Islamic Contract – Bay’ al-Istisnā‘: Late Delivery Charge Clause in Istisnā‘ Contracts

Islamic Contract – Bay’ al-Istisnā‘: Late Delivery Charge Clause in Istisnā‘ Contracts
Q1: Why are the terms
gharamah
and
ta‘wīd
not commonly used in istisnā‘ late delivery clauses?
Answer
The terms:

• gharamah (penalty); and
• ta‘wīd (compensation)

are more commonly used in:
debt-based contracts such as murābahah financing.
This is because murābahah primarily creates:

• a debt obligation owed by the customer to the bank.

Late payment in murābahah therefore concerns:

• delayed settlement of debt.

Hence:

• ta‘wīd compensates actual losses from delayed payment;
• gharamah acts as a deterrent penalty against intentional default.

Why Istisnā‘ Is Different
In istisnā‘:

• the issue is not late payment of debt;
• the issue is:

delay in completing or delivering a manufactured/construction asset.
Therefore, the late delivery clause in istisnā‘ is usually treated as:
a contractual performance penalty clause (shart jazā’ī)
rather than:

• debt compensation (ta‘wīd); or
• debt penalty (gharamah).

This is because:

• the purchaser suffers loss due to construction or manufacturing delay,
• not due to unpaid debt.

Q2: What is the AAOIFI position regarding late delivery charges?
Answer
According to AAOIFI Shariah Standard (Para 6/6):

• a fair penalty clause may be included in the istisnā‘ contract to compensate the purchaser if the manufacturer delays delivery.

However:

• force majeure situations are excluded.

Examples of force majeure:

• floods;
• earthquakes;
• war;
• government restrictions.

The compensation must be:

• fair;
• proportionate; and
• linked to actual contractual delay.

Q3: What is the BNM position regarding late delivery charges?
Answer
According to the BNM Policy Document on Istisnā‘ (Para 27.4):

• the contracting parties may include:

a punitive clause (shart jazā’ī)
against the seller for late delivery.
Unlike murābahah:

• the penalty amount may be recognised as income by the purchaser.

This is because:

• the purchaser may suffer genuine commercial losses from project delay.

Q4: What is
shart jazā’ī
?
Answer
Shart jazā’ī means:
a contractual penalty clause agreed upon in advance for breach or delay in performance obligations.
In istisnā‘:

• it applies when the seller/manufacturer:
  • fails to complete;
  • delays construction;
  • or delivers late.

Comparison Between Murābahah and Istisnā‘ Late Charges
Murābahah
Nature of Issue
Late payment of debt.
Terms Used

• ta‘wīd
• gharamah

Reason
Customer delays repayment obligation.


Istisnā‘
Nature of Issue
Late delivery or late construction.
Term Used

• shart jazā’ī

Reason
Manufacturer delays contractual performance.


Case Study 1: Murābahah Late Payment (Ta‘wīd and Gharamah)
An Islamic bank provides murābahah vehicle financing.
Financing Details

• Selling price: RM120,000
• Monthly instalment: RM2,000

The customer delays payment for:

• 5 months.

Analysis
This concerns:

• delayed debt repayment.

Thus:

• ta‘wīd and gharamah may apply.

Case Study 2: Istisnā‘ Late Delivery (
Shart Jazā’ī
)
A contractor agrees to construct a warehouse.
Contract Details

• Construction price: RM10,000,000
• Completion date: 1 January 2029

The contract states:
“Contractor shall pay RM15,000 per week for unjustified delay.”
The contractor delays completion by:

• 6 weeks.

Penalty Calculation
15,000 times 6 = 90,000​

Result

• Contractor pays RM90,000 to purchaser.

Analysis
This is:

• not ta‘wīd for debt delay;
• not gharamah for late payment.

Instead:

• it is a contractual performance penalty (shart jazā’ī)
  for delayed completion of construction.

Case Study 3: Force Majeure Situation
A construction company builds a factory under istisnā‘.
Contract Details

• Factory value: RM30,000,000

During construction:

• severe earthquake damages site.

Completion delayed by:

• 4 months.

Analysis
Delay caused by:

• force majeure beyond contractor’s control.

Therefore:

• penalty clause should not apply.

Result
✅ No shart jazā’ī imposed.


Important Principle
Murābahah
Late charges relate to:
debt repayment obligations.
Thus:

• ta‘wīd and gharamah apply.

Istisnā‘
Late charges relate to:
failure to complete or deliver manufactured asset on time.
Thus:

• shart jazā’ī applies instead.

The distinction exists because:

• the legal nature of the obligation is different.