- Published on
Islamic Contract – Bay’ al-Istijrār (Supply or Wholesale Sale)
1. Definition of Bay’ al-Istijrār
Literal Meaning
The word istijrār is derived from the Arabic verb:
istajarra
which means:
deferral,
particularly in relation to deferred debt or payment.
2. Technical Definition of Bay’ al-Istijrār
Technically, Bay’ al-Istijrār (hereinafter, istijrār) refers to:
a sale arrangement in which the buyer continuously takes merchandise from the seller in instalments or on a regular basis, while payment may be made either later or in advance.
Earlier Definition
Some jurists earlier defined istijrār as:
taking goods continuously from a vendor and paying later.
This definition focused mainly on:
More Accurate Definition
However, some scholars argue:
this definition is incomplete,
because:
Definition by al-Ashqar
Al-Ashqar defines istijrār as:
taking merchandise from the vendor in instalments on a regular basis while payment may be made in advance or deferred.
Definition by Securities Commission Malaysia
The Securities Commission Malaysia defines istijrār as:
“a contract whereby the supplier agrees to supply a particular product on an ongoing basis, e.g., monthly, at an agreed price and an agreed mode of payment.”
Main Features of Istijrār
1. Continuous Supply Relationship
Goods are supplied:
2. Goods Taken in Stages
The buyer:
3. Payment Flexibility
Payment may be:
✅ upfront;
✅ deferred;
✅ periodic;
✅ instalment-based.
4. Common in Commercial Supply Chains
Istijrār is commonly used in:
Example 1 – Istijrār With Deferred Payment
A restaurant regularly purchases:
Supply Arrangement
Week 1
100 kg chicken
Week 2
120 kg chicken
Week 3
90 kg chicken
The restaurant:
Analysis
The goods are:
✅ Istijrār with deferred payment.
Example 2 – Istijrār With Upfront Payment
A factory prepays:
Analysis
Payment:
✅ made upfront.
Goods:
✅ supplied gradually.
Result
✅ Istijrār with upfront payment.
Example 3 – Modern Commercial Example
A supermarket signs agreement with beverage company.
The beverage company agrees:
Features Present
✅ continuous supply
✅ repeated withdrawals
✅ agreed payment mechanism
Result
✅ Contemporary istijrār arrangement.
Importance of Istijrār in Islamic Finance
Istijrār is important because:
Application in Islamic Finance
Istijrār may be used in:
an alternative to murābahah or tawarruq-based trade financing.
Sharī‘ah Issues in Istijrār
The major Sharī‘ah issues concern:
Important Sharī‘ah Principle
Istijrār is generally permissible because:
the original rule in commercial transactions is permissibility,
provided:
✅ mutual consent exists;
✅ contractual obligations are clear;
✅ excessive uncertainty is avoided;
✅ Sharī‘ah requirements of sale are fulfilled.
1. Definition of Bay’ al-Istijrār
Literal Meaning
The word istijrār is derived from the Arabic verb:
istajarra
which means:
- to pull;
- to drag;
- to draw along.
deferral,
particularly in relation to deferred debt or payment.
2. Technical Definition of Bay’ al-Istijrār
Technically, Bay’ al-Istijrār (hereinafter, istijrār) refers to:
a sale arrangement in which the buyer continuously takes merchandise from the seller in instalments or on a regular basis, while payment may be made either later or in advance.
Earlier Definition
Some jurists earlier defined istijrār as:
taking goods continuously from a vendor and paying later.
This definition focused mainly on:
- deferred payment arrangements.
More Accurate Definition
However, some scholars argue:
this definition is incomplete,
because:
- payment in istijrār may be:
- deferred; or
- upfront.
- the concept is broader than merely deferred payment.
Definition by al-Ashqar
Al-Ashqar defines istijrār as:
taking merchandise from the vendor in instalments on a regular basis while payment may be made in advance or deferred.
Definition by Securities Commission Malaysia
The Securities Commission Malaysia defines istijrār as:
“a contract whereby the supplier agrees to supply a particular product on an ongoing basis, e.g., monthly, at an agreed price and an agreed mode of payment.”
Main Features of Istijrār
1. Continuous Supply Relationship
Goods are supplied:
- continuously;
- periodically;
- regularly.
- daily;
- weekly;
- monthly.
2. Goods Taken in Stages
The buyer:
- does not necessarily take all goods at once.
- goods are withdrawn progressively.
3. Payment Flexibility
Payment may be:
✅ upfront;
✅ deferred;
✅ periodic;
✅ instalment-based.
4. Common in Commercial Supply Chains
Istijrār is commonly used in:
- wholesale trade;
- supermarkets;
- restaurants;
- manufacturing supply chains;
- trade finance.
Example 1 – Istijrār With Deferred Payment
A restaurant regularly purchases:
- chicken supplies from wholesaler.
Supply Arrangement
Week 1
100 kg chicken
Week 2
120 kg chicken
Week 3
90 kg chicken
The restaurant:
- takes goods continuously;
- pays supplier at month-end.
Analysis
The goods are:
- supplied regularly;
- taken in stages;
- paid later.
✅ Istijrār with deferred payment.
Example 2 – Istijrār With Upfront Payment
A factory prepays:
- RM500,000
to steel supplier.
- delivers steel monthly over one year.
Analysis
Payment:
✅ made upfront.
Goods:
✅ supplied gradually.
Result
✅ Istijrār with upfront payment.
Example 3 – Modern Commercial Example
A supermarket signs agreement with beverage company.
The beverage company agrees:
- to supply drinks weekly.
- to pay every 30 days.
Features Present
✅ continuous supply
✅ repeated withdrawals
✅ agreed payment mechanism
Result
✅ Contemporary istijrār arrangement.
Importance of Istijrār in Islamic Finance
Istijrār is important because:
- modern businesses require continuous supply arrangements;
- repeated contracting for every transaction may be impractical;
- it facilitates trade and commercial efficiency.
Application in Islamic Finance
Istijrār may be used in:
- Islamic trade finance;
- import financing;
- wholesale supply arrangements;
- Islamic letter of credit facilities.
an alternative to murābahah or tawarruq-based trade financing.
Sharī‘ah Issues in Istijrār
The major Sharī‘ah issues concern:
- certainty of price;
- contractual formation;
- deferred payment;
- ownership and possession;
- uncertainty (gharar).
- pricing methods;
- sale by conduct (bay‘ al-mu‘āṭāh);
- unknown pricing structures.
Important Sharī‘ah Principle
Istijrār is generally permissible because:
the original rule in commercial transactions is permissibility,
provided:
✅ mutual consent exists;
✅ contractual obligations are clear;
✅ excessive uncertainty is avoided;
✅ Sharī‘ah requirements of sale are fulfilled.
- Published on
Islamic Contract – Legality of Bay’ al-Istijrār
1. General Legality of Istijrār
Explanation
In general:
Muslim jurists agree on the permissibility of istijrār,
based on:
✅ the price is known to both contracting parties.
What Is Istijrār?
Istijrār refers to:
a continuous supply arrangement where a buyer repeatedly takes goods from a seller over time with periodic settlement of payment.
It is commonly used in:
Example of Permissible Istijrār
A restaurant regularly purchases:
Example With Figures
Week 1
50 bags rice at RM80 each
50 \times 80 = 4{,}000
50 \times 80 = 4{,}000
Week 2
60 bags rice at RM82 each
60 \times 82 = 4{,}920
60 \times 82 = 4{,}920
Total Month-End Payment
4{,}000 + 4{,}920 = 8{,}920
4{,}000 + 4{,}920 = 8{,}920
Result
✅ Permissible because:
2. Position of the Shāfi‘ī School
Majority Shāfi‘ī View
The majority of the Shāfi‘ī School:
❌ do not generally recognise:
sale by conduct (bay‘ al-mu‘āṭāh)
without:
What Does This Mean?
According to the majority Shāfi‘īs:
Example
A customer enters grocery shop:
Majority Shāfi‘ī Concern
Because:
Some Shāfi‘ī Scholars Were More Flexible
Certain Shāfi‘ī scholars such as:
sale by conduct (bay‘ al-mu‘āṭāh).
Especially where:
3. Position of the Mālikī School
Mālikī View
The Mālikī School generally:
✅ allows istijrār.
However:
Thus:
Example
A bakery regularly takes:
Mālikī Analysis
The act of:
✅ contractual formation.
4. Unknown Price Issue in Istijrār
Main Sharī‘ah Concern
Jurists differ regarding:
permissibility of istijrār when the price is unknown at the time goods are taken.
Why Is This Important?
Islamic commercial law generally requires:
✅ certainty of price (thaman).
Uncertainty regarding price may create:
❌ gharar (excessive uncertainty).
Example of Problematic Situation
A retailer continuously takes:
Only later:
Juristic Concern
At the time goods are taken:
❌ price remains uncertain.
This may lead to:
Majority Position
Most jurists:
❌ do not allow sales with unknown prices.
They rely on:
Minority Position
Some Hanafi and Hanbali jurists:
✅ allow reliance on:
Example of Permissible Market-Based Practice
A petrol station continuously receives:
5. Important Sharī‘ah Principles in Istijrār
Principle 1
Sale Contracts Are Generally Permissible
Based on:
Principle 2
Mutual Consent Is Required
Contracting parties must genuinely consent.
Principle 3
Price Certainty Is Important
Islamic law generally requires:
✅ known price;
✅ known obligations.
Principle 4
Excessive Uncertainty (
Gharar
) Must Be Avoided
Unknown prices may invalidate sales.
Principle 5
Commercial Custom (
‘Urf
) May Be Considered
Some jurists allow flexibility where:
Overall Conclusion
Istijrār is generally:
✅ permissible in Islamic law,
particularly when:
avoiding uncertainty and ensuring fairness in commercial transactions.
1. General Legality of Istijrār
Explanation
In general:
Muslim jurists agree on the permissibility of istijrār,
based on:
- the general permissibility of sale contracts in Islamic law.
✅ the price is known to both contracting parties.
What Is Istijrār?
Istijrār refers to:
a continuous supply arrangement where a buyer repeatedly takes goods from a seller over time with periodic settlement of payment.
It is commonly used in:
- wholesale supply;
- retail supply;
- trade financing;
- import-export transactions.
Example of Permissible Istijrār
A restaurant regularly purchases:
- rice from supplier.
- quantity and price are specified.
- payment is settled collectively.
Example With Figures
Week 1
50 bags rice at RM80 each
50 \times 80 = 4{,}000
50 \times 80 = 4{,}000
Week 2
60 bags rice at RM82 each
60 \times 82 = 4{,}920
60 \times 82 = 4{,}920
Total Month-End Payment
4{,}000 + 4{,}920 = 8{,}920
4{,}000 + 4{,}920 = 8{,}920
Result
✅ Permissible because:
- goods known;
- prices known;
- obligations clear.
2. Position of the Shāfi‘ī School
Majority Shāfi‘ī View
The majority of the Shāfi‘ī School:
❌ do not generally recognise:
sale by conduct (bay‘ al-mu‘āṭāh)
without:
- explicit offer (ijāb);
- explicit acceptance (qabūl).
What Does This Mean?
According to the majority Shāfi‘īs:
- every sale transaction should contain:
- expressed offer;
- expressed acceptance.
- merely taking goods and paying later without verbal/formal contract may be insufficient.
Example
A customer enters grocery shop:
- takes bread daily;
- no formal agreement;
- pays at month-end.
Majority Shāfi‘ī Concern
Because:
- no explicit sale contract formed each time,
they may regard:
❌ the transaction as problematic.
Some Shāfi‘ī Scholars Were More Flexible
Certain Shāfi‘ī scholars such as:
- al-Ghazālī;
- Ibn Surayj
sale by conduct (bay‘ al-mu‘āṭāh).
Especially where:
- customary practice clearly indicates mutual consent.
3. Position of the Mālikī School
Mālikī View
The Mālikī School generally:
✅ allows istijrār.
However:
- the contract begins:
Thus:
- taking possession itself signifies contractual consent.
Example
A bakery regularly takes:
- flour supplies from wholesaler.
- simply collects flour;
- records quantities;
- pays later.
Mālikī Analysis
The act of:
- taking the flour
✅ contractual formation.
4. Unknown Price Issue in Istijrār
Main Sharī‘ah Concern
Jurists differ regarding:
permissibility of istijrār when the price is unknown at the time goods are taken.
Why Is This Important?
Islamic commercial law generally requires:
✅ certainty of price (thaman).
Uncertainty regarding price may create:
❌ gharar (excessive uncertainty).
Example of Problematic Situation
A retailer continuously takes:
- beverages from supplier.
- exact price;
- pricing formula;
- market benchmark
Only later:
- parties negotiate total amount.
Juristic Concern
At the time goods are taken:
❌ price remains uncertain.
This may lead to:
- disputes;
- unfairness;
- unlawful consumption of wealth.
Majority Position
Most jurists:
❌ do not allow sales with unknown prices.
They rely on:
- Qur’ānic prohibition against unlawful appropriation of wealth;
- prohibition of gharar;
- requirement of certainty in contracts.
Minority Position
Some Hanafi and Hanbali jurists:
✅ allow reliance on:
- prevailing market price;
- commercial custom (‘urf);
- public need.
- market prices are stable and commonly known.
Example of Permissible Market-Based Practice
A petrol station continuously receives:
- fuel supply.
- publicly displayed;
- commercially standardised.
- some jurists tolerate deferred reconciliation using prevailing market rates.
5. Important Sharī‘ah Principles in Istijrār
Principle 1
Sale Contracts Are Generally Permissible
Based on:
- general permissibility of trade in Islam.
Principle 2
Mutual Consent Is Required
Contracting parties must genuinely consent.
Principle 3
Price Certainty Is Important
Islamic law generally requires:
✅ known price;
✅ known obligations.
Principle 4
Excessive Uncertainty (
Gharar
) Must Be Avoided
Unknown prices may invalidate sales.
Principle 5
Commercial Custom (
‘Urf
) May Be Considered
Some jurists allow flexibility where:
- stable market practices exist;
- public need is widespread.
Overall Conclusion
Istijrār is generally:
✅ permissible in Islamic law,
particularly when:
- goods are known;
- prices are known;
- contractual obligations are clear.
- jurists differ regarding:
- sale by conduct (bay‘ al-mu‘āṭāh);
- unknown pricing;
- deferred settlement structures.
avoiding uncertainty and ensuring fairness in commercial transactions.
- Published on
Islamic Contract – Bay’ al-Istijrār: Istijrār With Deferred Payment
1. Definition of Istijrār With Deferred Payment
Explanation
Istijrār with deferred payment refers to:
a continuous supply arrangement where the buyer takes goods gradually over time and payment is deferred until a later date or settlement period.
Instead of:
2. Types of Istijrār With Deferred Payment
Scholars discuss several forms of deferred-payment istijrār.
A. Price Specified in Every Transaction
Structure
In this form:
the parties know:
✅ exact quantity
✅ exact price
during each transaction.
Scholarly View
This form is generally:
✅ permissible.
It is accepted by scholars who allow:
sale by conduct (bay‘ al-mu‘āṭāh).
Schools Allowing It
✅ Hanafis
✅ Mālikis
✅ Hanbalis
✅ Some Shāfi‘ī scholars
(such as al-Ghazālī and Ibn Surayj)
Majority Shāfi‘ī Position
The majority of Shāfi‘ī jurists:
❌ do not allow it.
Example
A restaurant regularly purchases:
Week 1
100 \times 15 = 1{,}500
100 \times 15 = 1{,}500
Week 2
120 \times 16 = 1{,}920
120 \times 16 = 1{,}920
End of Month
Restaurant pays:
1{,}500 + 1{,}920 = 3{,}420
1{,}500 + 1{,}920 = 3{,}420
Analysis
Every withdrawal:
Result
✅ Generally permissible according to majority non-Shāfi‘ī schools.
B. Price Not Specified Each Time But Determined by Market Price on Day Goods Are Taken
Structure
In this form:
Majority Juristic View
The famous opinion among the four schools:
❌ generally does NOT allow this arrangement.
Why?
Because:
Basis of Prohibition
The jurists rely upon:
Example
A supermarket continuously takes:
Parties merely agree:
“Price will follow market price each day.”
Problem
At the moment goods are taken:
❌ exact price unknown.
This may lead to:
❌ Invalid according to majority view.
Minority Hanafi and Hanbali View
Some Hanafi and Hanbali jurists:
✅ allow this arrangement
if:
Basis of Their Opinion
They rely on:
Example
A petrol station regularly takes:
✅ Permissible according to some Hanafi and Hanbali jurists.
C. Price Not Specified and No Agreed Pricing Mechanism
Structure
In this form:
Majority Juristic View
Most jurists:
❌ prohibit this arrangement.
Why?
Because:
Example
A retailer continuously takes:
At month-end:
Problem
At time goods are taken:
❌ no binding sale price exists.
Thus:
❌ Invalid according to majority.
Later Hanafi Position
Some later Hanafi scholars:
✅ allowed this arrangement
if:
Example
A grocery store continuously receives:
At month-end:
✅ tolerated it.
3. Comparative Summary
Type A
Price Specified in Every Transaction
Majority View
✅ Permissible.
Reason
Price known at every withdrawal.
Type B
Market Price Used But Not Expressly Stated
Majority View
❌ Not permissible.
Minority Hanafi/Hanbali View
✅ Permissible if market price stable.
Type C
No Price and No Pricing Mechanism Initially
Majority View
❌ Not permissible.
Later Hanafi View
✅ Permissible after reconciliation based on custom.
4. Important Sharī‘ah Principle
The major concern in deferred-payment istijrār is:
uncertainty regarding price (jahālah al-thaman).
Islamic commercial law generally requires:
✅ certainty of price;
✅ certainty of obligations;
✅ avoidance of excessive gharar.
However:
1. Definition of Istijrār With Deferred Payment
Explanation
Istijrār with deferred payment refers to:
a continuous supply arrangement where the buyer takes goods gradually over time and payment is deferred until a later date or settlement period.
Instead of:
- paying immediately upon each withdrawal,
- receives goods continuously;
- settles payment later.
- the permissibility of various forms of this arrangement,
particularly: - price determination.
2. Types of Istijrār With Deferred Payment
Scholars discuss several forms of deferred-payment istijrār.
A. Price Specified in Every Transaction
Structure
In this form:
- every time goods are taken,
- the price is clearly specified.
the parties know:
✅ exact quantity
✅ exact price
during each transaction.
Scholarly View
This form is generally:
✅ permissible.
It is accepted by scholars who allow:
sale by conduct (bay‘ al-mu‘āṭāh).
Schools Allowing It
✅ Hanafis
✅ Mālikis
✅ Hanbalis
✅ Some Shāfi‘ī scholars
(such as al-Ghazālī and Ibn Surayj)
Majority Shāfi‘ī Position
The majority of Shāfi‘ī jurists:
❌ do not allow it.
Example
A restaurant regularly purchases:
- chicken supplies from wholesaler.
Week 1
- 100 kg chicken
- RM15 per kg
100 \times 15 = 1{,}500
100 \times 15 = 1{,}500
Week 2
- 120 kg chicken
- RM16 per kg
120 \times 16 = 1{,}920
120 \times 16 = 1{,}920
End of Month
Restaurant pays:
1{,}500 + 1{,}920 = 3{,}420
1{,}500 + 1{,}920 = 3{,}420
Analysis
Every withdrawal:
- has known price;
- has known quantity.
Result
✅ Generally permissible according to majority non-Shāfi‘ī schools.
B. Price Not Specified Each Time But Determined by Market Price on Day Goods Are Taken
Structure
In this form:
- goods are taken continuously;
- price not expressly stated during each withdrawal.
- parties initially agree that:
Majority Juristic View
The famous opinion among the four schools:
❌ generally does NOT allow this arrangement.
Why?
Because:
- price is unknown during contract session;
- uncertainty (gharar) exists.
Basis of Prohibition
The jurists rely upon:
- Qur’ānic prohibition against unlawful consumption of wealth;
- prohibition of uncertainty in contracts;
- scholarly consensus requiring known price.
Example
A supermarket continuously takes:
- vegetables from supplier.
Parties merely agree:
“Price will follow market price each day.”
Problem
At the moment goods are taken:
❌ exact price unknown.
This may lead to:
- disputes;
- uncertainty.
❌ Invalid according to majority view.
Minority Hanafi and Hanbali View
Some Hanafi and Hanbali jurists:
✅ allow this arrangement
if:
- market price is stable and commonly known.
Basis of Their Opinion
They rely on:
- customary market practice (‘urf);
- prevailing market value (thaman al-mithl);
- practical commercial necessity.
Example
A petrol station regularly takes:
- fuel supplies.
- publicly known and stable.
- parties rely on prevailing market rate.
✅ Permissible according to some Hanafi and Hanbali jurists.
C. Price Not Specified and No Agreed Pricing Mechanism
Structure
In this form:
- goods are continuously taken;
- no exact price stated;
- no agreed pricing formula;
- final payment determined only during later account reconciliation.
Majority Juristic View
Most jurists:
❌ prohibit this arrangement.
Why?
Because:
- contract lacks certainty regarding price;
- excessive gharar exists.
Example
A retailer continuously takes:
- beverages from supplier.
- price;
- pricing formula;
- market benchmark
At month-end:
- parties negotiate final amount.
Problem
At time goods are taken:
❌ no binding sale price exists.
Thus:
- contract remains incomplete.
❌ Invalid according to majority.
Later Hanafi Position
Some later Hanafi scholars:
✅ allowed this arrangement
if:
- parties finally agree on price during reconciliation stage.
- juristic preference (istihsān);
- commercial custom (‘urf);
- widespread public need (‘umūm al-balwā).
Example
A grocery store continuously receives:
- bread supplies daily.
At month-end:
- parties reconcile account using accepted market rates.
- became widespread commercial custom,
✅ tolerated it.
3. Comparative Summary
Type A
Price Specified in Every Transaction
Majority View
✅ Permissible.
Reason
Price known at every withdrawal.
Type B
Market Price Used But Not Expressly Stated
Majority View
❌ Not permissible.
Minority Hanafi/Hanbali View
✅ Permissible if market price stable.
Type C
No Price and No Pricing Mechanism Initially
Majority View
❌ Not permissible.
Later Hanafi View
✅ Permissible after reconciliation based on custom.
4. Important Sharī‘ah Principle
The major concern in deferred-payment istijrār is:
uncertainty regarding price (jahālah al-thaman).
Islamic commercial law generally requires:
✅ certainty of price;
✅ certainty of obligations;
✅ avoidance of excessive gharar.
However:
- some jurists allow flexibility where:
- strong commercial custom exists;
- public need is widespread;
- market prices are stable and commonly known.
- Published on
Islamic Contract – Bay’ al-Istijrār: Istijrār With Upfront Payment
1. Definition of Istijrār With Upfront Payment
Explanation
This type of istijrār involves:
the buyer paying money upfront to the seller for a specified quantity of goods that will be supplied gradually in stages over time.
Instead of:
Simple Example
A restaurant pays:
✅ Istijrār with upfront payment.
2. Scholarly Views on Istijrār With Upfront Payment
Majority of Scholars
The majority of scholars:
✅ permit this arrangement,
although they differ regarding:
the fiqh characterization (takyīf fiqhī) of the contract.
Some classify it as:
Shāfi‘ī School
The Shāfi‘ī jurists:
❌ do not permit this form of istijrār.
Why?
Because:
3. SAC-BNM Approval on Istijrār Trade Financing
SAC-BNM Resolution
The:
Shariah Advisory Council of Bank Negara Malaysia (SAC-BNM)
at its:
194th meeting on 25 June 2019
approved:
a proposed import financing structure based on bay’ al-istijrār.
This approval was specifically for:
4. Structure of Istijrār Import Financing
The structure generally involves:
Chronological Flow of Istijrār Import Financing
STEP 1 — Customer Wants to Import Goods
A Malaysian importer wishes to import:
RM2,000,000
The customer requests:
STEP 2 — Customer Appointed as Agent
The Islamic bank appoints:
the importer/customer as purchasing agent (wakīl).
The customer now acts:
SAC-BNM Requirement
The facility agreement must clearly specify:
the importer’s responsibility as purchasing agent.
STEP 3 — Customer Purchases Goods for Bank
As agent:
✅ goods are purchased for the bank,
not yet for customer personally.
STEP 4 — Islamic Bank Becomes Owner of Goods
Once purchase completed:
✅ ownership transfers to Islamic bank.
Thus:
STEP 5 — Exporter Ships Goods
The exporter ships:
STEP 6 — Customer Receives Goods/Documents
The imported goods and/or shipping documents arrive.
STEP 7 — Customer Purchases Goods From Islamic Bank
After agency role completed,
the customer now enters:
separate purchase transaction with the Islamic bank.
This is important because:
SAC-BNM Requirement
The IFI must ensure:
proper sequencing of transactions.
Meaning:
STEP 8 — Customer Pays Bank
The customer pays:
Example With Figures
Import Cost Paid by Islamic Bank
RM2,000,000
Selling Price to Customer
RM2,300,000
Bank’s Profit
2{,}300{,}000 - 2{,}000{,}000 = 300{,}000
2{,}300{,}000 - 2{,}000{,}000 = 300{,}000
5. Why Proper Sequencing Is Important
Incorrect Structure
If customer:
Correct Structure
Sequence Must Be:
6. Risks and Liabilities
The agreement must clearly determine:
Example
Before Customer Purchases From Bank
✅ Bank bears ownership risk.
After Customer Purchases From Bank
✅ Customer bears ownership risk.
7. Why SAC-BNM Allowed This Structure
SAC-BNM approved this structure because:
the approval is confined specifically to the proposed trade finance structure.
Important Sharī‘ah Principle
Istijrār financing is permissible only if:
✅ proper ownership transfer occurs;
✅ agency and sale contracts are separated;
✅ sequencing is properly maintained;
✅ ownership risks are genuinely borne by the correct party.
Otherwise:
❌ the arrangement may resemble conventional interest-based financing.
1. Definition of Istijrār With Upfront Payment
Explanation
This type of istijrār involves:
the buyer paying money upfront to the seller for a specified quantity of goods that will be supplied gradually in stages over time.
Instead of:
- immediate full delivery,
- withdrawn progressively according to need.
Simple Example
A restaurant pays:
- RM100,000 upfront
to a food supplier for: - monthly supply of chicken over 1 year.
- delivers portions gradually every month.
✅ Istijrār with upfront payment.
2. Scholarly Views on Istijrār With Upfront Payment
Majority of Scholars
The majority of scholars:
✅ permit this arrangement,
although they differ regarding:
the fiqh characterization (takyīf fiqhī) of the contract.
Some classify it as:
- salam-like arrangement;
- continuous supply sale;
- hybrid contractual structure.
Shāfi‘ī School
The Shāfi‘ī jurists:
❌ do not permit this form of istijrār.
Why?
Because:
- payment occurs upfront;
- goods are delivered gradually later;
- uncertainty may arise regarding staged delivery.
3. SAC-BNM Approval on Istijrār Trade Financing
SAC-BNM Resolution
The:
Shariah Advisory Council of Bank Negara Malaysia (SAC-BNM)
at its:
194th meeting on 25 June 2019
approved:
a proposed import financing structure based on bay’ al-istijrār.
This approval was specifically for:
- Islamic trade finance facilities;
- Islamic letter of credit financing.
4. Structure of Istijrār Import Financing
The structure generally involves:
- Islamic Financial Institution (IFI);
- importer/customer;
- exporter/supplier.
Chronological Flow of Istijrār Import Financing
STEP 1 — Customer Wants to Import Goods
A Malaysian importer wishes to import:
- industrial machinery from Germany.
RM2,000,000
The customer requests:
- Islamic trade financing facility.
STEP 2 — Customer Appointed as Agent
The Islamic bank appoints:
the importer/customer as purchasing agent (wakīl).
The customer now acts:
- on behalf of the Islamic bank
to purchase goods.
SAC-BNM Requirement
The facility agreement must clearly specify:
the importer’s responsibility as purchasing agent.
STEP 3 — Customer Purchases Goods for Bank
As agent:
- the importer executes purchase transaction with exporter
on behalf of: - Islamic bank.
✅ goods are purchased for the bank,
not yet for customer personally.
STEP 4 — Islamic Bank Becomes Owner of Goods
Once purchase completed:
✅ ownership transfers to Islamic bank.
Thus:
- the bank bears ownership risk at this stage.
STEP 5 — Exporter Ships Goods
The exporter ships:
- industrial machinery.
STEP 6 — Customer Receives Goods/Documents
The imported goods and/or shipping documents arrive.
STEP 7 — Customer Purchases Goods From Islamic Bank
After agency role completed,
the customer now enters:
separate purchase transaction with the Islamic bank.
This is important because:
- agency role must finish first;
- customer cannot simultaneously act as:
- purchasing agent;
- purchaser.
SAC-BNM Requirement
The IFI must ensure:
proper sequencing of transactions.
Meaning:
- agency purchase first;
- customer purchase from bank second.
STEP 8 — Customer Pays Bank
The customer pays:
- agreed financing price;
- either deferred or instalment basis.
Example With Figures
Import Cost Paid by Islamic Bank
RM2,000,000
Selling Price to Customer
RM2,300,000
Bank’s Profit
2{,}300{,}000 - 2{,}000{,}000 = 300{,}000
2{,}300{,}000 - 2{,}000{,}000 = 300{,}000
5. Why Proper Sequencing Is Important
Incorrect Structure
If customer:
- purchases goods before agency role completed,
- contracts may overlap improperly;
- ownership transfer becomes unclear;
- Sharī‘ah issues may arise.
Correct Structure
Sequence Must Be:
- Customer acts as agent for bank.
- Bank acquires ownership.
- Customer later buys goods from bank.
6. Risks and Liabilities
The agreement must clearly determine:
- who bears ownership risk;
- liabilities at each stage.
Example
Before Customer Purchases From Bank
✅ Bank bears ownership risk.
After Customer Purchases From Bank
✅ Customer bears ownership risk.
7. Why SAC-BNM Allowed This Structure
SAC-BNM approved this structure because:
- modern trade finance requires practical import financing solutions;
- continuous supply financing is commercially needed;
- the structure facilitates Sharī‘ah-compliant international trade.
the approval is confined specifically to the proposed trade finance structure.
Important Sharī‘ah Principle
Istijrār financing is permissible only if:
✅ proper ownership transfer occurs;
✅ agency and sale contracts are separated;
✅ sequencing is properly maintained;
✅ ownership risks are genuinely borne by the correct party.
Otherwise:
❌ the arrangement may resemble conventional interest-based financing.
- 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.
- Published on
Islamic Trade Finance – Chronology Where Bill of Lading Is Sent Directly to Customer (Bank Has No Control)
Example Scenario
A Malaysian importer/customer wants to import:
RM1,000,000
The customer obtains:
the Bill of Lading (B/L) is sent directly to the customer,
so:
❌ the Islamic bank does NOT control the goods through the B/L.
This is one of the arrangements mentioned in:
STEP 1 — Customer Wants to Import Goods
The customer contacts:
STEP 2 — Customer Requests Financing From Islamic Bank
The customer asks:
STEP 3 — Islamic Bank Issues Letter of Credit (LC)
The Islamic bank issues:
a Letter of Credit (LC)
to the exporter.
The LC guarantees:
✅ payment to exporter
if:
IMPORTANT DIFFERENCE IN THIS STRUCTURE
The LC instructions provide that:
the Bill of Lading will be issued directly to customer/importer,
NOT:
❌ bank does not control shipment documents.
STEP 4 — Exporter Ships Goods
The exporter loads:
Bill of Lading (B/L).
STEP 5 — Bill of Lading Names Customer
The B/L states:
Consignee
➡ Customer/importer directly.
NOT:
✅ customer directly controls release of goods.
IMPORTANT CONSEQUENCE
Because customer is consignee:
❌ does not possess constructive control over goods through B/L.
STEP 6 — Exporter Receives Original B/L
The exporter physically receives:
STEP 7 — Exporter Submits Documents to Bank
The exporter still submits:
Why?
Because:
STEP 8 — Islamic Bank Pays Exporter
After checking documents:
✅ bank pays exporter.
STEP 9 — Ship Arrives in Malaysia
The ship reaches:
✅ can directly collect goods from port.
STEP 10 — Customer Repays Bank
The customer later settles:
IMPORTANT DIFFERENCE FROM BANK-CONTROLLED B/L
In Bank-Controlled Structure
B/L Names
➡ bank.
Result
✅ bank controls goods.
In Direct-to-Customer Structure
B/L Names
➡ customer.
Result
❌ bank does not control goods through B/L.
Ownership and Control in This Structure
During Shipment
Usually:
✅ customer may already have direct control rights through B/L.
The bank’s role mainly becomes:
Why Would This Structure Be Used?
It may be used:
Islamic Finance Perspective
This structure creates:
Chronological Summary
Step 1
Customer wants to import goods.
⬇
Step 2
Customer requests Islamic financing.
⬇
Step 3
Islamic bank issues LC.
⬇
Step 4
Exporter ships goods.
⬇
Step 5
Shipping company issues B/L directly to customer.
⬇
Step 6
Exporter submits documents to bank.
⬇
Step 7
Bank pays exporter.
⬇
Step 8
Ship arrives Malaysia.
⬇
Step 9
Customer directly collects goods.
⬇
Step 10
Customer repays financing to bank.
Important Principle
If B/L Names Bank
➡ bank controls goods.
If B/L Names Customer
➡ customer controls goods directly.
The:
Bill of Lading determines practical control and right to claim the shipment from the carrier.
Example Scenario
A Malaysian importer/customer wants to import:
- industrial equipment from Germany.
RM1,000,000
The customer obtains:
- Islamic trade financing facility.
the Bill of Lading (B/L) is sent directly to the customer,
so:
❌ the Islamic bank does NOT control the goods through the B/L.
This is one of the arrangements mentioned in:
- istijrār;
- certain import financing facilities.
STEP 1 — Customer Wants to Import Goods
The customer contacts:
- German exporter/supplier.
- industrial equipment.
STEP 2 — Customer Requests Financing From Islamic Bank
The customer asks:
- Islamic bank for import financing facility.
- subject to financing terms.
STEP 3 — Islamic Bank Issues Letter of Credit (LC)
The Islamic bank issues:
a Letter of Credit (LC)
to the exporter.
The LC guarantees:
✅ payment to exporter
if:
- exporter ships goods properly;
- exporter submits required documents.
IMPORTANT DIFFERENCE IN THIS STRUCTURE
The LC instructions provide that:
the Bill of Lading will be issued directly to customer/importer,
NOT:
- to the bank;
- not “to the order of the bank.”
❌ bank does not control shipment documents.
STEP 4 — Exporter Ships Goods
The exporter loads:
- industrial equipment onto ship.
Bill of Lading (B/L).
STEP 5 — Bill of Lading Names Customer
The B/L states:
Consignee
➡ Customer/importer directly.
NOT:
- Islamic bank.
✅ customer directly controls release of goods.
IMPORTANT CONSEQUENCE
Because customer is consignee:
- customer can directly claim goods from shipping company.
❌ does not possess constructive control over goods through B/L.
STEP 6 — Exporter Receives Original B/L
The exporter physically receives:
- original shipping documents.
STEP 7 — Exporter Submits Documents to Bank
The exporter still submits:
- invoice;
- B/L copy/original;
- shipping documents
Why?
Because:
- bank promised payment through LC.
STEP 8 — Islamic Bank Pays Exporter
After checking documents:
✅ bank pays exporter.
STEP 9 — Ship Arrives in Malaysia
The ship reaches:
- Malaysian port.
- customer already named consignee in B/L,
✅ can directly collect goods from port.
STEP 10 — Customer Repays Bank
The customer later settles:
- financing obligation with Islamic bank,
according to financing arrangement.
IMPORTANT DIFFERENCE FROM BANK-CONTROLLED B/L
In Bank-Controlled Structure
B/L Names
➡ bank.
Result
✅ bank controls goods.
In Direct-to-Customer Structure
B/L Names
➡ customer.
Result
❌ bank does not control goods through B/L.
Ownership and Control in This Structure
During Shipment
Usually:
✅ customer may already have direct control rights through B/L.
The bank’s role mainly becomes:
- payment financier;
- LC issuer.
Why Would This Structure Be Used?
It may be used:
- for commercial convenience;
- where importer has strong creditworthiness;
- where bank accepts lower documentary control.
Islamic Finance Perspective
This structure creates:
- less direct ownership/control by bank.
- Sharī‘ah structuring becomes more sensitive.
- financing does not become merely cash lending with profit.
- bank-controlled B/L structures are often preferred in murābahah trade financing.
Chronological Summary
Step 1
Customer wants to import goods.
⬇
Step 2
Customer requests Islamic financing.
⬇
Step 3
Islamic bank issues LC.
⬇
Step 4
Exporter ships goods.
⬇
Step 5
Shipping company issues B/L directly to customer.
⬇
Step 6
Exporter submits documents to bank.
⬇
Step 7
Bank pays exporter.
⬇
Step 8
Ship arrives Malaysia.
⬇
Step 9
Customer directly collects goods.
⬇
Step 10
Customer repays financing to bank.
Important Principle
If B/L Names Bank
➡ bank controls goods.
If B/L Names Customer
➡ customer controls goods directly.
The:
Bill of Lading determines practical control and right to claim the shipment from the carrier.
- Published on
Islamic Trade Finance – What Happens to Ownership When a Letter of Credit (LC) Is Issued?
Short Answer
Issuing a Letter of Credit (LC) alone:
does NOT automatically transfer ownership of the goods to the bank.
Ownership depends on:
a payment undertaking by the bank.
Important Principle
Letter of Credit (LC)
➡️ payment mechanism.
Bill of Lading (B/L)
➡️ control/possession document.
Sale Contract
➡️ determines ownership.
Chronological Ownership Explanation
Example Scenario
A Malaysian customer wants to import:
RM200,000
The customer requests:
STEP 1 — Customer Requests Financing
Customer asks:
“Please finance the import of this car.”
At this point:
❌ nobody new owns the car yet.
The exporter still owns the car.
STEP 2 — Islamic Bank Issues Letter of Credit
The Islamic bank issues:
a Letter of Credit (LC)
to exporter.
IMPORTANT POINT
At this stage:
❌ ownership still does NOT transfer to bank merely because LC is issued.
Why?
Because:
✅ exporter still owns the car.
STEP 3 — Exporter Ships the Car
Exporter loads car onto ship.
The shipping company issues:
Does B/L Automatically Transfer Ownership?
Not necessarily.
The B/L mainly gives:
✅ control over delivery/access to goods.
Ownership depends on:
STEP 4 — Bank Pays Exporter
After exporter submits compliant documents:
Did the bank purchase the car from exporter?
IF YES → Ownership Transfers to Bank
In Islamic murābahah financing:
usually:
✅ the bank purchases the goods from exporter first.
Thus:
✅ bank owns the car during shipment.
STEP 5 — Bank Sells Car to Customer
The bank later sells:
230,000 - 200,000 = 30,000
STEP 6 — Ownership Transfers to Customer
After murābahah sale:
✅ ownership transfers to customer.
The bank then:
VERY IMPORTANT DISTINCTION
LC Alone Does NOT Create Ownership
Issuing LC only means:
“The bank promises to pay.”
It does NOT automatically mean:
“The bank owns the goods.”
Ownership Comes From Sale Contract
Ownership usually transfers when:
Role of B/L
The B/L helps establish:
✅ constructive possession (qabd hukmī)
and
✅ control over delivery.
But:
Simplified Ownership Timeline
Before LC
Exporter owns car.
⬇
After LC Issued
Exporter STILL owns car.
⬇
After Bank Purchases Goods
Bank becomes owner.
⬇
During Shipment
Bank usually owns and controls goods through B/L.
⬇
After Murābahah Sale
Customer becomes owner.
⬇
After B/L Endorsed
Customer collects car.
Islamic Finance Perspective
This distinction is crucial because:
✅ bank must genuinely:
❌ transaction may resemble ribā-based financing.
Important Principle
LC
➡️ payment guarantee.
B/L
➡️ control and constructive possession.
Ownership
➡️ determined by actual sale contract and transfer of ownership rights.
Short Answer
Issuing a Letter of Credit (LC) alone:
does NOT automatically transfer ownership of the goods to the bank.
Ownership depends on:
- the underlying sale contract;
- when ownership transfer occurs;
- who purchased the goods.
a payment undertaking by the bank.
Important Principle
Letter of Credit (LC)
➡️ payment mechanism.
Bill of Lading (B/L)
➡️ control/possession document.
Sale Contract
➡️ determines ownership.
Chronological Ownership Explanation
Example Scenario
A Malaysian customer wants to import:
- a Toyota car from Japan.
RM200,000
The customer requests:
- Islamic bank financing through murābahah.
STEP 1 — Customer Requests Financing
Customer asks:
“Please finance the import of this car.”
At this point:
❌ nobody new owns the car yet.
The exporter still owns the car.
STEP 2 — Islamic Bank Issues Letter of Credit
The Islamic bank issues:
a Letter of Credit (LC)
to exporter.
IMPORTANT POINT
At this stage:
❌ ownership still does NOT transfer to bank merely because LC is issued.
Why?
Because:
- LC is only a promise to pay;
- not a sale contract by itself.
✅ exporter still owns the car.
STEP 3 — Exporter Ships the Car
Exporter loads car onto ship.
The shipping company issues:
- Bill of Lading (B/L).
- Islamic bank;
or - “to the order of Islamic bank.”
Does B/L Automatically Transfer Ownership?
Not necessarily.
The B/L mainly gives:
✅ control over delivery/access to goods.
Ownership depends on:
- underlying purchase contract;
- commercial terms.
STEP 4 — Bank Pays Exporter
After exporter submits compliant documents:
- Islamic bank pays exporter.
Did the bank purchase the car from exporter?
IF YES → Ownership Transfers to Bank
In Islamic murābahah financing:
usually:
✅ the bank purchases the goods from exporter first.
Thus:
- ownership transfers to bank;
- bank bears ownership risk;
- bank controls B/L.
✅ bank owns the car during shipment.
STEP 5 — Bank Sells Car to Customer
The bank later sells:
- the car to customer through murābahah.
- Bank cost = RM200,000
- Murābahah price = RM230,000
230,000 - 200,000 = 30,000
STEP 6 — Ownership Transfers to Customer
After murābahah sale:
✅ ownership transfers to customer.
The bank then:
- endorses/releases B/L to customer.
- collects car at port.
VERY IMPORTANT DISTINCTION
LC Alone Does NOT Create Ownership
Issuing LC only means:
“The bank promises to pay.”
It does NOT automatically mean:
“The bank owns the goods.”
Ownership Comes From Sale Contract
Ownership usually transfers when:
- bank actually purchases goods from exporter.
Role of B/L
The B/L helps establish:
✅ constructive possession (qabd hukmī)
and
✅ control over delivery.
But:
- B/L itself is not always the sole determinant of ownership.
Simplified Ownership Timeline
Before LC
Exporter owns car.
⬇
After LC Issued
Exporter STILL owns car.
⬇
After Bank Purchases Goods
Bank becomes owner.
⬇
During Shipment
Bank usually owns and controls goods through B/L.
⬇
After Murābahah Sale
Customer becomes owner.
⬇
After B/L Endorsed
Customer collects car.
Islamic Finance Perspective
This distinction is crucial because:
- Islamic banks cannot merely:
- lend money with profit.
✅ bank must genuinely:
- purchase goods;
- own goods;
- bear ownership risk;
- then resell goods.
❌ transaction may resemble ribā-based financing.
Important Principle
LC
➡️ payment guarantee.
B/L
➡️ control and constructive possession.
Ownership
➡️ determined by actual sale contract and transfer of ownership rights.
- Published on
Islamic Contract – Chronological Flow of Letter of Credit (LC) and Bill of Lading (B/L)
Example Scenario
A Malaysian customer wants to import:
RM200,000
The customer asks:
STEP 1 — Customer Requests Financing
The customer approaches the Islamic bank and says:
“I want to import a car from Japan but I need financing.”
The Islamic bank agrees to finance the transaction.
STEP 2 — Islamic Bank Issues Letter of Credit (LC)
The Islamic bank sends:
a Letter of Credit (LC)
to the Japanese exporter.
What Is the LC?
The LC is:
the bank’s promise to pay the exporter
provided:
Important LC Instruction
The LC states:
the Bill of Lading (B/L) must be issued:
Why Does the Bank Want This?
Because:
STEP 3 — Exporter Ships the Car
The Japanese exporter:
STEP 4 — Shipping Company Issues Bill of Lading (B/L)
After receiving the car,
the shipping company prepares:
the Bill of Lading.
What Is the Bill of Lading?
The B/L is:
IMPORTANT PART
The B/L says:
Consignee
➡ Islamic bank
or
➡ “to the order of Islamic bank.”
Meaning:
the shipping company will only release the car to whoever lawfully holds the endorsed original B/L.
Why Does the B/L Give Control Over Goods?
Because:
whoever controls the original B/L effectively controls access to the goods.
STEP 5 — Exporter Receives Original B/L
The shipping company physically gives:
Important Clarification
Although:
to submit documents to the bank and obtain payment.
STEP 6 — Exporter Submits Documents to Bank
The exporter sends:
This happens:
STEP 7 — Bank Checks Documents
The Islamic bank examines whether:
✅ bank pays exporter.
STEP 8 — Bank Now Controls the Goods
Now the bank possesses:
✅ the bank controls release of the car.
Why?
Because:
STEP 9 — Ship Arrives in Malaysia
The ship reaches:
❌ customer still cannot collect the car yet.
Why?
Because customer still does not possess:
STEP 10 — Bank Releases/Endorses B/L to Customer
After:
the bank transfers the right to claim the goods.
STEP 11 — Customer Presents B/L at Port
The customer now presents:
STEP 12 — Shipping Company Releases the Car
Once verification completed:
✅ shipping company releases the car to customer.
Now:
✅ customer obtains possession of the car.
Overall Timeline Summary
Step 1
Customer requests financing.
⬇
Step 2
Islamic bank issues LC.
⬇
Step 3
Exporter ships car.
⬇
Step 4
Shipping company issues B/L naming bank.
⬇
Step 5
Exporter receives B/L physically.
⬇
Step 6
Exporter submits B/L to bank.
⬇
Step 7
Bank checks documents and pays exporter.
⬇
Step 8
Bank now controls goods through B/L.
⬇
Step 9
Ship arrives Malaysia.
⬇
Step 10
Bank endorses/releases B/L to customer.
⬇
Step 11
Customer presents B/L at port.
⬇
Step 12
Shipping company releases car.
Islamic Finance Perspective
This structure is important because:
constructive possession (qabd hukmī)
which supports:
Important Principle
The:
original endorsed Bill of Lading represents legal control and right to claim the goods.
Therefore:
Example Scenario
A Malaysian customer wants to import:
- a Toyota car from Japan.
RM200,000
The customer asks:
- an Islamic bank to finance the import transaction.
- a Letter of Credit (LC).
STEP 1 — Customer Requests Financing
The customer approaches the Islamic bank and says:
“I want to import a car from Japan but I need financing.”
The Islamic bank agrees to finance the transaction.
STEP 2 — Islamic Bank Issues Letter of Credit (LC)
The Islamic bank sends:
a Letter of Credit (LC)
to the Japanese exporter.
What Is the LC?
The LC is:
the bank’s promise to pay the exporter
provided:
- exporter ships the goods properly;
- exporter submits required shipping documents.
Important LC Instruction
The LC states:
the Bill of Lading (B/L) must be issued:
- “to the order of the Islamic bank”
or - naming the bank as consignee.
Why Does the Bank Want This?
Because:
- the bank is paying first;
- the bank wants control over the goods;
- the bank must establish ownership/control for Sharī‘ah compliance.
STEP 3 — Exporter Ships the Car
The Japanese exporter:
- loads the car onto the ship.
- the shipping company receives the car for transportation.
STEP 4 — Shipping Company Issues Bill of Lading (B/L)
After receiving the car,
the shipping company prepares:
the Bill of Lading.
What Is the Bill of Lading?
The B/L is:
- receipt of goods;
- shipping contract;
- document of title/control over goods.
IMPORTANT PART
The B/L says:
Consignee
➡ Islamic bank
or
➡ “to the order of Islamic bank.”
Meaning:
the shipping company will only release the car to whoever lawfully holds the endorsed original B/L.
Why Does the B/L Give Control Over Goods?
Because:
- the port/shipping company refuses to release goods without the original B/L.
whoever controls the original B/L effectively controls access to the goods.
STEP 5 — Exporter Receives Original B/L
The shipping company physically gives:
- the original B/L documents
to the exporter.
Important Clarification
Although:
- exporter physically receives the B/L first,
- the Islamic bank as consignee/controller.
- exporter cannot simply release goods himself.
to submit documents to the bank and obtain payment.
STEP 6 — Exporter Submits Documents to Bank
The exporter sends:
- original B/L;
- commercial invoice;
- insurance documents;
- packing list
This happens:
- while the ship is still travelling.
STEP 7 — Bank Checks Documents
The Islamic bank examines whether:
- shipment complied with LC terms;
- documents are correct.
✅ bank pays exporter.
STEP 8 — Bank Now Controls the Goods
Now the bank possesses:
- the original B/L.
✅ the bank controls release of the car.
Why?
Because:
- the shipping company only releases goods to:
- lawful holder of original endorsed B/L.
STEP 9 — Ship Arrives in Malaysia
The ship reaches:
- Port Klang.
❌ customer still cannot collect the car yet.
Why?
Because customer still does not possess:
- endorsed original B/L.
STEP 10 — Bank Releases/Endorses B/L to Customer
After:
- financing documents signed;
- murābahah completed;
- customer obligations fulfilled,
- endorses/releases the B/L to customer.
the bank transfers the right to claim the goods.
STEP 11 — Customer Presents B/L at Port
The customer now presents:
- original endorsed B/L
to shipping company/port authority.
- authenticity;
- endorsement chain.
STEP 12 — Shipping Company Releases the Car
Once verification completed:
✅ shipping company releases the car to customer.
Now:
✅ customer obtains possession of the car.
Overall Timeline Summary
Step 1
Customer requests financing.
⬇
Step 2
Islamic bank issues LC.
⬇
Step 3
Exporter ships car.
⬇
Step 4
Shipping company issues B/L naming bank.
⬇
Step 5
Exporter receives B/L physically.
⬇
Step 6
Exporter submits B/L to bank.
⬇
Step 7
Bank checks documents and pays exporter.
⬇
Step 8
Bank now controls goods through B/L.
⬇
Step 9
Ship arrives Malaysia.
⬇
Step 10
Bank endorses/releases B/L to customer.
⬇
Step 11
Customer presents B/L at port.
⬇
Step 12
Shipping company releases car.
Islamic Finance Perspective
This structure is important because:
- Islamic bank must genuinely:
- own/control goods;
- bear ownership risk.
constructive possession (qabd hukmī)
which supports:
- murābahah financing;
- istijrār financing;
- Sharī‘ah-compliant trade finance.
- the arrangement may resemble:
❌ conventional interest-based lending.
Important Principle
The:
original endorsed Bill of Lading represents legal control and right to claim the goods.
Therefore:
- whoever lawfully possesses the endorsed B/L generally controls:
- release;
- access;
- practical possession of the shipment.