Published on

May 8, 2026

Islamic Contract – Difference Between Bay’ al-Salam and Bay’ al-Istisnā‘

Islamic Contract – Difference Between Bay’ al-Salam and Bay’ al-Istisnā‘
Q1: What is the main difference between salam and istisnā‘?
Answer
Although both contracts involve:

• future delivery of goods,

they differ in several important aspects such as:

• nature of asset;
• payment method;
• purpose of contract;
• type of goods involved.

1. Nature of Subject Matter
Salam
Salam involves:
fungible and standardised commodities.
Examples:

• rice;
• wheat;
• sugar;
• palm oil.

The goods:

• are usually generic;
• measurable by weight or quantity.

Istisnā‘
Istisnā‘ involves:
manufactured or constructed assets.
Examples:

• houses;
• aircraft;
• ships;
• machinery.

The assets:

• are produced or constructed according to specifications.

Example
Salam
Purchase of:

• 10 tonnes of wheat for future delivery.

Istisnā‘
Construction of:

• customised factory machinery.

2. Payment Method
Salam
The purchase price:
must be fully paid upfront at the contract session.
This is a mandatory condition.


Istisnā‘
Payment is flexible.
It may be:

• upfront;
• progressive;
• deferred;
• upon completion.

Example
Salam
Buyer pays:

• RM50,000 immediately
  for future rice delivery.

Istisnā‘
Customer pays:

• progressively during house construction.

3. Existence of Asset
Salam
Goods:

• usually exist naturally in future,
  such as:
• future crops or commodities.

Istisnā‘
Asset:

• must be manufactured or constructed.

Human work and production are essential.


Example
Salam
Future harvest of dates.


Istisnā‘
Manufacturing of aircraft.


4. Purpose of Contract
Salam
Mainly used to:

• finance farmers;
• support commodity producers;
• provide working capital.

Istisnā‘
Mainly used for:

• construction financing;
• manufacturing projects;
• infrastructure development.

Example
Salam
Advance financing for rice farmer.


Istisnā‘
Financing construction of highway.


5. Possibility of Contract Cancellation
Salam
Generally:

• cannot be unilaterally cancelled after conclusion because price fully prepaid.

Istisnā‘
Some jurists allow:

• greater flexibility before manufacturing starts.

6. Type of Goods
Salam
Requires:
fungible goods.
Meaning:

• interchangeable;
• standardised.

Istisnā‘
Can involve:
unique customised manufactured assets.


Example
Salam
Crude palm oil.


Istisnā‘
Custom-designed luxury yacht.


Case Study 1: Salam Contract
A farmer requires financing before harvest.
Contract Details

• Commodity: 15,000 kg rice
• Salam price: RM90,000
• Payment: fully prepaid
• Delivery: after 8 months

Analysis

• Commodity-based contract.
• Full advance payment required.

Result
✅ Salam.


Case Study 2: Istisnā‘ Contract
A company orders customised factory equipment.
Contract Details

• Equipment value: RM5,000,000
• Manufacturing period: 18 months
• Payment:
  • 30% upfront;
  • 40% during production;
  • 30% upon delivery.

Analysis

• Asset manufactured according to specifications.
• Flexible payment allowed.

Result
✅ Istisnā‘.


Simplified Comparison Between Salam and Istisnā‘
Salam
Subject Matter
Fungible commodities.
Payment
Full upfront payment compulsory.
Nature
Forward commodity sale.
Examples
Rice, wheat, sugar.
Main Purpose
Agricultural and commodity financing.


Istisnā‘
Subject Matter
Manufactured or constructed assets.
Payment
Flexible payment arrangements.
Nature
Manufacturing/construction contract.
Examples
Buildings, aircraft, machinery.
Main Purpose
Construction and project financing.


Easy Way to Remember
Salam
➡️ “Pay now, receive standard commodity later.”


Istisnā‘
➡️ “Manufacture or construct customised asset for future delivery.”

​

Published on

May 8, 2026

Classification of Sharīʿah Contracts and Principles

Islamic Contract-Classification of Sharīʿah Contracts and Principles


Exchange Contracts
Bayʿ al-Murābaḥah
Definition
A sale contract where the seller discloses the original cost of an asset and sells it to the buyer with an agreed profit margin.
Mechanism of Action

1. Customer identifies asset needed.
2. Bank/seller purchases the asset.
3. Seller discloses cost and profit margin.
4. Asset is sold to customer at deferred or lump-sum payment.

Example
Islamic home and vehicle financing.


Bayʿ al-Salam
Definition
A contract where payment is made in advance for goods delivered at a future date.
Mechanism of Action

1. Buyer pays full amount upfront.
2. Seller agrees to deliver goods later.
3. Quantity, quality, and delivery date must be specified.

Example
Agricultural financing.


Bayʿ al-ʿĪnah
Definition
A transaction where an asset is sold on deferred payment and repurchased immediately for cash at a lower price.
Mechanism of Action

1. Seller sells asset on credit.
2. Buyer resells asset for immediate cash.
3. Buyer obtains liquidity.

Example
Personal financing facility.


Bayʿ al-Dayn
Definition
A contract involving the sale or transfer of debt receivables.
Mechanism of Action

1. Creditor owns debt.
2. Debt is transferred or sold to another party.
3. New owner collects debt from debtor.

Example
Islamic capital market instruments.


Ijārah
Definition
A leasing contract where the right to use an asset is transferred for rental payment.
Mechanism of Action

1. Lessor purchases asset.
2. Asset is leased to customer.
3. Customer pays rental periodically.
4. Ownership may transfer later under separate agreement.

Example
Vehicle and equipment leasing.


Bayʿ al-Istiṣnāʿ
Definition
A contract for manufacturing or constructing an asset according to agreed specifications.
Mechanism of Action

1. Buyer places order.
2. Manufacturer produces asset.
3. Payment may be staged or deferred.
4. Completed asset delivered later.

Example
Construction and infrastructure projects.


Bayʿ al-Istijrār
Definition
A contract involving continuous supply of goods with periodic settlement.
Mechanism of Action

1. Buyer continuously receives goods.
2. Quantity accumulates over time.
3. Payment settled periodically.

Example
Retail and utility supplies.


Tawarruq
Definition
A financing arrangement using commodity trading to obtain cash liquidity.
Mechanism of Action

1. Bank purchases commodity.
2. Bank sells commodity to customer on deferred payment.
3. Customer sells commodity to third party for cash.
4. Customer obtains liquidity.

Example
Personal financing.


Bayʿ al-Ṣarf
Definition
A contract involving exchange of currencies or monetary values.
Mechanism of Action

1. Two currencies are exchanged.
2. Exchange rate agreed upon.
3. Immediate possession/delivery is required.

Example
Foreign currency exchange.


Musāwamah
Definition
A sale contract where the seller is not required to disclose the original cost price.
Mechanism of Action

1. Seller offers asset for sale.
2. Buyer and seller negotiate price freely.
3. Agreed price is finalized.
4. Ownership transfers upon completion.

Example
Ordinary market trading.


Tawliyah
Definition
A sale contract where the seller transfers an asset at the exact original purchase cost without profit.
Mechanism of Action

1. Seller discloses original cost.
2. Asset sold at same purchase price.
3. Ownership transferred to buyer.

Example
Friendly or trust-based sale.


Partnership Contracts
Mushārakah
Definition
A partnership where all partners contribute capital and share profit and loss.
Mechanism of Action

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

Example
Joint venture financing.


Muḍārabah
Definition
A partnership where one party provides capital and another provides expertise.
Mechanism of Action

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

Example
Investment funds.


Agency Contract
Wakālah
Definition
A contract where one party appoints another party as an agent to perform tasks on their behalf.
Mechanism of Action

1. Principal appoints agent.
2. Agent acts within authorized scope.
3. Agent may receive fee.
4. Transactions carried out for principal.

Example
Investment agency services.


Charity Contracts
Qard
Definition
An interest-free loan provided for welfare or assistance purposes.
Mechanism of Action

1. Lender provides money.
2. Borrower uses funds temporarily.
3. Borrower repays exact amount borrowed.

Example
Emergency financial assistance.


Wadīʿah
Definition
A contract where assets or money are entrusted to another party for safekeeping.
Mechanism of Action

1. Depositor places money/assets with custodian.
2. Custodian safeguards asset.
3. Asset returned upon request.

Example
Islamic savings accounts.


Hibah
Definition
A voluntary transfer of ownership without consideration.
Mechanism of Action

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

Example
Bank discretionary gifts to customers.


Security Contracts
Kafālah
Definition
A contract where a guarantor guarantees another party’s obligation.
Mechanism of Action

1. Guarantor assumes responsibility.
2. Debtor fulfills obligation.
3. Guarantor compensates if debtor defaults.

Example
Bank guarantee.


Rahn
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 if borrower defaults.

Example
Islamic pawn broking.


Supporting Contracts and Principles
Waʿd
Definition
A promise made by one party to undertake an action in the future.
Mechanism of Action

1. One party makes promise.
2. Promise supports financial transaction.
3. Promise may become binding.

Example
Islamic hedging arrangement.


Ḥiwālah
Definition
A contract involving transfer of debt responsibility from one party to another.
Mechanism of Action

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

Example
Remittance services.


Muqāṣṣah
Definition
A settlement mechanism through offsetting mutual debts.
Mechanism of Action

1. Two parties owe each other.
2. Debts are offset.
3. Only remaining balance is payable.

Example
Interbank settlements.


Ibrāʾ
Definition
A voluntary waiver or reduction of debt by the creditor.
Mechanism of Action

1. Creditor forgives part/all of debt.
2. Debtor’s obligation is reduced.
3. Liability ends partially or fully.

Example
Early settlement rebate in financing.

​

Published on

May 8, 2026

Islamic Contract – Bay’ al-Salam: Meaning of Fungible Goods

Islamic Contract – Bay’ al-Salam: Meaning of Fungible Goods
Q1: What are fungible goods?
Answer
Fungible goods are:
goods that are interchangeable with other goods of the same type, quality, and quantity.
This means:

• one unit can replace another identical unit without significant difference in value.

In other words:
the exact individual item is not important,
as long as the replacement has:

• the same specifications;
• same quality;
• same quantity.

Simple Explanation
If you borrow:

• 1 kilogram of rice,

you do not need to return:

• the exact same grains of rice.

You only need to return:

• rice of equivalent type and quality.

That is why rice is:
✅ fungible.


Q2: Why are fungible goods important in salam contracts?
Answer
In salam:

• the goods do not yet exist at the time of contract.

Therefore:

• the goods must be standardised and easily describable.

Fungible goods are suitable because:

• they can be precisely specified by:
  • weight;
  • quantity;
  • grade;
  • quality.

This reduces:

• uncertainty (gharar);
• disputes upon delivery.

Examples of Fungible Goods
Agricultural Commodities

• rice;
• wheat;
• sugar;
• dates;
• palm oil.

Raw Materials

• cement;
• steel bars;
• flour;
• crude oil.

Standardised Goods

• identical bottled water;
• standard fuel;
• generic manufactured items.

Example 1: Fungible Goods in Salam
A buyer enters salam contract for:

• 5,000 kg of Grade A rice.

Analysis
Rice is:

• measurable;
• standardised;
• interchangeable.

The farmer can deliver:

• any rice meeting agreed specifications.

Result
✅ Suitable fungible good for salam.


Example 2: Crude Palm Oil
An Islamic bank purchases:

• 100 tonnes of crude palm oil through salam.

Analysis
Palm oil is:

• standardised by industrial grading;
• measurable by quantity and quality.

Result
✅ Fungible good.


Q3: What are non-fungible goods?
Answer
Non-fungible goods are:
unique items that cannot easily be replaced by identical equivalents.
Each item has:

• distinct characteristics;
• unique value.

Examples of Non-Fungible Goods

• specific artwork;
• antique furniture;
• unique houses;
• rare collectibles;
• customised handmade products.

Example 3: Non-Fungible Asset
A buyer wants:

• a specific painting by a famous artist.

Analysis
The exact painting matters.
Another painting:

• cannot replace it.

Result
❌ Non-fungible good.


Q4: Why are non-fungible goods generally unsuitable for salam?
Answer
Salam requires:

• precise standardisation;
• certainty of specifications.

Unique assets create:

• uncertainty;
• disputes over equivalence and quality.

Therefore:

• salam generally applies to fungible commodities,
  not:
• unique individual assets.

Comparison Between Fungible and Non-Fungible Goods
Fungible Goods
Characteristics

• Interchangeable.
• Standardised.
• Measurable.

Examples

• rice;
• wheat;
• sugar;
• fuel.

Suitable for Salam?
✅ Yes


Non-Fungible Goods
Characteristics

• Unique.
• Individually distinguishable.
• Not interchangeable.

Examples

• artwork;
• antique car;
• unique property.

Suitable for Salam?
❌ Generally no


Important Principle
Salam contracts require:

• certainty;
• standardisation;
• precise specification.

Therefore:
fungible goods are ideal because they minimise uncertainty and contractual disputes.

​

Published on

May 8, 2026

Islamic Contract – Bay’ al-Salam: Definition and Nature of Forward Sale

​Islamic Contract – Bay’ al-Salam: Definition and Nature of Forward Sale
Q1: What is Bay’ al-Salam?
Answer
Literally, the word salam means:
“giving in advance.”
Technically, Bay’ al-Salam (hereinafter, salam) refers to:
a sale contract in which the purchaser pays the full purchase price in advance for specific commodities to be delivered in the future.
Thus, salam is:

• a forward sale contract;
• where payment is immediate;
• while delivery of goods is deferred.

Q2: What are the main characteristics of a salam contract?
Answer
The main characteristics of salam are:
1. Full Advance Payment
The purchase price must be:

• fully paid at the contract session.

2. Future Delivery
The commodities are delivered:

• at a future agreed date.

3. Specific Commodities
The goods must be:

• clearly specified;
• measurable;
• standardised.

4. Commodity-Based Contract
Salam usually applies to:

• fungible goods;
• commodities;
• agricultural products.

Q3: Why is salam permitted although the goods do not yet exist?
Answer
Normally, Islamic law prohibits:
selling something that does not yet exist or is not possessed.
However, salam is permitted as:
an exception based on necessity (ḥājah) and public interest.
Historically:

• farmers and traders needed advance financing before harvest or production.

Salam allows:

• producers to obtain immediate capital;
• purchasers to secure future supply of goods.

Q4: What types of commodities are commonly used in salam?
Answer
Salam commonly involves:

• wheat;
• rice;
• dates;
• palm oil;
• sugar;
• agricultural produce;
• standardised commodities.

The goods must be:

• precisely describable;
• measurable by quantity, weight, or volume.

Case Study 1: Agricultural Salam Contract
A farmer requires financing before harvesting rice crops.
A buyer enters into salam contract with the farmer.
Contract Details

• Commodity: 10,000 kg of rice
• Salam price: RM50,000
• Delivery date: 1 December 2027

The buyer:

• pays RM50,000 immediately.

The farmer:

• delivers the rice at the agreed future date.

Analysis

• Full payment made upfront.
• Commodity delivered later.
• Commodity clearly specified.

Result
✅ Valid salam contract.


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

• Commodity: 100 metric tonnes of crude palm oil
• Purchase price: RM400,000
• Delivery period: 6 months

The bank:

• pays RM400,000 immediately.

The producer:

• supplies palm oil after 6 months.

Analysis
The producer benefits because:

• immediate financing obtained.

The bank benefits because:

• future commodity supply secured.

Result
✅ Permissible salam arrangement.


Q5: What is the main difference between salam and istisnā‘?
Answer
Although both involve:

• future delivery of goods,

they differ significantly.


Difference Between Salam and Istisnā‘
Salam
Payment
Full price paid upfront.
Subject Matter
Usually commodities or fungible goods.
Delivery
Deferred.
Example
Rice, wheat, palm oil.


Istisnā‘
Payment
Flexible:

• upfront;
• progressive;
• deferred.

Subject Matter
Manufactured or constructed assets.
Delivery
Deferred.
Example
Buildings, ships, aircraft.


Example Comparing Salam and Istisnā‘
Salam Example
A buyer pays:

• RM100,000 now
  for:
• 50 tonnes of wheat
  to be delivered after harvest.

Istisnā‘ Example
A company commissions:

• construction of factory machinery
  worth:
• RM5,000,000,
  with payment made progressively during manufacturing.

Important Principle
Salam is permitted because:

• it facilitates financing for producers and farmers;
• it fulfils commercial needs;
• it promotes economic activity.

However:

• strict conditions apply to minimise uncertainty (gharar) and disputes.

Published on

May 8, 2026

Islamic Contract – Bay’ al-Istisnā‘: When Does the Customer Make Payment?

Islamic Contract – Bay’ al-Istisnā‘: When Does the Customer Make Payment?
Q1: When does the customer pay in an istisnā‘ contract?
Answer
In an istisnā‘ contract, payment is very flexible.
The customer may pay:

1. fully in advance;
2. progressively during construction;
3. upon completion and delivery; or
4. on a deferred instalment basis.

Unlike salam contracts:

• full upfront payment is NOT required in istisnā‘.

This flexibility is one of the reasons why istisnā‘ is widely used in:

• construction financing;
• infrastructure projects;
• Islamic banking.

Q2: What are the common payment methods in istisnā‘?
1. Upfront Payment
The purchaser pays the entire price at the beginning of the contract.


Example
A customer orders customised furniture.
Contract Price
RM100,000
Payment

• RM100,000 paid immediately upon signing.

Delivery
Furniture delivered after 6 months.


2. Progressive Payment (Most Common)
The purchaser pays according to stages of completion.
This is commonly used in:

• housing construction;
• infrastructure projects;
• manufacturing industries.

Example
Construction of a house.
Contract Price
RM500,000
Payment Structure

• RM100,000 upon signing;
• RM200,000 when structure completed;
• RM200,000 upon final delivery.

Analysis
Payments follow construction progress.


3. Payment Upon Completion
The purchaser only pays after the asset is completed and delivered.


Example
A factory orders machinery.
Contract Price
RM2,000,000
Payment
Full payment made:

• after machinery delivered.

4. Deferred Instalment Payment
The purchaser pays over time after delivery.
This structure is commonly used in:

• Islamic banking financing.

Example
An Islamic bank constructs a house through istisnā‘.
Construction Cost
RM400,000
The bank delivers completed house to customer.
The customer pays:

• RM2,500 monthly instalments for 20 years.

Analysis

• House constructed first.
• Customer repays gradually after delivery.

Q3: In parallel istisnā‘, who pays whom and when?
Answer
Parallel istisnā‘ involves:

• two separate contracts.

Thus:

• payment flows separately.

Example of Parallel Istisnā‘ Payment Flow
First Contract
Customer ↔ Islamic Bank
The customer agrees to buy:

• factory building.

Selling Price
RM15,000,000
Customer Payment

• progressive instalments over 10 years.

Second Contract
Islamic Bank ↔ Contractor
The bank appoints contractor to build factory.
Construction Cost
RM12,000,000
Bank Payment to Contractor

• according to construction milestones.

Important Point
The two payment obligations are:

• separate;
• independent.

The customer:

• pays bank.

The bank:

• separately pays contractor.

Q4: Can payment timing be revised later?
Answer
Yes, payment schedules may be revised by mutual agreement.
However:

• price cannot be increased merely because payment is delayed.

Otherwise:

• it may resemble ribā.

Simplified Summary
Istisnā‘ Payment Flexibility
Permissible Payment Timing
✅ Upfront
✅ Progressive
✅ Upon completion
✅ Deferred instalments


Most Common Practice in Islamic Finance
Construction Projects
➡️ Progressive payment
Islamic Home Financing
➡️ Deferred instalments after delivery
Manufacturing Projects
➡️ Milestone-based payments


Important Principle
Istisnā‘ is designed to facilitate:

• long-term construction;
• manufacturing;
• infrastructure financing.

Therefore:
Shariah allows flexible payment arrangements to suit commercial needs.

​

Published on

May 8, 2026

Islamic Contract – Bay’ al-Istisnā‘: Application of Istisnā‘ in Islamic Finance

​Islamic Contract – Bay’ al-Istisnā‘: Application of Istisnā‘ in Islamic Finance
Q1: How is istisnā‘ applied in contemporary Islamic finance?
Answer
In contemporary Islamic finance, istisnā‘ is widely used in:

• Islamic banking;
• project financing;
• industrial manufacturing; and
• ṣukūk structuring.

Istisnā‘ is especially suitable for:
assets that need to be manufactured, constructed, or developed according to specific requirements.
This is because the contract allows:

• future construction/manufacturing;
• flexible payment arrangements; and
• delivery at a future date.

Q2: What types of projects commonly use istisnā‘ financing?
Answer
Istisnā‘ is commonly used in financing:

• housing construction;
• infrastructure development;
• industrial manufacturing;
• advanced technology industries.

Examples include manufacturing or construction of:

• aircraft;
• automobiles;
• ships;
• factory equipment;
• buildings;
• roads;
• bridges.

Q3: Why is istisnā‘ suitable for construction and manufacturing industries?
Answer
Istisnā‘ is suitable because:

• the asset does not need to exist at contract formation;
• assets can be custom-built according to specifications;
• payment can be:
  • progressive;
  • deferred;
  • or upfront.

This flexibility makes istisnā‘ highly practical for:

• long-term projects;
• engineering industries;
• infrastructure financing.

Case Study 1: Housing Construction Financing
An Islamic bank finances the construction of residential houses through istisnā‘.
Contract Details

• Construction of 50 houses
• Total project value = RM25,000,000
• Construction period = 3 years

Structure
First Istisnā‘ Contract
Between:

• home developer;
• Islamic bank.

The bank agrees to deliver completed houses.


Second Istisnā‘ Contract (Parallel Istisnā‘)
Between:

• Islamic bank;
• construction company.

The contractor constructs the houses.
Construction Cost
RM22,000,000


Bank’s Profit Calculation
25{,}000{,}000 - 22{,}000{,}000 = 3{,}000{,}000
25{,}000{,}000 - 22{,}000{,}000 = 3{,}000{,}000
Analysis

• Houses are constructed according to specifications.
• Parallel istisnā‘ structure used.
• Common application in Islamic banking.

Case Study 2: Aircraft Manufacturing Financing
An airline company requires customised aircraft.
Contract Details

• Aircraft manufacturing price = RM500,000,000
• Delivery period = 5 years

The Islamic financial institution enters into:

• istisnā‘ arrangement with airline;
• parallel istisnā‘ with aircraft manufacturer.

Analysis
Istisnā‘ is suitable because:

• aircraft require future manufacturing;
• detailed specifications necessary;
• project involves long-term production.

Q4: How is istisnā‘ applied in ṣukūk structures?
Answer
Istisnā‘ is widely used in:
ṣukūk (Islamic bonds) for infrastructure and development projects.
In ṣukūk istisnā‘:

• investors finance construction/manufacturing projects;
• returns are generated from project completion and operation.

Case Study 3: Infrastructure Ṣukūk Using Istisnā‘
A government issues ṣukūk to finance construction of a highway.
Project Value
RM2 billion
Structure

• Investors subscribe to ṣukūk.
• Funds used to construct highway through istisnā‘.
• Upon completion:
  • highway may be leased using ijārah structure.

Analysis
Istisnā‘ finances:

• construction stage.

Ijārah finances:

• operational/use stage after completion.

Q5: What is an example of green ṣukūk using istisnā‘?
Answer
The world’s first green ṣukūk issued in Malaysia by:
Tadau Energy Sdn Bhd
was structured using:

• istisnā‘; combined with
• ijārah.

The ṣukūk financed:

• environmentally sustainable solar energy projects.

How the Structure Worked
Istisnā‘ Stage

• solar facilities were constructed.

Ijārah Stage

• completed facilities were leased to generate returns.

This demonstrates how:

• istisnā‘ finances creation/construction;
• ijārah monetises operational use.

Case Study 4: Green Energy Project
A renewable energy company constructs solar power facilities.
Project Cost
RM250,000,000
Structure

1. Investors fund project via ṣukūk.
2. Solar facilities constructed through istisnā‘.
3. Completed facilities leased under ijārah.

Analysis

• Istisnā‘ used during construction.
• Ijārah used after completion to generate rental returns.

This structure supports:

• sustainable financing;
• socially responsible investment.

Important Difference Between Istisnā‘ and Ijārah in Finance
Istisnā‘
Used for:

• construction;
• manufacturing;
• creation of assets.

Example
Building:

• houses;
• aircraft;
• infrastructure.

Ijārah
Used after asset completion for:

• leasing;
• operational usage;
• generating rental income.

Example
Leasing:

• completed buildings;
• machinery;
• solar facilities.

Important Principle
Istisnā‘ plays a major role in Islamic finance because it enables:

• Shariah-compliant project financing;
• infrastructure development;
• industrial manufacturing;
• sustainable investment projects;

while ensuring:

• genuine asset creation;
• ownership transfer; and
• real economic activity.

Published on

May 8, 2026

Islamic Contract – Bay’ al-Istisnā‘: Rebate Clause in Istisnā‘ Contracts

Islamic Contract – Bay’ al-Istisnā‘: Rebate Clause in Istisnā‘ Contracts
Q1: What is a rebate in an istisnā‘ contract?
Answer
A rebate refers to:
a reduction or waiver of part of the payment obligation granted by the seller or manufacturer to the purchaser.
In istisnā‘ financing, rebates commonly arise when:

• the purchaser makes early payment (prepayment);
• settlement occurs earlier than agreed.

The rebate functions similarly to:
ibrā’ (waiver or remission)
in Islamic finance.


Q2: What is the AAOIFI position regarding rebate clauses?
Answer
According to AAOIFI Shariah Standard (Para 4/1/3):

• granting a rebate for prepayment is permissible;
• however, the rebate:

must not be stipulated at the time the contract is concluded.
This means:

• the seller may voluntarily grant a rebate later;
• but the contract should not initially guarantee the rebate.

Why Does AAOIFI Restrict Pre-Agreed Rebate Clauses?
Explanation
AAOIFI is concerned that:

• pre-agreed rebates linked to early payment
  may resemble:

interest recalculation in conventional loans.
If rebate becomes contractually guaranteed:

• the transaction may appear similar to:
  • reducing interest because debt is settled earlier.

Therefore:

• AAOIFI prefers rebates to remain:
  • voluntary;
  • discretionary;
  • not contractually binding.

Q3: What is the BNM position regarding rebate clauses?
Answer
According to the BNM Policy Document on Istisnā‘ (Para 25.3):

• a rebate clause must be incorporated into the istisnā‘ contract
  if:

required by the relevant authority or regulator.
This approach:

• promotes transparency;
• protects customers;
• standardises industry practice.

Under BNM:

• rebate formulas may be predetermined and disclosed clearly.

Comparison Notes: AAOIFI vs BNM on Rebate Clauses
AAOIFI Position

• Rebate for prepayment permissible.
• Must not be stipulated during contract formation.
• Rebate remains voluntary.

BNM Position

• Rebate clause may be mandatory if required by regulator.
• Rebate mechanism may be stated in contract.
• Promotes transparency and customer protection.

Case Study 1: AAOIFI Approach — Voluntary Rebate
A developer enters into an istisnā‘ contract to construct a warehouse.
Contract Details

• Contract price = RM5,000,000
• Payment period = 5 years

The contract does NOT mention any rebate clause.
After 3 years:

• purchaser settles remaining balance early.

The developer voluntarily grants:

• RM200,000 rebate.

Final Settlement Calculation
5{,}000{,}000 - 200{,}000 = 4{,}800{,}000
5{,}000{,}000 - 200{,}000 = 4{,}800{,}000
Analysis

• Rebate was not pre-promised.
• Granted voluntarily after prepayment.

Result
✅ Permissible under AAOIFI.


Case Study 2: BNM Approach — Rebate Clause Included in Contract
An Islamic bank finances construction of apartment units under istisnā‘.
Contract Details

• Contract price = RM20,000,000
• Financing tenure = 10 years

The contract expressly states:
“Purchaser shall be entitled to rebate upon early settlement according to the bank’s rebate formula.”
After 6 years:

• purchaser settles financing early.

The bank grants:

• RM1,500,000 rebate.

Final Settlement Calculation
20,000,000 - 1,500,000 = 18,500,000
Analysis

• Rebate clause was contractually stated.
• Rebate mechanism transparent and predetermined.

Result
✅ Permissible under BNM framework.


Q4: Why is rebate important in istisnā‘ financing?
Answer
Rebate mechanisms:

• encourage early settlement;
• promote fairness;
• prevent unjust enrichment;
• align financing obligations with actual commercial exposure.

They are especially important in:

• long-term construction financing;
• project financing;
• Islamic banking facilities.

Important Principle
In Islamic finance:

• rebate should not become a disguised form of interest recalculation.

Therefore:

• AAOIFI prefers voluntary rebate;
• BNM permits contractual rebate for regulatory transparency.

Both approaches aim to:

• preserve fairness;
• maintain Shariah compliance;
• avoid ribā-like structures.

Published on

May 8, 2026

Islamic Contract – Bay’ al-Istisnā‘: Determination and Revision of Price Based on Cost

Islamic Contract – Bay’ al-Istisnā‘: Determination and Revision of Price Based on Cost
Q1: Can the price in an istisnā‘ contract be determined using murābahah cost-plus pricing?
Answer
According to AAOIFI, an istisnā‘ contract:
cannot be structured as a murābahah sale based on cost-plus pricing.
This means:

• the manufacturer is not required to disclose:
  • actual construction cost; and
  • profit margin separately.

Unlike murābahah:

• istisnā‘ is not a fiduciary (trust-based) sale.

Instead:

• the price in istisnā‘ is based on:

mutual agreement between the contracting parties.


Why Is Istisnā‘ Different from Murābahah?
Murābahah
In murābahah:

• seller must disclose:
  • acquisition cost;
  • profit markup.

Example:

• Cost = RM100,000
• Profit = RM20,000
• Selling price = RM120,000

This is:
✅ cost-plus sale.


Istisnā‘
In istisnā‘:

• parties only agree on:
  • final contract price.

The manufacturer does NOT need to disclose:

• construction cost;
• profit margin.

This is because:

• istisnā‘ focuses on manufacturing obligation,
• not resale of existing asset.

Q2: What is the AAOIFI position regarding price determination?
Answer
According to AAOIFI Shariah Standard (Para 3/2/5):

• istisnā‘ cannot be converted into murābahah pricing structure;
• determining price strictly as:

“cost + disclosed profit”
is not the nature of istisnā‘.
AAOIFI seeks to preserve:

• the independent contractual identity of istisnā‘.

Q3: What is the BNM position regarding determination and revision of price?
Answer
According to the BNM Policy Document on Istisnā‘ (Para 16):

• the price of the istisnā‘ asset must be determined through:

mutual agreement (agreed price)
at the time of contract.
However:

• the agreed price may later be revised if:
  • construction costs increase; or
  • construction costs decrease.

This flexibility reflects:

• practical realities of long-term construction and manufacturing projects.

Q4: Why does BNM allow price revision?
Answer
Large construction and manufacturing projects may face:

• inflation;
• increase in material prices;
• labour cost changes;
• design modifications.

Therefore:

• parties may mutually agree to revise the contract price after contract formation.

However:

• price revision must relate to:
  • actual construction cost changes;
  • specification amendments.

The price cannot be revised merely because:

• payment period is extended.

Otherwise:

• it may resemble ribā-based increase for deferment.

Comparison Notes: AAOIFI vs BNM
AAOIFI Position

• Istisnā‘ cannot use murābahah cost-plus structure.
• No requirement to disclose cost and profit separately.
• Preserves distinct nature of istisnā‘.

BNM Position

• Price determined by mutual agreement.
• Price may later be revised due to construction cost changes.
• Reflects commercial practicality.

Case Study 1: Impermissible Murābahah-Style Istisnā‘ Pricing
A contractor agrees to construct a factory.
The contract states:

• Construction cost = RM8,000,000
• Profit = RM2,000,000
• Selling price = RM10,000,000

The structure explicitly treats the contract as:
“cost plus disclosed profit.”
Analysis
Under AAOIFI:

• this resembles murābahah pricing methodology;
• inconsistent with independent nature of istisnā‘.

Result
❌ Not preferred under AAOIFI approach.


Case Study 2: Valid Normal Istisnā‘ Pricing
A developer agrees to construct an apartment building.
Contract Terms

• Agreed contract price = RM15,000,000
• Delivery period = 3 years

The purchaser and developer:

• only agree on final contract price;
• no disclosure of construction cost or profit breakdown.

Analysis

• Price determined through mutual agreement.
• Contract maintains nature of istisnā‘.

Result
✅ Valid istisnā‘ pricing.


Case Study 3: Permissible Price Revision Due to Increased Construction Cost
A contractor enters into istisnā‘ contract to build a warehouse.
Original Contract

• Agreed price = RM12,000,000

During construction:

• steel prices increase significantly;
• parties mutually agree to revise price upward.

Revised Price
RM13,500,000


Price Increase Calculation
13,500,000 - 12,000,000 = 1,500,000


Analysis
Price revision is permissible because:

• actual construction costs increased;
• both parties mutually agreed.

Result
✅ Permissible under BNM.


Case Study 4: Impermissible Price Revision Due to Extension of Payment Time
A purchaser requests:

• additional 2 years to pay construction price.

The contractor increases price solely because of:

• delayed payment period.

Original Price
RM10,000,000
Revised Price
RM12,000,000
Analysis
The increase is:

• not linked to construction cost;
• only linked to payment deferment.

This resembles:

• increase due to time value of debt.

Result
❌ Impermissible because it may resemble ribā.


Important Principle
In istisnā‘:

• price is based on:
  • manufacturing obligation;
  • agreed construction value.

It is NOT:

• a trust-based cost-plus resale like murābahah.

Price revisions are only permissible when linked to:

• genuine construction-related changes,
  not:
• mere extension of payment time.

Published on

May 8, 2026

Islamic Contract – Bay’ al-Istisnā‘: Late Delivery Charge Clause in Istisnā‘ Contracts

Islamic Contract – Bay’ al-Istisnā‘: Late Delivery Charge Clause in Istisnā‘ Contracts
Q1: Why are the terms
gharamah
and
ta‘wīd
not commonly used in istisnā‘ late delivery clauses?
Answer
The terms:

• gharamah (penalty); and
• ta‘wīd (compensation)

are more commonly used in:
debt-based contracts such as murābahah financing.
This is because murābahah primarily creates:

• a debt obligation owed by the customer to the bank.

Late payment in murābahah therefore concerns:

• delayed settlement of debt.

Hence:

• ta‘wīd compensates actual losses from delayed payment;
• gharamah acts as a deterrent penalty against intentional default.

Why Istisnā‘ Is Different
In istisnā‘:

• the issue is not late payment of debt;
• the issue is:

delay in completing or delivering a manufactured/construction asset.
Therefore, the late delivery clause in istisnā‘ is usually treated as:
a contractual performance penalty clause (shart jazā’ī)
rather than:

• debt compensation (ta‘wīd); or
• debt penalty (gharamah).

This is because:

• the purchaser suffers loss due to construction or manufacturing delay,
• not due to unpaid debt.

Q2: What is the AAOIFI position regarding late delivery charges?
Answer
According to AAOIFI Shariah Standard (Para 6/6):

• a fair penalty clause may be included in the istisnā‘ contract to compensate the purchaser if the manufacturer delays delivery.

However:

• force majeure situations are excluded.

Examples of force majeure:

• floods;
• earthquakes;
• war;
• government restrictions.

The compensation must be:

• fair;
• proportionate; and
• linked to actual contractual delay.

Q3: What is the BNM position regarding late delivery charges?
Answer
According to the BNM Policy Document on Istisnā‘ (Para 27.4):

• the contracting parties may include:

a punitive clause (shart jazā’ī)
against the seller for late delivery.
Unlike murābahah:

• the penalty amount may be recognised as income by the purchaser.

This is because:

• the purchaser may suffer genuine commercial losses from project delay.

Q4: What is
shart jazā’ī
?
Answer
Shart jazā’ī means:
a contractual penalty clause agreed upon in advance for breach or delay in performance obligations.
In istisnā‘:

• it applies when the seller/manufacturer:
  • fails to complete;
  • delays construction;
  • or delivers late.

Comparison Between Murābahah and Istisnā‘ Late Charges
Murābahah
Nature of Issue
Late payment of debt.
Terms Used

• ta‘wīd
• gharamah

Reason
Customer delays repayment obligation.


Istisnā‘
Nature of Issue
Late delivery or late construction.
Term Used

• shart jazā’ī

Reason
Manufacturer delays contractual performance.


Case Study 1: Murābahah Late Payment (Ta‘wīd and Gharamah)
An Islamic bank provides murābahah vehicle financing.
Financing Details

• Selling price: RM120,000
• Monthly instalment: RM2,000

The customer delays payment for:

• 5 months.

Analysis
This concerns:

• delayed debt repayment.

Thus:

• ta‘wīd and gharamah may apply.

Case Study 2: Istisnā‘ Late Delivery (
Shart Jazā’ī
)
A contractor agrees to construct a warehouse.
Contract Details

• Construction price: RM10,000,000
• Completion date: 1 January 2029

The contract states:
“Contractor shall pay RM15,000 per week for unjustified delay.”
The contractor delays completion by:

• 6 weeks.

Penalty Calculation
15,000 times 6 = 90,000​

Result

• Contractor pays RM90,000 to purchaser.

Analysis
This is:

• not ta‘wīd for debt delay;
• not gharamah for late payment.

Instead:

• it is a contractual performance penalty (shart jazā’ī)
  for delayed completion of construction.

Case Study 3: Force Majeure Situation
A construction company builds a factory under istisnā‘.
Contract Details

• Factory value: RM30,000,000

During construction:

• severe earthquake damages site.

Completion delayed by:

• 4 months.

Analysis
Delay caused by:

• force majeure beyond contractor’s control.

Therefore:

• penalty clause should not apply.

Result
✅ No shart jazā’ī imposed.


Important Principle
Murābahah
Late charges relate to:
debt repayment obligations.
Thus:

• ta‘wīd and gharamah apply.

Istisnā‘
Late charges relate to:
failure to complete or deliver manufactured asset on time.
Thus:

• shart jazā’ī applies instead.

The distinction exists because:

• the legal nature of the obligation is different.

Published on

May 8, 2026

Islamic Contract – Bay’ al-Istisnā‘: Transfer of Ownership of Istisnā‘ Asset Under Construction

Islamic Contract – Bay’ al-Istisnā‘: Transfer of Ownership of Istisnā‘ Asset Under Construction
Q1: What happens to ownership of an istisnā‘ asset while it is still under construction?
Answer:
Generally, in an istisnā‘ contract:

• ownership and risk remain with the manufacturer or seller until delivery and possession occur.

This is because:

• the asset is still incomplete;
• the purchaser has not yet taken possession.

However, modern Islamic finance standards discuss whether:
the purchaser may take possession of the asset even before completion.


Q2: What is the AAOIFI position regarding transfer of ownership of an under-construction istisnā‘ asset?
Answer
The AAOIFI Shariah Standard is:
silent on this issue.
This means:

• AAOIFI does not expressly provide rules allowing or prohibiting transfer of possession of the unfinished asset during construction.

As a result:

• classical general principles regarding possession and ownership continue to apply.

Q3: What is the BNM position regarding under-construction istisnā‘ assets?
Answer
According to the BNM Policy Document on Istisnā‘ (Para 15.6):

• the contracting parties may agree that the purchaser takes possession of the istisnā‘ asset on an “as-is” basis while construction is still ongoing.

Once possession occurs:

• ownership risk transfers to the purchaser;
• the purchaser may subsequently:
  • use;
  • transfer; or
  • sell the under-construction asset to another party.

This provides greater commercial flexibility in modern project financing.


Q4: What does “as-is basis” mean?
Explanation
“As-is basis” means:
the purchaser accepts the asset in its current incomplete condition.
The purchaser:

• acknowledges ongoing construction status;
• assumes ownership risks from that stage onward.

Case Study 1: Traditional Position (No Transfer Before Completion)
A developer constructs an office building under istisnā‘.
Contract Details

• Construction price: RM50,000,000
• Completion period: 3 years

Before completion:

• building remains under ownership and risk of developer.

The purchaser:

• cannot yet sell the exact unfinished building because possession has not transferred.

Analysis
This reflects:

• traditional istisnā‘ principles;
• consistent with AAOIFI’s silence on early transfer.

Case Study 2: BNM Approach — Transfer During Construction
An Islamic bank finances construction of an apartment tower under istisnā‘.
Contract Details

• Total project price: RM100,000,000
• Construction progress: 60% completed

The contract states:
purchaser may take possession of the project on an “as-is basis” during construction.
The purchaser:

• accepts current construction status;
• assumes ownership risks from that point.

Subsequent Sale by Purchaser
After taking possession:

• purchaser sells the under-construction apartment project to another investor for:
  • RM120,000,000

Profit Calculation
RM120,000,000 - RM100,000,000 = RM20,000,000
120,000,000 - 100,000,000 = 20,000,000
Analysis
Under BNM:

• purchaser already took possession;
• ownership risk transferred;
• purchaser may now sell the under-construction asset.

Thus:
✅ permissible under BNM framework.


Q5: Why is this important in Islamic finance?
Explanation
This flexibility is important for:

• property development financing;
• infrastructure projects;
• large-scale construction financing.

It allows:

• transfer of commercial interests during construction;
• greater liquidity in project financing.

However:

• possession and ownership transfer must be genuine;
• contractual responsibilities must be clearly documented.

Comparison Notes: AAOIFI vs BNM
AAOIFI Position

• Silent regarding transfer during construction.
• Traditional ownership principles continue to apply.

BNM Position

• Allows purchaser to take possession on “as-is basis.”
• Purchaser may sell under-construction asset after possession.
• Greater commercial flexibility.

Important Shariah Principle
The key issue is:
possession and ownership risk.
Once:

• genuine possession transfers;
• and purchaser assumes ownership risk,

the purchaser may generally:

• transfer or sell the asset,

even if:

• construction is not yet fully completed.