​Islamic Contract – Bay’ al-Istisnā‘: Definition and Nature of Manufacturing Sale
Q1: What is Bay’ al-Istisnā‘?
Answer:
The word istisnā‘ is derived from the Arabic verb istaṣna‘a, which means:
“to request the manufacture of an asset.”
Technically, Bay’ al-Istisnā‘ (hereinafter, istisnā‘) refers to:
a contractual agreement with a manufacturer to produce or construct an asset with specified descriptions at a pre-determined price to be delivered on an agreed future date.
In an istisnā‘ contract:

• one party requests the manufacture or construction of an asset;
• the manufacturer agrees to produce it according to agreed specifications; and
• delivery takes place in the future.

Q2: What are the main characteristics of an istisnā‘ contract?
Answer:
The main characteristics of istisnā‘ are as follows:
Manufacturing or Construction Basis
The contract involves:

• manufacturing;
• construction; or
• production of an asset.

Specified Asset
The asset must be clearly specified, including:

• quantity;
• quality;
• design;
• measurements; and
• other relevant specifications.

Future Delivery
The manufactured asset is delivered at a future agreed date.
Pre-Determined Price
The contract price must be agreed upon at the beginning of the contract.
Flexibility of Payment
Payment may be:

• made upfront;
• deferred; or
• paid progressively according to stages of completion.

Q3: What types of assets are commonly subject to istisnā‘?
Answer:
Istisnā‘ is commonly used for assets requiring manufacturing or construction, such as:

• houses;
• buildings;
• ships;
• aircraft;
• roads;
• machinery;
• furniture; and
• customised products.

It is widely used in:

• Islamic project financing;
• infrastructure development; and
• construction financing.

Case Study 1: Construction of a House
Ahmad enters into an istisnā‘ contract with a construction company to build a house.
Contract Details

• Type of asset: Double-storey house
• Contract price: RM500,000
• Construction period: 18 months
• Payment structure:
  • RM100,000 upfront;
  • RM200,000 during construction;
  • RM200,000 upon completion.

The specifications of the house are fully agreed upon, including:

• size;
• number of rooms;
• building materials; and
• design layout.

Analysis

• The house does not yet exist at the time of contract.
• The manufacturer (contractor) agrees to construct it.
• Delivery will occur in the future.
• Price and specifications are predetermined.

This is a valid istisnā‘ contract.


Case Study 2: Manufacturing of Industrial Machinery
A factory owner orders specialised machinery from a manufacturer through istisnā‘ financing.
Contract Details

• Machinery price: RM1,200,000
• Manufacturing period: 12 months
• Payment arrangement:
  • 30% upon signing;
  • 40% during production;
  • 30% upon delivery.

The contract specifies:

• machine capacity;
• technical features;
• materials used; and
• performance requirements.

Analysis

• The machinery will be manufactured according to specifications.
• Delivery occurs in the future.
• Payment is structured progressively.
• The contract satisfies the requirements of istisnā‘.

Notes: Important Features of Istisnā‘
Nature of Contract

• Manufacturing or construction contract.
• Asset may not yet exist at contract formation.

Essential Requirements

• Clear specifications.
• Agreed price.
• Agreed delivery timeline.

Payment Flexibility

• Upfront payment allowed.
• Deferred payment allowed.
• Progressive payment allowed.

Common Applications

• Construction projects.
• Infrastructure financing.
• Manufacturing industries.
• Islamic project financing.

​Islamic Contract – Bay’ al-Murābahah: Late Payment Charges in Murābahah Transactions
Q1: What are late payment charges in murābahah financing?
Answer:
Late payment charges refer to charges imposed on customers who fail to make payment within the agreed payment period in a murābahah contract.
In Islamic finance, late payment charges are carefully regulated to ensure that they:

• do not amount to ribā (interest); and
• are imposed only for legitimate Shariah purposes such as compensation or deterrence against intentional delay.

Q2: What is the AAOIFI position regarding late payment charges?
Answer:
According to AAOIFI Shariah Standard No. 8 (Para 5/6):

• the murābahah contract may include an undertaking by the customer to pay an amount of money or percentage of the debt upon late payment;
• however, the amount collected must be donated to charitable causes.

This means:

• the Islamic bank cannot treat the penalty amount as profit or income;
• the purpose is mainly to discourage deliberate default by customers.

AAOIFI adopts this approach because:

• benefiting financially from late payment resembles ribā;
• therefore, any collected penalty should not enrich the bank.

Q3: What is the BNM position regarding late payment charges?
Answer:
According to the Bank Negara Malaysia (BNM) Policy Document on Murābahah (Para 19.1):

• the murābahah contract may include a clause imposing late payment charges;
• these charges may consist of:
  • gharamah (penalty); and
  • ta‘wīd (compensation).

The amount imposed must follow the rates and guidelines determined by the relevant authorities.
Meaning of Gharamah

• Penalty imposed to deter late payment.
• Usually channelled for charitable purposes and not recognised as bank profit.

Meaning of Ta‘wīd

• Compensation for actual loss suffered by the bank due to delayed payment.
• May be recognised as income to the extent of actual losses incurred.

BNM’s approach balances:

• Shariah compliance;
• operational practicality; and
• financial discipline in Islamic banking.

Comparison Notes: AAOIFI vs BNM on Late Payment Charges
AAOIFI Position

• Late payment undertaking allowed.
• Amount collected must be donated to charity.
• Bank cannot profit from customer’s delay.
• Stronger precaution against ribā.

BNM Position

• Late payment charges expressly allowed.
• Includes:
  • gharamah (penalty); and
  • ta‘wīd (compensation).
• Charges subject to regulatory limits.
• Bank may recover actual losses through ta‘wīd.

Case Study 1: AAOIFI Approach on Late Payment
An Islamic bank provides murābahah financing for equipment.
Figures

• Murābahah selling price: RM120,000
• Monthly instalment: RM2,000
• Customer delays payment for 3 months.

The contract states:
“In the event of late payment, the customer undertakes to contribute 1% of overdue instalments for charitable purposes.”
Calculation

• Overdue amount = RM6,000
• 1% late payment amount = RM60

The RM60 collected:

• cannot be recognised as bank profit;
• must be channelled to charity.

Analysis

• Purpose is deterrence, not profit-making.
• This arrangement complies with AAOIFI standards.

Case Study 2: BNM Approach on Late Payment
An Islamic bank grants home financing through murābahah.
Figures

• Murābahah selling price: RM500,000
• Monthly instalment: RM3,000
• Customer delays payment for 4 months.
• Total overdue amount = RM12,000

The contract includes:

• ta‘wīd rate = 1% per annum;
• gharamah imposed according to BNM guidelines.

Calculation Example
Ta‘wīd (Compensation)
RM12,000 \times 1\% \times \frac{4}{12}
12000 \times 1% \times \frac{4}{12} = 40
Ta‘wīd payable = RM40
Additional gharamah may also be imposed according to regulatory guidelines.
Analysis

• Ta‘wīd compensates the bank for actual losses caused by delayed payment.
• Gharamah functions as a deterrent penalty.
• The arrangement complies with BNM requirements.

Notes: Important Principles Regarding Late Payment Charges
AAOIFI Emphasis

• Penalties allowed only as deterrence.
• Amount collected must go to charity.
• Bank cannot profit from delay.

BNM Emphasis

• Allows both:
  • ta‘wīd (compensation); and
  • gharamah (penalty).
• Charges regulated by authorities.
• Bank may recover actual losses.

Common Shariah Principle
Late payment charges in Islamic finance must:

• avoid ribā;
• prevent injustice;
• encourage payment discipline; and
• remain within Shariah-approved limits.

​Islamic Contract – Bay’ al-Murābahah: Ibrā’ (Rebate) in Murābahah Transactions
Q1: What is Ibrā’ in Islamic finance?
Answer:
Ibrā’ refers to a rebate, waiver, or remission granted by the seller or Islamic bank to the purchaser by reducing part of the outstanding payment obligation.
In murābahah financing, ibra’ commonly occurs when:

• the customer settles the financing earlier than scheduled; or
• the bank voluntarily grants a discount on the outstanding balance.

Ibrā’ is based on the concept of benevolence and goodwill in Islamic commercial transactions.


Q2: Why is Ibrā’ important in murābahah financing?
Answer:
Ibrā’ is important because murābahah financing usually involves deferred payment over a long period.
When customers:

• make early settlement; or
• complete payment before maturity,

Islamic banks may provide a rebate by deducting:

• unearned profit; or
• part of the remaining sale price.

This ensures fairness to the customer because:

• the bank receives payment earlier than expected; and
• the bank no longer bears financing risk for the remaining period.

Q3: What is the AAOIFI position regarding Ibrā’?
Answer:
According to AAOIFI Shariah Standard No. 8 (Para 5/9):

• ibra’ cannot be stipulated as part of the murābahah contract.

This means:

• the bank cannot contractually promise a rebate in advance;
• ibra’ must remain a voluntary act by the seller.

AAOIFI adopts this position because:

• making ibra’ contractually binding may resemble interest recalculation in conventional loans.

Thus, under AAOIFI:

• the rebate should be discretionary and not pre-agreed within the contract itself.

Q4: What is the BNM position regarding Ibrā’?
Answer:
According to the Bank Negara Malaysia (BNM) Policy Document on Murābahah (Para 18.2):

• ibra’ must be included as part of the contract if required by the regulator.

In Malaysia:

• Islamic financial institutions are generally required to specify ibra’ clauses in financing agreements.

This approach aims to:

• promote transparency;
• protect customers;
• standardise early settlement calculations; and
• ensure fairness in Islamic financing practices.

Comparison Notes: AAOIFI vs BNM on Ibrā’
AAOIFI Position

• Ibrā’ cannot be part of the murābahah contract.
• Rebate must remain voluntary.
• Concerned that contractual rebate resembles interest adjustment.
• Emphasises discretionary benevolence.

BNM Position

• Ibrā’ clause must be included if required by regulation.
• Rebate calculation becomes transparent and predictable.
• Protects customers in early settlement situations.
• Widely applied in Malaysian Islamic banking practice.

Case Study 1: AAOIFI Approach on Ibrā’
An Islamic bank finances machinery through murābahah.
Figures

• Cost price: RM100,000
• Profit margin: RM20,000
• Murābahah selling price: RM120,000
• Payment period: 5 years

After 2 years, the customer wishes to settle the balance early.
The bank voluntarily grants:

• RM8,000 rebate (ibrā’) on the remaining balance.

Analysis

• The rebate was not pre-promised in the contract.
• The bank granted it voluntarily.
• This complies with AAOIFI standards.

Case Study 2: BNM Approach on Ibrā’
An Islamic bank provides home financing through murābahah.
Figures

• House purchase cost: RM300,000
• Profit margin: RM90,000
• Murābahah selling price: RM390,000
• Financing tenure: 20 years

The financing contract expressly states:
“The customer shall be entitled to ibra’ for early settlement based on the bank’s rebate formula.”
After 10 years:

• outstanding balance = RM220,000
• bank grants RM25,000 ibra’
• customer pays final settlement amount = RM195,000

Analysis

• Ibrā’ was expressly included in the contract.
• Rebate calculation was transparent and predetermined.
• This complies with BNM regulatory requirements.

Notes: Important Principles Regarding Ibrā’
AAOIFI Emphasis

• Ibrā’ should remain voluntary.
• Cannot be contractually stipulated.
• Avoids resemblance to conventional interest adjustments.

BNM Emphasis

• Ibrā’ clause included for transparency.
• Regulatory protection for customers.
• Standardised industry practice.

Common Shariah Principle
Ibrā’ represents:

• fairness;
• benevolence; and
• equitable treatment in deferred payment transactions.

​Islamic Contract – Bay’ al-Murābahah: Meaning of “Absorbing the Takaful Cost”
Q1: What does “absorbing the takaful cost” mean in murābahah?
Answer:
“Absorbing the takaful cost” means bearing or paying the takaful contribution associated with the asset.
In the context of murābahah:

• the takaful cost may either be borne by the seller (Islamic bank); or
• paid directly by the purchaser (customer), depending on the contractual arrangement.

When BNM states that:
“the purchaser may absorb the takaful cost before entering into the murābahah contract,”
it means:

• the customer agrees to pay the takaful contribution separately before the murābahah sale contract is executed.

Example 1: Seller Absorbs the Takaful Cost (AAOIFI Approach)
An Islamic bank purchases machinery for murābahah financing.
Figures

• Cost of machinery: RM200,000
• Takaful contribution paid by bank: RM5,000
• Total acquisition cost: RM205,000
• Profit margin: RM20,000
• Murābahah selling price: RM225,000

Explanation
Here:

• the bank initially bears (“absorbs”) the takaful cost of RM5,000;
• the bank includes it as part of the acquisition cost.

Thus:
RM200,000 + RM5,000 = RM205,000 acquisition cost
The customer then pays:
RM225,000 = RM205,000 cost + RM20,000 profit
Key Point
The takaful cost becomes part of the murābahah selling price because the bank paid it first.


Example 2: Purchaser Absorbs the Takaful Cost (BNM Approach)
A customer applies for Islamic vehicle financing.
Figures

• Vehicle price: RM100,000
• Takaful contribution: RM3,000
• Bank’s profit margin: RM15,000
• Murābahah selling price: RM115,000

Arrangement
Before the murābahah contract:

• the customer separately agrees to pay the RM3,000 takaful contribution directly.

Therefore:

• the bank’s acquisition cost remains RM100,000;
• the murābahah selling price becomes RM115,000 only.

The customer separately pays:

• RM3,000 takaful contribution; and
• RM115,000 murābahah price.

Total customer payment

• Murābahah price = RM115,000
• Separate takaful payment = RM3,000
• Total overall payment = RM118,000

Key Point
The purchaser “absorbs” the takaful cost because:

• the customer personally bears and pays the takaful expense instead of the bank including it in the murābahah cost.

Simple Difference Between the Two Approaches
Seller Absorbs Takaful Cost

• Bank pays takaful first.
• Takaful included in murābahah cost.
• Customer indirectly pays through instalments.

Purchaser Absorbs Takaful Cost

• Customer pays takaful separately.
• Takaful excluded from murābahah cost.
• Murābahah selling price becomes lower.

Islamic Contract – Bay’ al-Murābahah: Takaful Coverage for Asset Under Seller’s Possession


Q1: What is the purpose of takaful coverage in a murābahah transaction?


Answer:
In a murābahah transaction, the seller or Islamic bank may obtain takaful coverage for the asset while it remains under the seller’s ownership and possession before being sold to the purchaser.


The purpose of takaful is to:

• protect the asset against damage or loss;

• manage ownership risks borne by the seller; and

• ensure proper risk management in accordance with Shariah principles.

This reflects the Shariah principle:


“Risk accompanies ownership.”


Since the seller owns the asset before resale, the seller bears the associated risks during that ownership period.




Q2: What is the AAOIFI position regarding takaful cost?


Answer:
According to AAOIFI Shariah Standard No. 8 (Paras 3/2/6–3/2/7):

• the seller is obligated to bear the takaful cost while the asset remains under the seller’s possession; and

• the seller may include the takaful expense as part of the acquisition cost of the asset.

This means the seller initially bears the takaful responsibility because the seller still owns the asset before transferring ownership to the purchaser.


⸻


Q3: What is the BNM position regarding takaful cost?


Answer:
According to the Bank Negara Malaysia (BNM) Policy Document on Murābahah (Para 17.5):

• the purchaser may absorb the takaful cost before entering into the murābahah contract.

This allows:

• greater operational flexibility; and

• cost-sharing arrangements agreed upon between the parties before the sale contract is concluded.

However, the arrangement must be:

• clearly agreed upon; and

• properly documented.

Comparison Notes: AAOIFI vs BNM on Takaful Cost


AAOIFI Position

• Seller bears takaful cost during ownership period.

• Takaful cost may be included in acquisition cost.

• Emphasises ownership-risk principle.

• Seller remains responsible until ownership transfer.

BNM Position

• Purchaser may absorb takaful cost before murābahah contract.

• Allows more operational flexibility.

• Requires proper contractual documentation.

• Commonly applied in Islamic banking practice.

Case Study 1: AAOIFI Approach with Figures


An Islamic bank purchases industrial machinery for a customer under a murābahah arrangement.


Transaction Details

• Purchase price of machinery: RM200,000

• Takaful contribution paid by the bank: RM5,000

• Total acquisition cost borne by the bank: RM205,000

• Bank’s profit margin: RM25,000

• Final murābahah selling price: RM230,000

The bank obtains takaful coverage while the machinery remains under its ownership before reselling it to the customer.


Analysis

• The bank bore the takaful cost because it owned the machinery.

• The takaful contribution was included as part of the acquisition cost.

• The customer was informed that:

• original cost = RM205,000; and

• profit = RM25,000.

• This arrangement complies with AAOIFI standards.

Case Study 2: BNM Approach with Figures


A customer applies for murābahah vehicle financing from an Islamic bank.


Transaction Details

• Purchase price of vehicle: RM100,000

• Takaful contribution: RM3,000

• Customer agrees to bear takaful contribution before murābahah execution.

• Bank’s disclosed acquisition cost: RM100,000

• Bank’s profit margin: RM15,000

• Final murābahah selling price: RM115,000

Before the murābahah contract is concluded, the customer separately agrees to pay the RM3,000 takaful contribution.


Analysis

• The purchaser absorbed the takaful cost before the sale contract.

• The bank’s murābahah cost excluded the takaful amount.

• Proper documentation separated:

• takaful arrangement; and

• murābahah contract.

• This arrangement is permissible under BNM guidelines.

Notes: Important Principles Regarding Takaful in Murābahah


AAOIFI Emphasis

• Ownership risk remains with seller before sale.

• Seller responsible for takaful during ownership period.

• Takaful expense may be included in cost price.

BNM Emphasis

• Purchaser may absorb takaful cost earlier.

• Greater flexibility in banking operations.

• Proper agreement and documentation required.

Common Shariah Principle


The party bearing ownership risk should generally bear the corresponding liabilities and responsibilities associated with the asset until ownership is transferred.

​Islamic Contract – Bay’ al-Salam: Legality of Salam
Q1: What is the legal basis for the permissibility of salam?
Answer
The legality of the salam contract is established through:

• the Qur’ān;
• the Sunnah; and
• ijmā‘ (consensus of Muslim jurists).

Salam is recognised as a valid exception to the general prohibition of:
selling something that does not yet exist (bay‘ al-ma‘dūm).
This exception was permitted because of:

• commercial necessity;
• public interest; and
• the needs of farmers and producers.

Q2: What is the Qur’ānic basis for salam?
Answer
The permissibility of salam is deduced from the following verse of the Qur’ān:
“You who believe, when you contract a debt for a stated term, put it down in writing…”
(Qur’ān, 2:282)
Ibn ‘Abbās explained that:

• this verse includes salam transactions because salam creates:

a debt obligation involving future delivery of goods.
The verse also emphasises:

• proper documentation;
• specified terms;
• contractual certainty.

These are important elements in salam contracts.


Q3: What evidence from the Sunnah supports salam?
Answer
Ibn ‘Abbās reported that:
when the Prophet Muhammad (SAW) migrated to Madinah,
people were engaging in salam transactions involving fruits for:

• one year;
• two years;
• or three years.

The Prophet (SAW) then said:
“Whoever pays money in advance for something should pay it for a specified measure or specified weight for delivery on a specified date.”
(al-Bukhāri, hadith no. 2240)
This hadith establishes several important conditions of salam:

• full advance payment;
• specified quantity;
• specified quality;
• specified delivery date.

Q4: Why was salam permitted although it involves future goods?
Answer
Normally, Islamic law prohibits:
selling non-existent goods (bay‘ al-ma‘dūm)
because it may lead to:

• uncertainty (gharar);
• disputes;
• injustice.

However, salam was exceptionally permitted because:

• farmers and producers required advance financing;
• they needed working capital before harvest or production.

Salam therefore:

• supports economic activity;
• assists agricultural communities;
• provides Shariah-compliant financing.

Q5: What is the role of ijmā‘ in salam?
Answer
Muslim jurists unanimously accepted:
the permissibility of salam.
This scholarly consensus (ijmā‘) developed because:

• salam was widely practised;
• the Prophet (SAW) approved it;
• society had genuine commercial need for it.

Thus:

• all major schools of Islamic jurisprudence recognise salam as permissible.

Case Study 1: Farmer Salam Financing
A rice farmer requires money before planting season.
A trader enters into salam contract with the farmer.
Contract Details

• Commodity: 20,000 kg of rice
• Salam price: RM100,000
• Payment: fully paid immediately
• Delivery date: 1 December 2028

The farmer uses the money for:

• seeds;
• fertiliser;
• labour costs.

Analysis

• Full payment made upfront.
• Delivery deferred.
• Commodity clearly specified.

This arrangement:

• helps farmer obtain capital;
• complies with salam requirements.

Result
✅ Valid salam contract.


Case Study 2: Palm Oil Producer Financing
An Islamic bank finances a palm oil producer using salam.
Contract Details

• Commodity: 200 tonnes crude palm oil
• Salam price: RM800,000
• Delivery period: 8 months

The bank:

• pays full price immediately.

The producer:

• delivers palm oil after production.

Analysis
The salam contract:

• provides immediate liquidity to producer;
• secures future commodity supply for bank.

Result
✅ Permissible salam arrangement.


Important Principle
Salam is permitted because:

• it fulfils genuine commercial needs;
• it assists producers and farmers;
• it facilitates economic activity.

However:

• strict conditions apply to minimise:
  • uncertainty (gharar);
  • disputes;
  • exploitation.

These conditions include:

• full upfront payment;
• specified quantity;
• specified quality;
• specified delivery date.

Overview of Classification of Contract in Islamic Commercial Law


Contract
Contracts in Islamic commercial law are generally divided into:

1. Bilateral Contracts
2. Unilateral Contracts

Bilateral Contracts
Definition
A bilateral contract is an agreement where both parties have mutual obligations and responsibilities.


Work or Services Contracts
Definition
Contracts involving performance of work or provision of services for compensation.


Commission-based contract
Islamic Contract
Juʿālah (الجعالة)
Definition
A contract where a person receives commission or reward for completing a specific task or service.
Mechanism of Action

1. Client offers reward for completing task.
2. Service provider performs work.
3. Reward/commission paid upon successful completion.

Example
Brokerage or reward-based services.


Agency-based contract
Islamic Contract
Wakālah (الوكالة)
Definition
A contract where one party acts on behalf of another party.
Mechanism of Action

1. Principal appoints agent.
2. Agent performs authorized tasks.
3. Agent may receive agreed fee.

Example
Investment agency services.


Safe Custody Contracts
Definition
Contracts involving safekeeping and protection of assets.


Transfer of debt
Islamic Contract
Ḥiwālah (الحوالة)
Definition
Transfer of debt obligation from one party to another.
Mechanism of Action

1. Original debtor transfers liability.
2. New debtor accepts responsibility.
3. Creditor claims payment from new debtor.

Example
Remittance transactions.


Security Contracts
Definition
Contracts that provide assurance or security against default.


Guarantee
Islamic Contract
Kafālah (الكفالة)
Definition
A contract where a guarantor guarantees another person’s obligation.
Mechanism of Action

1. Guarantor undertakes responsibility.
2. Debtor fulfills obligation.
3. Guarantor compensates if default occurs.

Example
Bank guarantees.


Pledge
Islamic Contract
Rahn (الرهن)
Definition
A contract where an asset is pledged as collateral for debt.
Mechanism of Action

1. Borrower pledges asset.
2. Creditor holds collateral.
3. Asset may be sold upon default.

Example
Islamic pawn broking.


Partnership Contracts
Definition
Contracts involving cooperation between parties to conduct business and share profit or loss.


Partnership by reputation
Islamic Contract
Shirkat al-Wujūh (شركة الوجوه)
Definition
A partnership based on reputation or creditworthiness without capital contribution.
Mechanism of Action

1. Partners obtain goods using reputation.
2. Goods sold in market.
3. Profit shared according to agreement.

Example
Trading partnership based on reputation.


Partnership by work and services
Islamic Contract
Shirkat al-Abdān (شركة الأبدان)
Definition
A partnership where partners contribute labor, expertise, or services instead of capital.
Mechanism of Action

1. Partners jointly provide services.
2. Income generated from work.
3. Profit shared according to agreement.

Example
Professional consultancy partnership.


Partnership by capital
Islamic Contract
Shirkat al-Amwāl (شركة الأموال)
Definition
A partnership where all partners contribute capital.
Mechanism of Action

1. Partners invest capital.
2. Business conducted jointly.
3. Profit shared according to agreement.
4. Loss shared according to capital contribution.

Example
Business joint venture.


Partnership by combining capital and work
Islamic Contract
Muḍārabah (المضاربة)
Definition
A partnership where one party contributes capital and another contributes expertise or management.
Mechanism of Action

1. Investor provides funds.
2. Entrepreneur manages business.
3. Profit shared according to agreed ratio.
4. Financial loss borne by investor unless negligence occurs.

Example
Investment financing.


Leasing Contracts
Definition
Contracts transferring right to use an asset for rental payment.


Financial lease
Islamic Contract
Ijārah Muntahiyah bi al-Tamlīk (الإجارة المنتهية بالتمليك)
Definition
A lease where ownership may transfer to lessee at end of contract.
Mechanism of Action

1. Lessor purchases asset.
2. Asset leased to customer.
3. Customer pays rental installments.
4. Ownership transferred at maturity if agreed.

Example
Islamic home financing.


Operating lease
Islamic Contract
Ijārah (الإجارة)
Definition
A lease where ownership remains with lessor permanently.
Mechanism of Action

1. Asset leased temporarily.
2. Customer uses asset.
3. Asset returned after lease period.

Example
Vehicle rental.


Sale Contracts
Definition
Contracts involving transfer of ownership for consideration.


Subject Matter of Sale
Currency
Islamic Contract
Bayʿ al-Ṣarf (بيع الصرف)
Definition
A contract involving exchange of currencies or monetary values.
Mechanism of Action

1. Two currencies exchanged.
2. Exchange rate agreed upon.
3. Immediate possession required.

Example
Foreign exchange transactions.


Rights or intangible properties
Islamic Contract
Ḥaqq Mālī (حق مالي)
Definition
Transfer or sale involving intangible rights or non-physical properties.
Mechanism of Action

1. Rights legally recognized.
2. Rights transferred contractually.

Example
Intellectual property rights.


Receivable
Islamic Contract
Bayʿ al-Dayn (بيع الدين)
Definition
A contract involving transfer or sale of receivables/debt.
Mechanism of Action

1. Creditor owns receivable.
2. Receivable transferred or settled.

Example
Trade receivable financing.


Tangible asset
Islamic Contract
Bayʿ (البيع)
Definition
A sale involving physical assets with material existence.
Mechanism of Action

1. Asset ownership transferred.
2. Buyer pays agreed price.

Example
Property or machinery sale.


Cost or Profit Classification
Discounted-based sale
Islamic Contract
Waḍīʿah (الوضيعة)
Definition
A sale where seller offers asset below original purchase price.
Mechanism of Action

1. Seller discloses lower sale price.
2. Buyer purchases at discounted value.

Example
Discount or clearance sale.


Cost-based sale
Islamic Contract
Tawliyah (التولية)
Definition
A sale where seller transfers asset at original cost without profit.
Mechanism of Action

1. Seller discloses actual cost.
2. Asset sold at same purchase price.

Example
Friendly transfer sale.


Negotiated sale
Islamic Contract
Musāwamah (المساومة)
Definition
A sale where price is negotiated without disclosure of original cost.
Mechanism of Action

1. Buyer and seller negotiate freely.
2. Agreed price finalized.
3. Ownership transferred.

Example
Ordinary market trading.


Cost plus profit
Islamic Contract
Murābaḥah (المرابحة)
Definition
A sale where seller discloses cost and adds known profit margin.
Mechanism of Action

1. Seller purchases asset.
2. Cost and profit disclosed.
3. Buyer pays agreed price.

Example
Islamic financing facility.


Time of Payment Classification
Future payment sale
Islamic Contract
Bayʿ Muʾajjal (بيع مؤجل)
Definition
A sale where payment is deferred to a future date.
Mechanism of Action

1. Asset delivered immediately.
2. Payment made later according to agreement.

Example
Installment financing.


Spot payment sale
Islamic Contract
Bayʿ Naqdan (بيع نقداً)
Definition
A sale where payment is made immediately.
Mechanism of Action

1. Buyer pays instantly.
2. Seller transfers asset immediately.

Example
Cash purchase.


Time of Delivery of Object
Future delivery sale
Islamic Contract
Bayʿ al-Salam (بيع السلم)
Definition
A sale where delivery occurs at a future date while payment is made upfront.
Mechanism of Action

1. Buyer pays in advance.
2. Seller delivers goods later.

Example
Agricultural financing.


Spot delivery sale
Islamic Contract
Bayʿ Ḥāl (بيع حال)
Definition
A sale where delivery occurs immediately after agreement.
Mechanism of Action

1. Contract finalized.
2. Goods transferred immediately.

Example
Retail purchase transaction.


Loan Contracts
Islamic Contract
Qard (القرض)
Definition
A contract involving temporary transfer of money with obligation to repay equivalent amount without interest.
Mechanism of Action

1. Lender provides money.
2. Borrower uses funds temporarily.
3. Borrower repays equivalent amount only.

Example
Qard Hasan financing.


Unilateral Contracts
Definition
Contracts formed through declaration or commitment by one party only.


Will
Islamic Contract
Waṣiyyah (الوصية)
Definition
A declaration regarding distribution of property after death.
Mechanism of Action

1. Person specifies beneficiaries.
2. Will becomes effective after death.
3. Assets distributed accordingly.

Example
Islamic estate planning.


Waiver
Islamic Contract
Ibrāʾ (الإبراء)
Definition
Voluntary release or forgiveness of obligation or right.
Mechanism of Action

1. Creditor waives obligation.
2. Debtor’s liability reduced or removed.

Example
Debt rebate.


Donation
Islamic Contract
Ṣadaqah (الصدقة)
Definition
Voluntary charitable transfer of wealth without compensation.
Mechanism of Action

1. Donor gives asset voluntarily.
2. Recipient receives ownership.

Example
Charitable donation.


Gift
Islamic Contract
Hibah (الهبة)
Definition
Voluntary transfer of ownership without consideration.
Mechanism of Action

1. Donor offers gift.
2. Recipient accepts.
3. Ownership transfers immediately.

Example
Gift from bank to depositor.

​

​Islamic Contract – Bay’ al-Istisnā‘: Legality of Istisnā‘
Q1: What is the legal basis for the permissibility of istisnā‘?
Answer:
According to Muslim jurists, the legality of the istisnā‘ contract is established through various Islamic legal sources, including:

• the Sunnah;
• ijmā‘ (consensus);
• qiyās (analogy); and
• istihsān (juristic preference).

These sources collectively support the permissibility of istisnā‘ as a valid Islamic commercial contract.


Q2: What evidence from the Sunnah supports the legality of istisnā‘?
Answer:
The legality of istisnā‘ is supported by a narration reported by Nāfi‘:
“Abdullāh ibn ‘Umar reported that Prophet Muhammad (SAW) requested that a ring be manufactured for him.”
(Ahmad, 2001, hadith no. 12360)
This hadith demonstrates that:

• the Prophet (SAW) requested the manufacture of an item according to specifications; and
• the manufactured item was to be produced in the future.

Jurists regard this narration as a clear basis for the permissibility of istisnā‘ contracts in Islam.


Q3: How does ijmā‘ support the legality of istisnā‘?
Answer:
According to Hanafi jurists, istisnā‘ is also legitimised through:
ijmā‘ (consensus of Muslim jurists).
They argue that:

• people have continuously practised istisnā‘ transactions throughout different periods of Islamic history;
• scholars did not object to this widespread commercial practice.

This continuous acceptance and practice constitute implied consensus regarding the permissibility of istisnā‘.


Q4: What is the role of qiyās and istihsān in legitimising istisnā‘?
Answer:
Qiyās (Analogy)
Jurists use analogy to compare istisnā‘ with other recognised sale contracts involving future delivery and specified assets.
Istihsān (Juristic Preference)
Hanafi jurists particularly rely on istihsān because:

• strict analogy may initially disallow selling something not yet in existence;
• however, commercial necessity and public interest justify allowing istisnā‘.

Thus, istisnā‘ is permitted to facilitate:

• manufacturing;
• construction; and
• economic activities essential for society.

Case Study 1: Manufacturing of Custom Furniture
A hotel owner contracts a furniture manufacturer to produce 200 customised chairs.
Contract Details

• Total contract price: RM80,000
• Manufacturing period: 4 months
• Specifications:
  • wood type;
  • dimensions;
  • colour;
  • design.

Analysis

• The chairs do not yet exist at the time of contract.
• The manufacturer agrees to produce them according to specifications.
• The transaction reflects the essence of istisnā‘.
• Its permissibility is supported by the Sunnah and customary commercial practice.

This is a valid istisnā‘ contract.


Case Study 2: Construction of a Commercial Building
A company appoints a contractor to construct a warehouse under an istisnā‘ arrangement.
Contract Details

• Construction price: RM2,500,000
• Completion period: 24 months
• Payment schedule:
  • RM500,000 upfront;
  • RM1,000,000 during construction;
  • RM1,000,000 upon completion.

Analysis

• The building will be constructed in the future.
• Specifications and delivery timeline are predetermined.
• Payment arrangement is flexible.
• The contract reflects established customary practice accepted by Muslim jurists.

This arrangement is permissible under Islamic law through:

• Sunnah;
• ijmā‘;
• qiyās; and
• istihsān.

Notes: Legal Basis of Istisnā‘
Sunnah

• Prophet Muhammad (SAW) requested manufactured items.
• Hadith supports permissibility of manufacturing contracts.

Ijmā‘

• Continuous practice of istisnā‘ accepted by Muslim jurists.
• No significant objection from scholars historically.

Qiyās

• Analogy with other valid commercial contracts.

Istihsān

• Juristic preference based on commercial necessity and public interest.

Important Principle
Istisnā‘ is permitted because it facilitates:

• trade;
• manufacturing;
• infrastructure development; and
• societal economic needs within Shariah principles.

​Islamic Contract – Bay’ al-Istisnā‘: Types of Istisnā‘

Q1: What are the types of istisnā‘ contracts?
​Answer:
The istisnā‘ contract is generally categorised into two types:

1. Ordinary Istisnā‘
2. Parallel Istisnā‘

Q2: What is Ordinary Istisnā‘?
Answer:
Ordinary istisnā‘ involves only two contracting parties:

• the purchaser (mustaṣni‘); and
• the manufacturer (ṣāni‘).

Under this arrangement:

• the purchaser requests the manufacturer to construct or manufacture an asset according to specified descriptions;
• the parties agree on the contract price;
• payment may be made:
  • upfront,
  • progressively, or
  • on a deferred basis; and
• delivery takes place on an agreed future date.

The manufacturer is directly responsible for producing the asset requested by the purchaser.

Case Study 1: Ordinary Istisnā‘
A restaurant owner orders customised kitchen equipment from a manufacturer.
Contract Details

• Asset: Industrial kitchen equipment
• Contract price: RM150,000
• Manufacturing period: 6 months
• Payment arrangement:
  • RM50,000 upfront;
  • RM50,000 during production;
  • RM50,000 upon delivery.

The purchaser directly contracts with the manufacturer to produce the equipment according to agreed specifications.
Analysis

• Only two parties are involved:
  • purchaser (mustaṣni‘);
  • manufacturer (ṣāni‘).
• The manufacturer directly produces the asset.
• Delivery occurs in the future.

This is an example of ordinary istisnā‘.

Q3: What is Parallel Istisnā‘?
Answer:
Parallel istisnā‘ involves:

• three contracting parties; and
• two separate istisnā‘ contracts.

First ContractBetween:

• the ultimate purchaser (mustaṣni‘); and
• the seller (ṣāni‘).

Under this contract:

• the seller agrees to deliver a specifically described asset to the ultimate purchaser.

Second Contract (Parallel Istisnā‘)Between:

• the seller (who now becomes the mustaṣni‘); and
• the actual manufacturer (ṣāni‘).

In this second contract:

• the seller appoints another party to manufacture or construct the asset.

Importantly:

• the two contracts must remain separate;
• one contract must not be legally contingent upon the other.

This separation ensures Shariah compliance and avoids combining contractual obligations improperly.

Case Study 2: Parallel Istisnā‘
An Islamic bank provides financing for the construction of a factory.
First Istisnā‘ ContractBetween:

• Customer (ultimate purchaser); and
• Islamic bank.

Contract Details

• Factory construction price: RM5,000,000
• Delivery period: 24 months

The Islamic bank agrees to deliver the completed factory to the customer.

Second Istisnā‘ Contract (Parallel Istisnā‘)Between:

• Islamic bank; and
• construction company.

Contract Details

• Construction cost payable by bank to contractor: RM4,200,000
• Construction period: 24 months

The construction company undertakes the actual construction work.

Analysis

• Two separate contracts exist.
• The customer has no contractual relationship with the contractor.
• The Islamic bank acts as intermediary.
• The bank profits from the difference between:
  • selling price to customer = RM5,000,000;
  • construction cost = RM4,200,000.

Profit Calculation[
RM5,000,000 - RM4,200,000 = RM800,000

The bank’s profit from the parallel istisnā‘ arrangement is RM800,000.

Notes: Differences Between Ordinary Istisnā‘ and Parallel Istisnā‘Ordinary Istisnā‘

• Involves only two parties.
• Purchaser directly contracts with manufacturer.
• Single istisnā‘ contract.
• Manufacturer personally produces the asset.

Parallel Istisnā‘

• Involves three parties.
• Consists of two separate istisnā‘ contracts.
• Seller may subcontract manufacturing to another party.
• Commonly used in Islamic banking and project financing.
• Contracts must remain legally independent.

Important Shariah Principle in parallel istisnā‘:

• each contract must stand independently;
• performance of one contract cannot be made legally conditional upon the other;
• this preserves contractual certainty and Shariah compliance.