession of the car.
Overall Timeline Summary
Step 1
Customer requests financing.
⬇
Step 2
Islamic bank issues LC.
⬇
Step 3
Exporter ships car.
⬇
Step 4
Shipping company issues B/L naming bank.
⬇
Step 5
Exporter receives B/L physically.
⬇
Step 6
Exporter submits B/L to bank.
⬇
Step 7
Bank checks documents and pays exporter.
⬇
Step 8
Bank now controls goods through B/L.
⬇
Step 9
Ship arrives Malaysia.
⬇
Step 10
Bank endorses/releases B/L to customer.
⬇
Step 11
Customer presents B/L at port.
⬇
Step 12
Shipping company releases car.
Islamic Finance Perspective
This structure is important because:
constructive possession (qabd hukmī)
which supports:
Important Principle
The:
original endorsed Bill of Lading represents legal control and right to claim the goods.
Therefore:
Example Scenario
A Malaysian customer wants to import:
- a Toyota car from Japan.
RM200,000
The customer asks:
- an Islamic bank to finance the import transaction.
- a Letter of Credit (LC).
STEP 1 — Customer Requests Financing
The customer approaches the Islamic bank and says:
“I want to import a car from Japan but I need financing.”
The Islamic bank agrees to finance the transaction.
STEP 2 — Islamic Bank Issues Letter of Credit (LC)
The Islamic bank sends:
a Letter of Credit (LC)
to the Japanese exporter.
What Is the LC?
The LC is:
the bank’s promise to pay the exporter
provided:
- exporter ships the goods properly;
- exporter submits required shipping documents.
Important LC Instruction
The LC states:
the Bill of Lading (B/L) must be issued:
- “to the order of the Islamic bank”
or - naming the bank as consignee.
Why Does the Bank Want This?
Because:
- the bank is paying first;
- the bank wants control over the goods;
- the bank must establish ownership/control for Sharī‘ah compliance.
STEP 3 — Exporter Ships the Car
The Japanese exporter:
- loads the car onto the ship.
- the shipping company receives the car for transportation.
STEP 4 — Shipping Company Issues Bill of Lading (B/L)
After receiving the car,
the shipping company prepares:
the Bill of Lading.
What Is the Bill of Lading?
The B/L is:
- receipt of goods;
- shipping contract;
- document of title/control over goods.
IMPORTANT PART
The B/L says:
Consignee
➡ Islamic bank
or
➡ “to the order of Islamic bank.”
Meaning:
the shipping company will only release the car to whoever lawfully holds the endorsed original B/L.
Why Does the B/L Give Control Over Goods?
Because:
- the port/shipping company refuses to release goods without the original B/L.
whoever controls the original B/L effectively controls access to the goods.
STEP 5 — Exporter Receives Original B/L
The shipping company physically gives:
- the original B/L documents
to the exporter.
Important Clarification
Although:
- exporter physically receives the B/L first,
- the Islamic bank as consignee/controller.
- exporter cannot simply release goods himself.
to submit documents to the bank and obtain payment.
STEP 6 — Exporter Submits Documents to Bank
The exporter sends:
- original B/L;
- commercial invoice;
- insurance documents;
- packing list
This happens:
- while the ship is still travelling.
STEP 7 — Bank Checks Documents
The Islamic bank examines whether:
- shipment complied with LC terms;
- documents are correct.
✅ bank pays exporter.
STEP 8 — Bank Now Controls the Goods
Now the bank possesses:
- the original B/L.
✅ the bank controls release of the car.
Why?
Because:
- the shipping company only releases goods to:
- lawful holder of original endorsed B/L.
STEP 9 — Ship Arrives in Malaysia
The ship reaches:
- Port Klang.
❌ customer still cannot collect the car yet.
Why?
Because customer still does not possess:
- endorsed original B/L.
STEP 10 — Bank Releases/Endorses B/L to Customer
After:
- financing documents signed;
- murābahah completed;
- customer obligations fulfilled,
- endorses/releases the B/L to customer.
the bank transfers the right to claim the goods.
STEP 11 — Customer Presents B/L at Port
The customer now presents:
- original endorsed B/L
to shipping company/port authority.
- authenticity;
- endorsement chain.
STEP 12 — Shipping Company Releases the Car
Once verification completed:
✅ shipping company releases the car to customer.
Now:
✅ customer obtains possession of the car.
Overall Timeline Summary
Step 1
Customer requests financing.
⬇
Step 2
Islamic bank issues LC.
⬇
Step 3
Exporter ships car.
⬇
Step 4
Shipping company issues B/L naming bank.
⬇
Step 5
Exporter receives B/L physically.
⬇
Step 6
Exporter submits B/L to bank.
⬇
Step 7
Bank checks documents and pays exporter.
⬇
Step 8
Bank now controls goods through B/L.
⬇
Step 9
Ship arrives Malaysia.
⬇
Step 10
Bank endorses/releases B/L to customer.
⬇
Step 11
Customer presents B/L at port.
⬇
Step 12
Shipping company releases car.
Islamic Finance Perspective
This structure is important because:
- Islamic bank must genuinely:
- own/control goods;
- bear ownership risk.
constructive possession (qabd hukmī)
which supports:
- murābahah financing;
- istijrār financing;
- Sharī‘ah-compliant trade finance.
- the arrangement may resemble:
❌ conventional interest-based lending.
Important Principle
The:
original endorsed Bill of Lading represents legal control and right to claim the goods.
Therefore:
- whoever lawfully possesses the endorsed B/L generally controls:
- release;
- access;
- practical possession of the shipment.
- Published on
Islamic Trade Finance – What Happens to Ownership When a Letter of Credit (LC) Is Issued?
Short Answer
Issuing a Letter of Credit (LC) alone:
does NOT automatically transfer ownership of the goods to the bank.
Ownership depends on:
a payment undertaking by the bank.
Important Principle
Letter of Credit (LC)
➡️ payment mechanism.
Bill of Lading (B/L)
➡️ control/possession document.
Sale Contract
➡️ determines ownership.
Chronological Ownership Explanation
Example Scenario
A Malaysian customer wants to import:
RM200,000
The customer requests:
STEP 1 — Customer Requests Financing
Customer asks:
“Please finance the import of this car.”
At this point:
❌ nobody new owns the car yet.
The exporter still owns the car.
STEP 2 — Islamic Bank Issues Letter of Credit
The Islamic bank issues:
a Letter of Credit (LC)
to exporter.
IMPORTANT POINT
At this stage:
❌ ownership still does NOT transfer to bank merely because LC is issued.
Why?
Because:
✅ exporter still owns the car.
STEP 3 — Exporter Ships the Car
Exporter loads car onto ship.
The shipping company issues:
Does B/L Automatically Transfer Ownership?
Not necessarily.
The B/L mainly gives:
✅ control over delivery/access to goods.
Ownership depends on:
STEP 4 — Bank Pays Exporter
After exporter submits compliant documents:
Did the bank purchase the car from exporter?
IF YES → Ownership Transfers to Bank
In Islamic murābahah financing:
usually:
✅ the bank purchases the goods from exporter first.
Thus:
✅ bank owns the car during shipment.
STEP 5 — Bank Sells Car to Customer
The bank later sells:
230,000 - 200,000 = 30,000
STEP 6 — Ownership Transfers to Customer
After murābahah sale:
✅ ownership transfers to customer.
The bank then:
VERY IMPORTANT DISTINCTION
LC Alone Does NOT Create Ownership
Issuing LC only means:
“The bank promises to pay.”
It does NOT automatically mean:
“The bank owns the goods.”
Ownership Comes From Sale Contract
Ownership usually transfers when:
Role of B/L
The B/L helps establish:
✅ constructive possession (qabd hukmī)
and
✅ control over delivery.
But:
Simplified Ownership Timeline
Before LC
Exporter owns car.
⬇
After LC Issued
Exporter STILL owns car.
⬇
After Bank Purchases Goods
Bank becomes owner.
⬇
During Shipment
Bank usually owns and controls goods through B/L.
⬇
After Murābahah Sale
Customer becomes owner.
⬇
After B/L Endorsed
Customer collects car.
Islamic Finance Perspective
This distinction is crucial because:
✅ bank must genuinely:
❌ transaction may resemble ribā-based financing.
Important Principle
LC
➡️ payment guarantee.
B/L
➡️ control and constructive possession.
Ownership
➡️ determined by actual sale contract and transfer of ownership rights.
Short Answer
Issuing a Letter of Credit (LC) alone:
does NOT automatically transfer ownership of the goods to the bank.
Ownership depends on:
- the underlying sale contract;
- when ownership transfer occurs;
- who purchased the goods.
a payment undertaking by the bank.
Important Principle
Letter of Credit (LC)
➡️ payment mechanism.
Bill of Lading (B/L)
➡️ control/possession document.
Sale Contract
➡️ determines ownership.
Chronological Ownership Explanation
Example Scenario
A Malaysian customer wants to import:
- a Toyota car from Japan.
RM200,000
The customer requests:
- Islamic bank financing through murābahah.
STEP 1 — Customer Requests Financing
Customer asks:
“Please finance the import of this car.”
At this point:
❌ nobody new owns the car yet.
The exporter still owns the car.
STEP 2 — Islamic Bank Issues Letter of Credit
The Islamic bank issues:
a Letter of Credit (LC)
to exporter.
IMPORTANT POINT
At this stage:
❌ ownership still does NOT transfer to bank merely because LC is issued.
Why?
Because:
- LC is only a promise to pay;
- not a sale contract by itself.
✅ exporter still owns the car.
STEP 3 — Exporter Ships the Car
Exporter loads car onto ship.
The shipping company issues:
- Bill of Lading (B/L).
- Islamic bank;
or - “to the order of Islamic bank.”
Does B/L Automatically Transfer Ownership?
Not necessarily.
The B/L mainly gives:
✅ control over delivery/access to goods.
Ownership depends on:
- underlying purchase contract;
- commercial terms.
STEP 4 — Bank Pays Exporter
After exporter submits compliant documents:
- Islamic bank pays exporter.
Did the bank purchase the car from exporter?
IF YES → Ownership Transfers to Bank
In Islamic murābahah financing:
usually:
✅ the bank purchases the goods from exporter first.
Thus:
- ownership transfers to bank;
- bank bears ownership risk;
- bank controls B/L.
✅ bank owns the car during shipment.
STEP 5 — Bank Sells Car to Customer
The bank later sells:
- the car to customer through murābahah.
- Bank cost = RM200,000
- Murābahah price = RM230,000
230,000 - 200,000 = 30,000
STEP 6 — Ownership Transfers to Customer
After murābahah sale:
✅ ownership transfers to customer.
The bank then:
- endorses/releases B/L to customer.
- collects car at port.
VERY IMPORTANT DISTINCTION
LC Alone Does NOT Create Ownership
Issuing LC only means:
“The bank promises to pay.”
It does NOT automatically mean:
“The bank owns the goods.”
Ownership Comes From Sale Contract
Ownership usually transfers when:
- bank actually purchases goods from exporter.
Role of B/L
The B/L helps establish:
✅ constructive possession (qabd hukmī)
and
✅ control over delivery.
But:
- B/L itself is not always the sole determinant of ownership.
Simplified Ownership Timeline
Before LC
Exporter owns car.
⬇
After LC Issued
Exporter STILL owns car.
⬇
After Bank Purchases Goods
Bank becomes owner.
⬇
During Shipment
Bank usually owns and controls goods through B/L.
⬇
After Murābahah Sale
Customer becomes owner.
⬇
After B/L Endorsed
Customer collects car.
Islamic Finance Perspective
This distinction is crucial because:
- Islamic banks cannot merely:
- lend money with profit.
✅ bank must genuinely:
- purchase goods;
- own goods;
- bear ownership risk;
- then resell goods.
❌ transaction may resemble ribā-based financing.
Important Principle
LC
➡️ payment guarantee.
B/L
➡️ control and constructive possession.
Ownership
➡️ determined by actual sale contract and transfer of ownership rights.