Islamic Contract – Application of Istijrār in Islamic Finance

​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:

• concluding a separate contract for every individual purchase,

the parties:

• establish an ongoing supply arrangement.

Istijrār is commonly suitable for:

• 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).

Under this arrangement:

• the importer obtains financing from an Islamic bank;
• goods are purchased from exporter/supplier;
• financing is arranged through continuous supply mechanism.

Istijrār serves as an alternative to:

• 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.

The arrangement may involve:

• 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.

The bill of lading is issued:

• in the bank’s name.

Thus:

• 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.

Thus:

• 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.

Result
✅ 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.

The importer:

• receives goods directly from exporter.

The bank:

• 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.

Thus:

• 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.

Result
✅ 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.

It is especially useful for:

• 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.

It provides:

• a Sharī‘ah-compliant alternative to conventional trade financing,
  while avoiding:
• ribā-based lending structures.