Islamic Contract – Bay’ al-Istisnā‘: Avoidance of Sale and Buyback Transactions (Bay‘ al-‘Īnah) in Ordinary and Parallel Istisnā‘
​
Q1: Why must istisnā‘ avoid bay‘ al-‘īnah?

Answer:
Islamic finance requires istisnā‘ transactions to involve:

• genuine manufacturing;
• real ownership transfer; and
• actual commercial risk.

If the arrangement merely circulates assets between the same parties to obtain financing, it may resemble:
bay‘ al-‘īnah (sale and buyback transaction),
which many scholars prohibit because it may function similarly to an interest-based loan.
For this reason, AAOIFI imposes safeguards to prevent:

• artificial transactions;
• circular ownership structures; and
• disguised financing arrangements.

AAOIFI Position
According to AAOIFI Shariah Standard (Para 2/2/4):

• the manufacturer cannot be the ultimate purchaser; and
• the ultimate purchaser cannot own more than one-third of the manufacturing facility.

This ensures:

• independence between contracting parties;
• genuine transfer of ownership and risk.

BNM Position
The BNM Policy Document on Istisnā‘ is:
silent on this specific restriction.
However:

• transactions must still remain genuine and Shariah-compliant.

PART A — Ordinary Istisnā‘
1. Normal Ordinary Istisnā‘ (Permissible)
Structure
Only two parties:

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

Example
A hotel company orders customised furniture from an independent furniture manufacturer.
Contract Details

• Furniture manufacturing price: RM500,000
• Delivery period: 6 months

The manufacturer:

• supplies materials;
• manufactures furniture;
• delivers completed furniture to hotel company.

Analysis

• Independent parties.
• Genuine manufacturing.
• No buyback arrangement.
• Real transfer of ownership and risk.

Result
✅ Valid ordinary istisnā‘.


2. Ordinary Istisnā‘ Involving Sale and Buyback (
Bay‘ al-‘Īnah)(Problematic)
Example
A company owns a furniture manufacturing factory.
The same company:

1. asks its own factory to manufacture furniture under istisnā‘;
2. then “purchases” the furniture from the factory through financing arrangement.

Ownership Structure

• Customer owns 90% of manufacturing company.

Analysis
Although two legal entities appear to exist:

• economically they are substantially the same party.

This creates concern that:

• no genuine commercial transfer occurs;
• transaction merely simulates financing.

Result Under AAOIFI
❌ Generally prohibited due to resemblance to bay‘ al-‘īnah.


PART B — Parallel Istisnā‘
1. Normal Parallel Istisnā‘ (Permissible)
Structure
Two separate independent contracts.


First Istisnā‘ Contract
Between:

• customer;
• Islamic bank.

Contract Price
RM20,000,000
The bank promises to deliver:

• 100 buses.

Second Istisnā‘ Contract
Between:

• Islamic bank;
• independent manufacturer.

Manufacturing Cost
RM17,000,000
The manufacturer constructs buses for bank.


Profit Calculation
RM20,000,000 - RM17,000,000 = RM3,000,000
20,000,000 - 17,000,000 = 3,000,000
Analysis

• Contracts are separate.
• Manufacturer independent from customer.
• Genuine manufacturing occurs.
• No circular ownership.

Result
✅ Valid parallel istisnā‘.


2. Parallel Istisnā‘ Involving Sale and Buyback (
Bay‘ al-‘Īnah
) (Problematic)
Example
An Islamic bank enters into parallel istisnā‘ for aircraft manufacturing.


First Contract
Bank agrees to deliver aircraft to Airline A.
Contract Price
RM200,000,000


Second Contract
Bank appoints Manufacturer B to construct aircraft.
Manufacturing Cost
RM180,000,000


Problematic Ownership Structure
Airline A owns:

• 80% shares in Manufacturer B.

Analysis
Although formally:

• two separate contracts exist,

in substance:

• customer substantially controls manufacturer.

This creates risk that:

• the arrangement becomes a circular financing structure;
• rather than genuine independent manufacturing.

Concern
The aircraft effectively moves:

• from customer-controlled manufacturer;
• back to customer.

This resembles:
sale and buyback arrangement (bay‘ al-‘īnah).
Result Under AAOIFI
❌ Generally impermissible.


Simplified Comparison
Normal Ordinary Istisnā‘
✅ Independent manufacturer and purchaser.


Ordinary Istisnā‘ with
Bay‘ al-‘Īnah
❌ Purchaser substantially controls manufacturer.


Normal Parallel Istisnā‘
✅ Independent customer, bank, and manufacturer.


Parallel Istisnā‘ with
Bay‘ al-‘Īnah
❌ Customer substantially controls manufacturer used in second contract.


Important Principle
Islamic finance requires:

• genuine commercial activity;
• real manufacturing risk;
• independent contracting parties.

Transactions should not merely:

• circulate ownership artificially;
• disguise financing;
• or replicate conventional interest-based lending through formal legal structures.

​Islamic Contract – Bay’ al-Istisnā‘: Determination of the Delivery Date in Istisnā‘ Contracts
Q1: Why is the delivery date important in an istisnā‘ contract?
Answer:
The delivery date is important in an istisnā‘ contract because:

• the subject matter does not yet exist at the time of contract;
• the asset will only be manufactured or constructed in the future.

Therefore, determining the delivery timeline helps:

• remove uncertainty (gharar);
• avoid disputes between parties; and
• ensure contractual certainty regarding completion and handover.

Q2: What is the AAOIFI position regarding the delivery date?
Answer
According to AAOIFI Shariah Standard (Para 2/2/1):

• the delivery date must be determined if necessary.

This means:

• flexibility is allowed in certain situations;
• especially where customary business practice sufficiently determines delivery expectations.

AAOIFI adopts a relatively flexible approach depending on:

• nature of the manufactured asset;
• industry custom; and
• practical commercial circumstances.

Q3: What is the BNM position regarding the delivery date?
Answer
According to the Bank Negara Malaysia (BNM) Policy Document on Istisnā‘ (Para 10.2):
the istisnā‘ contract must include the time of delivery.
Under BNM:

• specifying the delivery date is mandatory;
• the delivery timeline must be clearly stated in the contract.

This stricter approach aims to:

• increase legal certainty;
• strengthen risk management; and
• reduce future contractual disputes.

Comparison Notes: AAOIFI vs BNM on Delivery Date
AAOIFI Position

• Delivery date determined if necessary.
• More flexible approach.
• May rely on customary business practice.

BNM Position

• Delivery date must be specified.
• Mandatory contractual requirement.
• Greater emphasis on certainty and documentation.

Case Study 1: AAOIFI Flexible Approach
A customer enters into an istisnā‘ contract for handcrafted furniture.
Contract Details

• Asset: Handmade luxury furniture
• Contract price: RM80,000

The contract states:
“Delivery shall be made upon completion according to normal industry practice.”
No exact delivery date is specified because:

• handcrafted manufacturing time may vary depending on artistic customisation.

Analysis
Under AAOIFI:

• this may be acceptable if:
  • industry custom sufficiently removes uncertainty;
  • parties understand expected completion timeframe.

Case Study 2: BNM Mandatory Delivery Date Requirement
An Islamic bank finances construction of industrial machinery under istisnā‘.
Contract Details

• Machinery price: RM2,000,000
• Delivery date: 30 June 2028

The contract expressly specifies:

• exact delivery timeline;
• installation completion schedule.

Analysis
Under BNM:

• specifying the delivery date is compulsory;
• this ensures:
  • certainty of obligations;
  • enforceability;
  • proper risk allocation.

Q4: What happens if the manufacturer fails to deliver on time?
Answer
If delivery is delayed:

• the purchaser may:
  • accept late delivery;
  • renegotiate terms; or
  • terminate the contract depending on contractual provisions.

The rights of parties depend on:

• agreed contractual terms;
• extent of delay; and
• applicable Shariah and legal standards.

Example of Delay in Delivery
A contractor agrees to construct a warehouse under istisnā‘.
Contract Details

• Contract price: RM5,000,000
• Delivery date: 1 January 2029

The contractor fails to complete construction by the agreed date.
Purchaser’s Options
The purchaser may:

1. accept delayed completion;
2. negotiate revised terms;
3. terminate the contract.

Important Principle in Istisnā‘
Because istisnā‘ involves:

• future manufacturing;
• deferred delivery; and
• non-existent assets at contract formation,

clear determination of:

• specifications;
• delivery period; and
• contractual obligations

is essential to preserve:

• Shariah compliance;
• fairness; and
• commercial certainty.

​Islamic Contract – Bay’ al-Istisnā‘: Basic Rules and Conditions of Istisnā‘
1. The Object of Istisnā‘ Must Be Specifically Described
Explanation
Since istisnā‘ involves the sale of an asset that does not yet exist (bay‘ al-ma‘dūm), the subject matter must be clearly specified to avoid uncertainty (gharar).
The following specifications must be clearly determined:

• type;
• kind;
• quality;
• quantity;
• measurements;
• design; and
• essential characteristics.

If the manufactured asset does not comply with the agreed specifications, the purchaser may:

1. reject the asset and terminate the contract;
2. accept the asset at the agreed price; or
3. accept the asset subject to revised terms such as:
   • reduced price; or
   • extended completion period.

Example
A customer orders a customised sofa set through istisnā‘.
Agreed Specifications

• Material: Genuine leather
• Colour: Black
• Length: 3 metres
• Quantity: 2 sofa units
• Price: RM25,000

However, the manufacturer delivers fabric sofas instead of leather sofas.
Purchaser’s Rights
The purchaser may:

• reject delivery entirely;
• accept the sofas at RM25,000;
• negotiate a lower revised price.

2. The Object Must Be Manufacturable
Explanation
The subject matter of istisnā‘ must be something:

• commonly manufactured or constructed; and
• customarily contracted through istisnā‘.

Examples include:

• houses;
• vehicles;
• aircraft;
• furniture; and
• machinery.

An already completed or existing asset does not qualify as a valid istisnā‘ asset.
Similarly, items not commonly manufactured through istisnā‘ arrangements may not qualify.


Example
Valid Istisnā‘
A company commissions the construction of:

• a warehouse;
• delivery trucks; or
• industrial machinery.

These are manufacturable assets.
Invalid Istisnā‘
A person attempts to use istisnā‘ to purchase:

• an already completed apartment.

Since the apartment already exists and is identifiable at contract formation, it does not qualify as a valid istisnā‘ asset.


3. Materials Must Be Supplied by the Manufacturer
Explanation
In an istisnā‘ contract:

• the manufacturer (ṣāni‘) should supply the construction or manufacturing materials.

If the purchaser (mustaṣni‘) supplies the materials:

• the contract changes in nature and may become an ijārah (service) contract instead of istisnā‘.

Example
Valid Istisnā‘
A contractor agrees to build a house and personally supplies:

• cement;
• steel;
• bricks; and
• construction materials.

This is a valid istisnā‘ arrangement.
Ijārah Situation
A homeowner personally purchases all building materials and only hires the contractor for labour and construction work.
This arrangement resembles ijārah because the contractor mainly provides services rather than manufacturing.


4. Time of Delivery Must Be Specified
Explanation
The delivery date must be clearly determined to avoid uncertainty and future disputes.
If the seller fails to deliver on time, the purchaser may:

1. accept the asset on an “as-is” basis; or
2. terminate the contract.

Example
A company orders customised buses under istisnā‘.
Contract Terms

• Delivery date: 1 December 2027
• Contract price: RM2,000,000

The manufacturer delays delivery by 6 months.
Purchaser’s Options
The purchaser may:

• continue and accept late delivery; or
• terminate the contract due to non-compliance.

5. Place of Delivery Must Be Determined
Explanation
The delivery location should be specified, especially where:

• transportation;
• shipping; or
• loading arrangements are involved.

This avoids confusion regarding:

• delivery obligations; and
• transfer of possession.

Example
A manufacturer constructs industrial generators.
Contract Terms

• Delivery place: Port Klang, Selangor
• Delivery date: 15 March 2028

The specified location determines:

• transportation responsibilities;
• delivery completion point; and
• transfer of risk.

6. Price Must Be Determined
Explanation
The price in istisnā‘:

• must be known and agreed during the contract session.

The price may be:

• cash;
• deferred payment;
• progressive payment;
• usufruct; or
• other valuable consideration.

Payment arrangements may include:

• bullet payment;
• instalments; or
• progressive payments linked to project completion stages.

The parties may later revise:

• specifications; and
• price accordingly.

However:

• the price cannot be increased merely because of an extension in payment period.

Example
A construction company agrees to build a factory.
Contract Details

• Contract price: RM10,000,000
• Payment arrangement:
  • RM2,000,000 upfront
  • RM4,000,000 during construction
  • RM4,000,000 upon completion

Later:

• the purchaser requests additional warehouse space;
• parties revise the contract price to RM11,500,000.

Permissible Revision
The price increase is permissible because:

• specifications changed.

Impermissible Revision
The seller cannot increase the price solely because:

• the purchaser requested longer payment time.

7. Possession and Ownership Transfer
Explanation
Ownership transfers to the purchaser only after:

• the purchaser takes possession of the istisnā‘ asset; and
• the asset complies with agreed specifications.

Possession may occur through:

• actual possession (qabd haqīqī); or
• constructive possession (qabd hukmī).

Before delivery:

• ownership remains with the seller;
• ownership risks are borne by the seller.

The purchaser cannot sell the exact istisnā‘ asset before taking possession.
However:

• the purchaser may enter into another separate istisnā‘ contract (parallel istisnā‘) involving a similar asset.

Example
An Islamic bank commissions construction of a ship under istisnā‘.
Contract Details

• Ship construction price: RM50,000,000
• Delivery period: 3 years

Before delivery:

• the ship remains under the ownership and risk of the manufacturer.

After completion:

• the bank takes constructive possession through delivery documents and registration transfer.

Only then:

• ownership transfers to the bank.

The bank may subsequently sell:

• a similar ship through a separate parallel istisnā‘ arrangement.

​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.

​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-Murābahah: Promise by the Purchase Orderer
Q1: What is meant by the promise of the purchase orderer in murābahah?
Answer:
In Murābahah to the Purchase Orderer (MPO), the purchase orderer (customer) usually gives a promise (wa‘d) to purchase the asset after the seller or Islamic bank acquires it.
This promise is important because:

• the Islamic bank purchases the asset based on the customer’s request; and
• the promise helps reduce the bank’s ownership and market risks.

Q2: What is the AAOIFI position regarding the customer’s promise?
Answer:
According to AAOIFI Shariah Standard No. 8 (Para 2/3/3):

• the promise may either:
  • be binding; or
  • include an option to cancel.

This means AAOIFI provides flexibility regarding whether the customer must compulsorily complete the purchase.
The approach depends on:

• the agreement between the parties; and
• the structure adopted by the Islamic financial institution.

Q3: What is the BNM position regarding the customer’s promise?
Answer:
According to the Bank Negara Malaysia (BNM) Policy Document on Murābahah (Para 15.2):

• the promise becomes binding once the seller or Islamic bank takes action to acquire the asset.

This means:

• after the bank incurs costs or purchases the asset based on the customer’s undertaking,
• the customer can no longer freely withdraw from the promise without consequences.

This rule protects the Islamic bank from financial loss after relying on the customer’s commitment.


Comparison Notes: AAOIFI vs BNM on Promise by the Purchase Orderer
AAOIFI Position

• Promise may be:
  • binding; or
  • non-binding with cancellation option.
• Greater contractual flexibility.
• Focuses on preserving voluntary consent.

BNM Position

• Promise becomes binding once the bank acts to acquire the asset.
• Protects the bank from ownership and commercial risks.
• Provides stronger operational certainty in Islamic banking practice.

Case Study: Promise to Purchase Machinery
A company requests an Islamic bank to purchase machinery worth RM500,000 through a murābahah arrangement.
The company signs a promise to purchase the machinery after the bank acquires it.
The bank then:

1. purchases the machinery from the supplier; and
2. incurs transportation and documentation costs.

Later, the company attempts to cancel the transaction.
Under AAOIFI

• If the promise was structured as non-binding with cancellation rights, cancellation may be possible depending on the agreement.
• If the promise was binding, the customer may be required to honour the undertaking.

Under BNM

• Once the bank acted to acquire the machinery, the promise became binding.
• The customer may be required to proceed with the purchase or compensate the bank for losses suffered.

Analysis
The difference reflects:

• AAOIFI’s more flexible contractual approach; and
• BNM’s stronger protection of Islamic banks as financial intermediaries in murābahah financing operations.

​Islamic Contract – Bay’ al-Murābahah: Comparison Between AAOIFI and BNM Requirements for Murābahah
Q1: What is the difference between AAOIFI and BNM regarding the appointment of the purchase orderer as an agent?
Answer:
AAOIFI and Bank Negara Malaysia (BNM) differ in their approach regarding whether the purchase orderer may act as an agent to purchase the murābahah asset.
AAOIFI Standard (Shariah Standard No. 8)
According to AAOIFI:

• appointing the purchase orderer as an agent to purchase the murābahah asset is generally not allowed;
• it is only permitted in cases of dire need.

This position is stated in:
AAOIFI Shariah Standard No. 8, Paragraph 3/1/3.
AAOIFI adopts a stricter approach to prevent:

• legal manipulation (hīlah);
• fictitious transactions; and
• situations where ownership transfer may not genuinely occur.

Bank Negara Malaysia (BNM) Policy Document on Murābahah
According to BNM:

• the purchase orderer may be appointed as an agent to purchase the murābahah asset;
• however, the agency appointment and murābahah contract must not be combined in the same document.

This position is stated in:
BNM Policy Document on Murābahah, Paragraphs 16.1–16.2.
BNM allows this structure to facilitate practical Islamic banking operations while still maintaining:

• separation between agency and sale contracts; and
• proper ownership transfer procedures.

Comparison Notes: AAOIFI vs BNM on Agency Appointment
AAOIFI Position

• Generally prohibits appointing the purchase orderer as agent.
• Permits it only in exceptional or necessary circumstances.
• Adopts a stricter Shariah governance approach.
• Concerned about fictitious ownership and legal stratagems.

BNM Position

• Allows the purchase orderer to act as agent.
• Requires agency agreement and murābahah contract to be separate documents.
• Focuses on operational practicality in Islamic finance.
• Ensures procedural safeguards to preserve Shariah compliance.

Case Study: Appointment of Customer as Purchasing Agent
A customer wishes to purchase industrial equipment through murābahah financing from an Islamic bank.
Instead of the bank directly purchasing the equipment:

• the bank appoints the customer as its agent to purchase the equipment from the supplier;
• after the purchase is completed on behalf of the bank, the bank then sells the equipment to the customer through a murābahah contract.

Under AAOIFI

• This arrangement is generally discouraged unless there is genuine necessity.
• AAOIFI fears the arrangement may merely simulate ownership transfer without actual possession by the bank.

Under BNM

• The arrangement is permissible.
• However:
  • the agency appointment document must be separate from the murābahah sale contract; and
  • the bank must still ensure proper ownership and risk transfer before resale.

Analysis
The difference reflects:

• AAOIFI’s stricter precautionary approach; and
• BNM’s more practical regulatory approach tailored to modern Islamic banking operations.

Islamic Contract – Bay’ al-Murābahah: Application of Murābahah in Islamic Finance
Q1: How is murābahah applied in Islamic finance?
Answer:
Murābahah is one of the most widely used financing mechanisms in Islamic finance and Islamic banking. Islamic banks apply murābahah mainly through the concept of Murābahah to the Purchase Orderer (MPO).
Under this arrangement:

• the customer identifies an asset he wishes to acquire;
• the Islamic bank purchases the asset from the supplier;
• the bank then sells the asset to the customer at a disclosed cost plus profit markup; and
• payment is usually made through deferred instalments.

Murābahah is widely used because it provides:

• a Shariah-compliant alternative to interest-based financing;
• certainty in pricing and repayment obligations; and
• relatively lower business risk for Islamic banks.

Q2: What types of financing commonly use murābahah?
Answer:
Murābahah is commonly used in various Islamic financing facilities, including:
Home Financing
Islamic banks purchase a property and subsequently sell it to the customer at a disclosed markup price payable through instalments.
Motor Vehicle Financing
The bank purchases a vehicle requested by the customer and resells it at a higher deferred payment price.
Personal Financing
Murābahah structures may be used for personal financing through commodity-based transactions approved by Shariah standards.
Trade Financing
Murābahah is widely used in import and export financing where banks purchase goods and resell them to customers at a disclosed profit.


Q3: Why do Islamic banks commonly use the MPO structure?
Answer:
Islamic banks commonly use the Murābahah to the Purchase Orderer (MPO) structure because of their role as financial intermediaries.
The MPO structure helps Islamic banks:

• reduce ownership and market risks;
• ensure that the asset already has a buyer before purchase;
• minimise the possibility of unsold assets; and
• facilitate efficient financing operations.

In MPO:

• the customer first promises to purchase the asset;
• the bank only purchases the asset after receiving the customer’s undertaking.

This arrangement reduces the bank’s commercial exposure while maintaining Shariah compliance.


Q4: Why is ownership important in Islamic bank murābahah financing?
Answer:
Ownership is a fundamental Shariah requirement in murābahah financing.
The Islamic bank must:

1. genuinely purchase the asset;
2. obtain ownership and possession of the asset; and
3. only then sell the asset to the customer.

This distinguishes murābahah from a conventional loan because:

• the bank earns profit through sale and trade;
• not through lending money with interest.

If the bank merely finances the customer without owning the asset, the transaction may resemble ribā-based financing and become non-compliant with Shariah principles.


Case Study 1: Home Financing Through Murābahah
Zain wishes to purchase a house worth RM400,000 but lacks sufficient funds. He approaches an Islamic bank for financing.
The bank:

1. purchases the house from the developer;
2. obtains ownership of the property; and
3. sells the house to Zain for RM520,000 payable over 25 years.

The bank clearly discloses:

• the original purchase cost of RM400,000; and
• the profit margin of RM120,000.

Analysis

• The transaction is based on sale, not lending.
• Ownership is transferred to the bank before resale.
• The selling price is fixed and known in advance.
• The transaction uses the MPO concept.

This is a valid murābahah financing arrangement.


Case Study 2: Motor Vehicle Financing Through MPO
Farah wishes to purchase a car costing RM90,000. She requests an Islamic bank to purchase the car on her behalf.
The bank:

1. purchases the car from the dealer;
2. takes ownership of the vehicle; and
3. resells it to Farah for RM110,000 payable over seven years.

Analysis

• The customer initiated the request.
• The bank reduced ownership risk because the customer promised to purchase the car.
• The bank’s profit comes from the sale transaction.
• The deferred payment price is permissible because it was agreed upon at the contract stage.

This represents the practical application of MPO in Islamic banking.


Notes: Key Features of Murābahah Application in Islamic Finance
Common Applications

• Home financing
• Vehicle financing
• Personal financing
• Trade financing

Key Operational Features

• Customer identifies the asset.
• Islamic bank purchases and owns the asset first.
• Bank discloses cost and profit.
• Customer pays through deferred instalments.

Why Islamic Banks Prefer MPO

• Reduces ownership risk.
• Minimises unsold inventory risk.
• Provides predictable financing structure.
• Ensures Shariah-compliant profit generation.

Important Shariah Principle
The bank’s profit in murābahah must arise from a genuine sale transaction involving ownership and transfer of assets, not from lending money with interest.

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Islamic Contract – Bay’ al-Murābahah: Pricing in Murābahah Transactions
Q1: Does Islamic law allow different prices for cash sales and deferred payment sales in murābahah?
Answer:
Yes. Islamic law recognises the legitimacy of having a higher price in a deferred payment sale compared to a cash sale in murābahah transactions.
A famous legal maxim states:
“Time is a portion of the price.”
This means that the deferred payment period may justify a higher selling price because the seller waits longer to receive payment.
For this reason, Muslim jurists generally permit:

• a lower price for spot cash payment; and
• a higher price for deferred instalment payment.

However, the price must be:

• fixed;
• clearly known; and
• mutually agreed upon at the time the contract is concluded.

Q2: Why is a higher deferred payment price permissible?
Answer:
According to al-Kāsānī of the Hanafi School, deferred payment warrants additional consideration (‘iwad) in the form of a price markup because time has value in commercial transactions.
The majority of Muslim jurists agree that:

• deferment increases commercial risk and opportunity cost; and
• therefore justifies a higher selling price.

The higher price may reflect:

• inflation risk;
• uncertainty;
• delayed access to money;
• lost investment opportunities; or
• other market considerations.

Importantly, this concept of time preference is not automatically equivalent to ribā (interest), because:

• the price is fixed once at the contract stage; and
• no additional increase occurs due to late payment after the contract is concluded.

Q3: What did classical Muslim jurists say about time preference?
Answer:
Classical jurists from various schools of Islamic law recognised that deferment affects pricing.
Maliki School – al-Dasūqī
Al-Dasūqī stated that the seller in murābahah must disclose the deferred payment period because:
“the deferred period comprises a portion of the price.”
Hanafi School – al-Kāsānī
Al-Kāsānī explained that:
“the price increases according to the deferred period.”
This means that a longer payment period may justify a higher sale price.
Shafi‘i School – al-Sharbīnī
Al-Sharbīnī stated that specifying the deferred payment period is necessary because:
“the deferral is equivalent to a portion of the sale price.”
Hanbali School – Ibn Taymiyyah
Ibn Taymiyyah similarly stated:
“the deferred period takes a portion of the sale price.”
These juristic opinions demonstrate that classical Islamic jurisprudence recognises the commercial value of time in exchange transactions.


Q4: Is there a limit on profit in murābahah?
Answer:
Muslim jurists differ regarding the maximum permissible profit margin in murābahah.
Majority View
The majority of scholars hold that:

• Shariah does not fix a maximum profit limit;
• profit should be determined by market forces such as demand and supply; and
• contracting parties are free to negotiate a mutually acceptable price.

Maliki View
The Maliki School restricts profit margins exceeding one-third of the original cost.
According to this view:

• excessive profit (ghabn fāhish) is prohibited;
• profit beyond one-third may be considered exploitative.

This opinion is based on the hadith in which the Prophet Muhammad (SAW) stated:
“A third is a lot.”
(al-Bukhāri, hadith no. 2742)


Q5: What is the position of the Shariah Advisory Council (SAC) Malaysia regarding pricing?
Answer:
The Shariah Advisory Council (SAC) of the Securities Commission Malaysia resolved in its 224th meeting held on 26 September 2019 that, in relation to sukūk issuance:

• the purchase price of an identified asset must not exceed 1.51 times the asset’s fair value; or
• any other appropriate value determined for the asset.

This guideline aims to avoid excessive pricing and ensure fairness in Islamic financial transactions.


Case Study 1: Permissible Deferred Pricing in Murābahah
An Islamic bank purchases a vehicle for RM80,000. The bank offers the customer two payment options:

• Cash payment price: RM85,000
• Deferred payment price over five years: RM100,000

The customer agrees to purchase the vehicle for RM100,000 through monthly instalments.
Analysis

• The higher deferred price is permissible because:
  • the price was fixed at the contract stage;
  • both parties agreed to the deferred arrangement;
  • no additional increase will occur after the contract.

This is considered a valid murābahah transaction and not ribā.


Case Study 2: Impermissible Increase After Delay
A customer purchases equipment through murābahah for RM50,000 payable over three years. After missing several instalments, the seller increases the outstanding amount to RM60,000 solely because of the delay.
Analysis

• The additional increase due to delay resembles ribā.
• In murābahah, the price must remain fixed once agreed.
• Charging extra money merely because payment is late is generally prohibited.

Notes: Key Principles of Pricing in Murābahah
Permissible

• Higher price for deferred payment.
• Profit margin agreed upon at contract stage.
• Price fixed and certain.
• Deferred period clearly specified.

Impermissible

• Additional increase after contract due to delay.
• Uncertain or floating selling price.
• Excessive exploitation or injustice.

Important Principle
In murābahah, time may influence the original sale price, but time alone cannot justify additional charges after the debt has already been established.

​

​Islamic Contract – Bay’ al-Murābahah: Murābahah Involving Ribawī Items Such as Gold


Q1: Is it permissible to sell ribawī items such as gold through murābahah?


Answer:
Yes, it is permissible to sell ribawī items such as gold through murābahah, provided that the rules of ribā in Islamic law are strictly observed.


Gold is classified as a ribawī item. Therefore, transactions involving gold must comply with the Shariah rules governing the exchange of ribawī items.


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Q2: Is the exchange of gold for money permissible in murābahah?


Answer:
Yes. The exchange of gold for money is generally permissible because they are of different categories:

• gold is a ribawī commodity; and

• money functions as currency.

However, the transaction must fulfil the Shariah requirement of:

• immediate exchange (taqabud or possession); and

• absence of ribā and excessive uncertainty.

If the murābahah transaction involves deferred payment, scholars have discussed the issue extensively because gold and currency are both ribawī items associated with monetary value.


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Q3: Why is deferred payment involving gold controversial?


Answer:
The controversy arises because classical Islamic law treats gold and silver as currency. Under the rules of bay‘ al-sarf (currency exchange):

• the exchange of gold and money must generally occur on a spot basis; and

• deferment by one or both parties may lead to ribā al-nasī’ah (ribā due to delay).

For this reason, many classical scholars prohibit deferred sales of gold for money.


However, some contemporary scholars and Shariah standards permit deferred murābahah involving gold if:

• the gold is treated as a commodity rather than currency;

• ownership and possession are properly transferred; and

• the transaction avoids speculative or interest-based elements.

This approach is commonly adopted in certain Islamic banking and commodity murābahah practices today.


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Case Scenario 1: Permissible Spot Transaction


A jewellery shop sells a gold bracelet worth RM8,000 to a customer. The customer pays the full amount immediately, and the gold bracelet is handed over on the spot.


Analysis

• Gold is exchanged for money immediately.

• Both payment and delivery occur at the same session.

• No ribā arises.

This transaction is generally permissible under Shariah.


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Case Scenario 2: Problematic Deferred Transaction


A seller agrees to sell 100 grams of gold to a buyer today, but the buyer will only pay six months later.


Analysis

• Gold and money are exchanged on a deferred basis.

• Delay in payment may lead to ribā al-nasī’ah.

• Many classical scholars consider this impermissible.

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Case Scenario 3: Contemporary Murābahah Practice


An Islamic bank purchases gold bullion as a commodity investment and subsequently sells it to a customer through a structured murābahah arrangement. The bank first acquires ownership and possession of the gold before reselling it at a disclosed markup.


Analysis

• The transaction is structured as a commodity sale.

• Ownership transfer is essential.

• The permissibility depends on compliance with contemporary Shariah standards and regulatory guidelines.

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Notes: Important Rules on Gold in Murābahah


Permissible Situations

• Gold may be sold for money on a spot basis.

• Ownership and possession must be genuine.

• Cost price and profit must be disclosed in murābahah.

Impermissible Situations

• Exchange of gold for gold with unequal quantities.

• Deferred exchange that leads to ribā.

• Transactions involving speculation or fictitious ownership.

Key Principle


The main objective is to ensure that the transaction remains a genuine sale and does not become a disguised form of interest-based financing.