- Published on
Islamic Contract – Application of Istijrār in Islamic Finance
Q1: What is istijrār?
Answer
Istijrār refers to:
a contractual arrangement where a buyer continuously purchases goods from a seller over a period of time, usually with periodic settlement of payment.
Instead of:
Q2: How is istijrār applied in Islamic finance?
Answer
In contemporary Islamic finance, istijrār can be used to structure:
Islamic trade financing facilities,
particularly:
Q3: What is the role of the Islamic bank in istijrār import financing?
Answer
The Islamic bank facilitates:
Two Types of Delivery Arrangement in Istijrār
1. Bill of Lading Controlled by the Bank
Explanation
The Islamic bank:
Case Study 1: Bank Controls Goods
A Malaysian importer wishes to import:
Transaction Structure
Step 1
Islamic bank issues:
Step 2
Exporter ships goods.
The:
Step 3
Bank finances importer through istijrār arrangement.
Importer gradually purchases goods from bank.
Financing Amount
Bank’s Profit
2{,}300{,}000 - 2{,}000{,}000 = 300{,}000
2{,}300{,}000 - 2{,}000{,}000 = 300{,}000
Analysis
The bank:
✅ Sharī‘ah-compliant istijrār trade financing.
2. Bill of Lading Not Controlled by the Bank
Explanation
In this structure:
Case Study 2: Direct Delivery to Importer
A food importer purchases:
Transaction Structure
Step 1
Islamic bank issues:
Step 2
Exporter ships goods directly to importer.
The:
Step 3
Importer settles financing progressively with bank under istijrār arrangement.
Financing Details
Bank’s Profit
1{,}700{,}000 - 1{,}500{,}000 = 200{,}000
1{,}700{,}000 - 1{,}500{,}000 = 200{,}000
Analysis
✅ Permissible istijrār-based financing arrangement.
Q4: Why is istijrār useful in Islamic trade finance?
Answer
Istijrār is beneficial because:
Q5: How does istijrār differ from murābahah and tawarruq?
Istijrār
Murābahah
Tawarruq
Important Principle
Istijrār supports:
Q1: What is istijrār?
Answer
Istijrār refers to:
a contractual arrangement where a buyer continuously purchases goods from a seller over a period of time, usually with periodic settlement of payment.
Instead of:
- concluding a separate contract for every individual purchase,
- establish an ongoing supply arrangement.
- repetitive supply transactions;
- trade financing;
- import-export businesses.
Q2: How is istijrār applied in Islamic finance?
Answer
In contemporary Islamic finance, istijrār can be used to structure:
Islamic trade financing facilities,
particularly:
- import financing under a letter of credit (LC).
- the importer obtains financing from an Islamic bank;
- goods are purchased from exporter/supplier;
- financing is arranged through continuous supply mechanism.
- murābahah financing;
- tawarruq financing.
Q3: What is the role of the Islamic bank in istijrār import financing?
Answer
The Islamic bank facilitates:
- payment to exporter;
- issuance of letter of credit;
- trade financing for importer.
- bank controlling goods; or
- direct delivery to importer.
Two Types of Delivery Arrangement in Istijrār
1. Bill of Lading Controlled by the Bank
Explanation
The Islamic bank:
- retains control over shipping documents;
- controls ownership/title of goods during shipment.
- in the bank’s name.
- the bank has constructive possession (qabd hukmī) over goods.
Case Study 1: Bank Controls Goods
A Malaysian importer wishes to import:
- electronic equipment from Japan.
Transaction Structure
Step 1
Islamic bank issues:
- letter of credit to Japanese exporter.
Step 2
Exporter ships goods.
The:
- bill of lading is issued in bank’s name.
- the bank controls goods during shipment.
Step 3
Bank finances importer through istijrār arrangement.
Importer gradually purchases goods from bank.
Financing Amount
- Import cost = RM2,000,000
- Selling price to importer = RM2,300,000
Bank’s Profit
2{,}300{,}000 - 2{,}000{,}000 = 300{,}000
2{,}300{,}000 - 2{,}000{,}000 = 300{,}000
Analysis
The bank:
- obtains constructive possession through bill of lading;
- assumes ownership risk during shipment.
✅ Sharī‘ah-compliant istijrār trade financing.
2. Bill of Lading Not Controlled by the Bank
Explanation
In this structure:
- goods are shipped directly to importer;
- the bank does not control shipping documents.
- receives goods directly from exporter.
- still finances the trade arrangement through agreed istijrār facility.
Case Study 2: Direct Delivery to Importer
A food importer purchases:
- frozen meat products from Australia.
Transaction Structure
Step 1
Islamic bank issues:
- letter of credit.
Step 2
Exporter ships goods directly to importer.
The:
- bill of lading names importer directly.
- bank does not physically or constructively control goods.
Step 3
Importer settles financing progressively with bank under istijrār arrangement.
Financing Details
- Import value = RM1,500,000
- Payment by importer over 12 months = RM1,700,000
Bank’s Profit
1{,}700{,}000 - 1{,}500{,}000 = 200{,}000
1{,}700{,}000 - 1{,}500{,}000 = 200{,}000
Analysis
- Goods move directly to importer.
- Bank provides financing facility.
- Continuous supply relationship exists.
✅ Permissible istijrār-based financing arrangement.
Q4: Why is istijrār useful in Islamic trade finance?
Answer
Istijrār is beneficial because:
- it facilitates repeated trade transactions;
- reduces need for repeated separate contracts;
- supports import-export financing;
- simplifies ongoing commercial supply arrangements.
- wholesalers;
- importers;
- manufacturers;
- commodity traders.
Q5: How does istijrār differ from murābahah and tawarruq?
Istijrār
- Continuous supply arrangement.
- Suitable for repetitive transactions.
- Trade-oriented structure.
Murābahah
- Single cost-plus sale transaction.
- Common in asset financing.
Tawarruq
- Cash liquidity arrangement through commodity trading.
- Mainly financing-oriented rather than supply-oriented.
Important Principle
Istijrār supports:
- genuine commercial activity;
- trade financing;
- continuous supply relationships.
- a Sharī‘ah-compliant alternative to conventional trade financing,
while avoiding: - ribā-based lending structures.
0 Comments