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.

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