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.

​

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.”

​

Islamic Contract — Sale Contracts
The most important group of contracts in Islamic commercial law is the sale contract. Throughout history, sales have played a crucial role in economic activities and commercial transactions. In Islam, sale contracts are strongly emphasized as lawful and legitimate means of conducting business and generating profit.
The Qur’an specifically recognizes sale (Bayʿ) as permissible and distinguishes it from Riba (interest or usury). Allah says in the Qur’an, Chapter 2, Verse 275:
“Allah has permitted trade and prohibited Riba.”
This verse establishes that trade and sale contracts are lawful alternatives to interest-based transactions.
The term Bayʿ in Islamic law includes:

1. Sale of ownership of an asset
2. Sale of usufruct or right to use an asset

The sale of usufruct or services is generally discussed under lease contracts such as Ijārah, while ordinary sale contracts involve the transfer of legal ownership of an asset from one party to another.
Generally, a sale contract involves:

• Exchange of commodity for another commodity (barter trade)
• Exchange of commodity for money (ordinary sale)
• Exchange of money for money (currency exchange)

In Islamic commercial law, Riba may arise in:

• Commodity-for-commodity exchanges
• Money-for-money exchanges

if the Sharīʿah requirements are not fulfilled.
For example, when exchanging ribawi items such as gold, silver, or currencies:

• Equality in amount may be required
• Immediate exchange (spot transaction) may be compulsory

However, Riba does not normally exist in the sale of commodity for money because the two counter-values are different categories of items. Therefore, conditions such as equality in quantity are not required. This characteristic makes ordinary sale contracts distinct from interest-based transactions.
Although sale contracts are generally free from Riba, they may still be affected by Gharar (uncertainty or ambiguity). Gharar usually occurs when there is insufficient knowledge or clarity regarding:

• The subject matter of the sale
• Quality or specification of goods
• Price or consideration
• Delivery terms

Therefore, Islamic law requires transparency, certainty, mutual consent, and fairness in all sale transactions.
Sale contracts consist of many different types and classifications. These classifications explain the features, functions, and mechanisms of each contract. In practice, some classifications may overlap because one contract can possess multiple characteristics at the same time.

​

​Islamic Contract
Q1: What is Bay' al-Murābahah (Markup Sale)?
Bay' al-Murābahah, commonly known as murābahah, is a type of Islamic sale contract where the seller discloses both the original acquisition cost of an item and the profit markup added before selling it to the buyer. The term murābahah originates from the Arabic word ribh, which means profit. This contract may be conducted either on a cash basis or through deferred payment arrangements.

Q2: What is the main characteristic of a murābahah contract?
The distinguishing feature of a murābahah contract is transparency and trust. The seller must clearly inform the buyer about the actual cost incurred in obtaining the asset and the amount of profit being charged. This disclosure differentiates murābahah from ordinary sale contracts where the original cost is usually not revealed.

Q3: How is murābahah different from musāwamah?
Musāwamah is a sale contract in which the selling price is negotiated freely between the buyer and seller without disclosing the original cost price of the item. In contrast, murābahah requires the seller to disclose both the acquisition cost and the profit margin to the purchaser.
Q4: What is bay' al-wadī‘ah and how does it differ from murābahah?
Bay' al-wadī‘ah is a type of sale where goods are sold below their original purchase price, meaning the seller incurs a loss or gives a discount. Similar to murābahah, the seller must disclose the original cost of the goods. However, unlike murābahah, no profit is added in wadī‘ah.
​
Q5: What is bay' al-tawliyah?
Bay' al-tawliyah refers to a sale where the seller transfers the asset to the buyer at exactly the same cost price without adding any profit or discount. It is therefore different from murābahah, which includes a disclosed profit margin.

​Islamic Contract – Legality of Murābahah

​Question 1: What is the basis for the legality of murābahah in Islam?The legality of murābahah is based on the general permissibility of trade in Islam as stated in the Qur’ān:
“Allah has permitted trade and prohibited ribā”
(Qur’ān, 2:275)
This verse establishes that trade and commercial transactions are lawful, provided they do not involve prohibited elements such as ribā (interest).

Question 2: What Islamic legal principles support the permissibility of murābahah?
The permissibility of murābahah is supported by:

1. Ijmā‘ (Consensus of Muslim Jurists) – Muslim scholars generally agree that murābahah is a valid form of sale.
2. Islamic Legal Principle –
   “The basic principle in financial transactions is permissibility unless there is clear evidence to the contrary.”

This principle means that all financial transactions are considered permissible unless explicitly prohibited by Islamic law.

Question 3: How is qiyās (analogy) used to justify murābahah?
The permissibility of murābahah is also based on qiyās (analogy) with tawliyah, a sale at cost price that was permitted by the Prophet Muhammad (SAW) (al-Bukhāri, 1422H, hadith no. 3905). Since tawliyah is permissible and murābahah shares similar characteristics, Muslim jurists conclude that murābahah is also permissible.

Question 4: Is there any direct evidence from the Sunnah regarding murābahah?
There is no direct juristic authority from the Sunnah of the Prophet Muhammad (SAW) specifically mentioning the legitimacy of the murābahah contract. However, Muslim jurists accept its validity because it complies with the general principles of Islamic commercial law and does not involve ribā.

Question 5: A case scenario relating to the legality of murābahah.
Fatimah wishes to purchase furniture for her office but does not want to take an interest-based loan. She approaches an Islamic financing company for assistance. The company purchases the furniture for RM10,000 and later sells it to Fatimah for RM11,500 on deferred payment terms. The company clearly discloses the original cost price and the RM1,500 profit margin before the contract is concluded.

This transaction is considered permissible because it is based on a valid sale contract, involves transparency in pricing, and does not contain elements of ribā.

​Islamic Contract – Bay’ al-Murābahah: Definition, Legality, Types, and Differences

Q1: What is Bay’ al-Murābahah?
Answer:
Literally, the word murābahah is derived from the Arabic root word ribh, meaning profit. Technically, bay’ al-murābahah is a sale contract in which the seller discloses both the acquisition cost and the profit markup to the purchaser. The sale may be conducted either on a cash basis or a deferred payment basis.
The main characteristic of murābahah is transparency, where the seller clearly informs the buyer of:

• the original purchase cost; and
• the amount of profit added.

Q2: What distinguishes murābahah from other forms of sale?
Answer:
Murābahah differs from other sale contracts because it is based on trust and disclosure of cost price. The seller must honestly disclose the actual cost incurred and the profit earned.
Other forms of sale include:

• Musāwamah – the selling price is negotiated without disclosing the original cost price.
• Wadī‘ah – the asset is sold below the original purchase price.
• Tawliyah – the asset is sold exactly at the original cost price without profit.

Q3: What is the legal basis for murābahah in Islamic law?
Answer:
The legality of murābahah is based on the general permissibility of trade in Islam as stated in the Qur’ān:
“Allah has permitted trade and prohibited ribā”
(Qur’ān 2:275)
Its permissibility is also supported by:

• the consensus of Muslim jurists (ijmā‘);
• the Islamic legal principle that all financial transactions are permissible unless proven otherwise; and
• analogy (qiyās) with tawliyah, which was approved by the Prophet Muhammad (SAW).

Although there is no direct Sunnah specifically mentioning murābahah, Muslim jurists generally accept it as a valid Islamic commercial transaction.

Q4: What are the types of murābahah?
Answer:
There are two types of murābahah:
1. Ordinary Murābahah
This occurs when trader purchases goods without any prior request or promise from a customer. The trader later sells the goods to a buyer on a murābahah basis by disclosing the cost and profit.
Case ScenarioA bookstore owner buys books worth RM1,000 for resale. Later, a customer agrees to purchase the books for RM1,200 after being informed of the RM200 profit margin. This is an example of ordinary murābahah.

2. Murābahah to the Purchase Orderer (MPO)
This occurs when a customer requests the seller or Islamic bank to purchase a specific asset on their behalf. The customer promises to buy the asset from the seller at a disclosed markup price, usually through deferred payment.
This type is commonly used by Islamic banks for financing purposes.
Case ScenarioSarah wishes to purchase machinery costing RM50,000 but cannot pay immediately. She requests an Islamic bank to purchase the machinery for her. The bank buys the machinery and later sells it to Sarah for RM58,000 payable over four years. The bank clearly discloses the original cost and profit margin. This is an example of Murābahah to the Purchase Orderer (MPO).

Notes: Differences Between Ordinary Murābahah and Murābahah to the Purchase Orderer (MPO)Ordinary Murābahah

• No prior request from the customer.
• No promise to purchase is made beforehand.
• Seller purchases goods independently for resale.
• Commonly practiced by ordinary traders and merchants.
• May involve cash or deferred payment.
• Mainly used for ordinary trading activities.

Murābahah to the Purchase Orderer (MPO)

• Customer requests the seller or Islamic bank to purchase a specific asset.
• Customer usually gives a promise to purchase the asset.
• Seller purchases the asset only after receiving the customer’s request.
• Commonly practiced by Islamic banks and financial institutions.
• Usually involves deferred payment or instalment financing.
• Mainly used as an Islamic financing instrument.

​Islamic Contract – Bay’ al-Murābahah: Emphasis on Murābahah to the Purchase Orderer (MPO)
Q1: What is Murābahah to the Purchase Orderer (MPO)?
Answer:
Murābahah to the Purchase Orderer (MPO) is a special form of murābahah in which a customer requests a seller or Islamic bank to purchase a specific asset on their behalf. The customer also promises to buy the asset from the seller at a disclosed markup price, usually through deferred payment or instalments.
Unlike ordinary murābahah, the transaction in MPO begins with the customer’s request. The seller or Islamic bank only purchases the asset after receiving the customer’s order and promise to purchase.
MPO is widely used in Islamic banking as a financing mechanism for:

• vehicles;
• houses;
• machinery;
• business equipment; and
• other commercial assets.

The Islamic bank must first obtain ownership and possession of the asset before selling it to the customer. This is important to ensure that the transaction is a genuine sale and not merely a loan with interest.


Q2: How does MPO operate in practice?
Answer:
The operation of MPO generally involves the following steps:

1. The customer identifies an asset that he wishes to purchase.
2. The customer requests the Islamic bank to purchase the asset.
3. The customer signs a promise to purchase the asset from the bank.
4. The bank purchases and takes ownership of the asset from the supplier.
5. The bank sells the asset to the customer at a disclosed cost plus profit margin.
6. The customer pays the selling price through deferred instalments.

Q3: How is MPO different from ordinary murābahah?
Answer:
The major difference lies in the existence of a prior request and financing purpose.
In ordinary murābahah, the seller independently purchases goods for resale without any prior arrangement with a customer. In MPO, however, the purchase is initiated by the customer’s request, and the seller or Islamic bank purchases the asset specifically for that customer.
MPO is therefore more structured and financing-oriented, while ordinary murābahah is mainly trade-oriented.


Case Study Comparison
Case Study 1: Ordinary Murābahah
Ahmad owns an electronics shop. He purchases ten laptops from a supplier for RM3,000 each without any prior customer order. Later, a customer named Hakim visits the shop and agrees to buy one laptop for RM3,500 after Ahmad discloses the original cost and the RM500 profit margin.
Analysis

• Ahmad purchased the laptops independently.
• No customer requested the purchase beforehand.
• The transaction is a normal trading activity.
• The profit is earned through resale after ownership is obtained.

This is an example of ordinary murābahah.


Case Study 2: Murābahah to the Purchase Orderer (MPO)
Aisyah wishes to buy industrial sewing machines worth RM100,000 for her clothing business but lacks sufficient funds. She approaches an Islamic bank and requests the bank to purchase the machines on her behalf.
The bank agrees after Aisyah signs a promise to purchase the machines once the bank acquires them. The bank then purchases the machines from the supplier and takes ownership. Afterwards, the bank sells the machines to Aisyah for RM120,000 payable over five years in monthly instalments.
The bank clearly discloses:

• the original purchase cost of RM100,000; and
• the profit margin of RM20,000.

Analysis

• The transaction started with the customer’s request.
• The bank purchased the asset specifically for Aisyah.
• The customer promised to purchase the asset.
• The transaction serves as an Islamic financing arrangement.
• Ownership was first transferred to the bank before resale to the customer.

This is an example of Murābahah to the Purchase Orderer (MPO).


Notes: Key Differences Between Ordinary Murābahah and MPO
Ordinary Murābahah

• Seller purchases goods before finding a buyer.
• No prior promise or order from customers.
• Common in normal retail and trading businesses.
• Seller bears the commercial risk of not finding buyers.
• Transaction focuses mainly on trade and resale.

Murābahah to the Purchase Orderer (MPO)

• Customer requests the seller or Islamic bank to purchase a specific asset.
• Customer usually provides a purchase undertaking or promise.
• Commonly used by Islamic banks for financing purposes.
• Asset is purchased specifically for the customer.
• Seller or bank must own the asset before reselling it.
• Transaction functions as a Shariah-compliant financing mechanism instead of an interest-based loan.

​Islamic Contract – Bay’ al-Murābahah: Disclosure of Cost Price, Profit Margin, and Sale Price
Q1: What must be disclosed in a murābahah contract?
Answer:
In a murābahah contract, the seller must disclose:

• the original cost price of the asset; and
• the profit margin added to the cost.

Once both the cost price and profit margin are disclosed, the final sale price becomes known automatically.
For example:

• Cost price = RM10,000
• Profit margin = RM2,000
• Final sale price = RM12,000

Thus, murābahah is commonly described as:
“A sale based on disclosed cost and disclosed profit.”


Q2: Does murābahah require disclosure of the sale price as well?
Answer:
Yes. Although the essential requirement is the disclosure of the cost price and profit margin, the final sale price must also be clearly known and agreed upon by both parties before the contract is concluded.
The sale price is calculated as:
Cost Price + Profit Margin = Sale Price
Therefore, murābahah involves transparency in all pricing elements to avoid uncertainty (gharar) and ensure fairness between the contracting parties.


Q3: How is murābahah different from musāwamah in terms of price disclosure?
Answer:
The main difference lies in the disclosure requirement.
Murābahah

• Seller discloses:
  • original cost price; and
  • profit margin.
• Buyer knows how the final sale price is calculated.

Musāwamah

• Seller only states the final selling price.
• Original cost price and profit margin are not disclosed.
• Price is determined through negotiation between the parties.

Case Scenario
An Islamic bank purchases office equipment for RM20,000 at the request of a customer. The bank informs the customer that:

• the original purchase cost is RM20,000; and
• the bank’s profit margin is RM5,000.

The bank then sells the equipment to the customer for RM25,000 payable over three years.
This transaction is valid murābahah because:

• the cost price was disclosed;
• the profit margin was disclosed; and
• the final sale price was clearly agreed upon before the contract was concluded.

​Islamic Contract – Bay’ al-Murābahah: Basic Rules and Conditions of Murābahah
Q1: What are the basic rules and conditions of a murābahah contract?
Answer:
Since murābahah is a type of sale contract, all general conditions of a valid sale contract in Islamic law also apply to murābahah. In addition, there are specific conditions that must be fulfilled for a murābahah contract to be valid.
The basic rules and conditions are as follows:


Q2: Why must the cost price be disclosed in murābahah?
Answer:
The cost price must be disclosed because murābahah is a trust-based (fiduciary) sale contract. The buyer must know the actual cost incurred by the seller for the contract to be valid.
According to the majority of Shariah scholars:

• failure to disclose the cost price renders the murābahah contract null and void.

According to the Hanafi School:

• the contract becomes fāsid (defective) but rectifiable;
• once the defect is corrected through proper disclosure, the contract becomes valid.

If the exact cost is unknown, the commodity cannot be sold through murābahah. Instead, it may be sold using another sale contract such as musāwamah, where disclosure of cost is not required.
Case Scenario
A trader purchases ten different electronic items in one bulk transaction for RM20,000 but does not know the individual cost of each item. Since the exact cost of each item is unknown, the trader cannot sell the items individually on a murābahah basis. However, the trader may still sell them through musāwamah by negotiating the selling price without disclosing the original cost.


Q3: Why must the profit margin be disclosed?
Answer:
The markup or profit margin must also be disclosed because it forms part of the selling price in a murābahah contract. The buyer must clearly know:

• how much represents the original cost; and
• how much represents the seller’s profit.

The profit margin must be mutually agreed upon by both contracting parties at the time the contract is concluded.
Case Scenario
An Islamic bank purchases machinery for RM50,000 and informs the customer that:

• the cost price is RM50,000; and
• the bank’s profit margin is RM8,000.

The machinery is then sold for RM58,000 through deferred instalments. The contract is valid because both the cost price and profit margin were clearly disclosed and agreed upon.


Q4: What kind of asset can be sold through murābahah?
Answer:
The subject matter of murābahah must be recognised as valuable property (māl) under Shariah. Therefore, prohibited or impure items cannot be the subject matter of a murābahah contract.
Examples of prohibited items include:

• pork;
• wine;
• blood; and
• other unlawful substances.

These items are not recognised as lawful property in Islam and therefore cannot be traded through murābahah.
Case Scenario
A businessman seeks financing from an Islamic bank to purchase alcoholic beverages for resale. The Islamic bank cannot enter into a murābahah contract for this transaction because alcohol is prohibited and is not recognised as lawful property under Shariah.


Q5: Why must murābahah avoid ribā?
Answer:
A murābahah contract must not involve any element of ribā (usury or interest). If the subject matter is a ribawī item (an item subject to the rules of ribā in sales), the transaction must comply with Shariah requirements to prevent ribā from occurring.
If ribawī items of the same type are exchanged with an increment, the increment is considered ribā rather than legitimate profit.
Therefore:

• ribawī items of the same genus and quantity cannot be traded through murābahah if an increment exists;
• they also cannot be traded through wadī‘ah if a discount or increment leads to ribā;
• however, they may be exchanged through tawliyah if no increment occurs.

Case Scenario
A person exchanges 100 grams of gold for 120 grams of gold through a murābahah arrangement and claims that the extra 20 grams represent profit. This transaction is invalid because the increment in the exchange of the same ribawī item constitutes ribā rather than lawful profit.
However, if 100 grams of gold are exchanged for exactly 100 grams of gold without any increment, the transaction may be permissible through tawliyah because no ribā exists.


Notes: Important Conditions for a Valid Murābahah Contract
Disclosure Requirement

• Cost price must be disclosed.
• Profit margin must be disclosed.
• Final sale price must be clearly agreed upon.

Subject Matter Requirement

• Asset must be lawful and recognised by Shariah.
• Prohibited items cannot be sold through murābahah.

Ribā Requirement

• Transaction must not involve ribā.
• Ribawī items must comply with Islamic rules of exchange.

Certainty Requirement

• The seller must know the exact cost of the asset.
• Uncertainty regarding cost may invalidate the murābahah contract.