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Islamic Contract – Bay’ al-Murābahah, Bay’ al-Istisnā‘ and Bay’ al-Salam
Islamic Contract – Bay’ al-Murābahah, Bay’ al-Istisnā‘ and Bay’ al-Salam
PART I — BAY’ AL-MURĀBAHAH (MARKUP SALE)
1. Definition of Murābahah
Literal Meaning
The word murābahah is derived from the Arabic root word:
ribh
which means:
profit.
Technical Definition
Technically, Bay’ al-Murābahah refers to:
a sale contract in which the seller discloses to the purchaser:
cost price + disclosed profit.
Example
A trader purchases a laptop for:
4,000 + 500 = 4,500
Result
✅ Valid murābahah sale.
2. Legality of Murābahah
The legality of murābahah is based on:
“Allah has permitted trade and prohibited ribā.”
(Qur’ān, 2:275)
Murābahah is also accepted because:
3. Types of Murābahah
A. Ordinary Murābahah
The seller:
Example
A trader buys furniture for:
12,000 - 10,000 = 2{,}000
Result
✅ Ordinary murābahah.
B. Murābahah to the Purchase Orderer (MPO)
The customer:
Case Study: MPO
A customer requests an Islamic bank to purchase:
The bank then sells machinery to customer for:
600{,}000 - 500{,}000 = 100{,}000
600{,}000 - 500{,}000 = 100{,}000
Result
✅ Murābahah to purchase orderer.
Difference Between Ordinary Murābahah and MPO
Ordinary Murābahah
4. Basic Rules and Conditions of Murābahah
1. Cost Price Must Be Disclosed
The buyer must know:
2. Profit Must Be Disclosed
The seller must disclose:
3. Asset Must Be Sharī‘ah-Compliant
Examples:
✅ vehicles
✅ machinery
Invalid:
❌ wine
❌ pork
4. Murābahah Must Not Lead to Ribā
Ribawi items cannot be structured improperly through murābahah.
Example: Gold Sale
Gold may be sold through murābahah if:
5. Pricing in Murābahah
Islamic law permits:
“time takes a portion of the price.”
Example
Cash Price
RM100,000
Deferred Price (5 years)
RM120,000
Additional Amount
120{,}000 - 100{,}000 = 20{,}000
120{,}000 - 100{,}000 = 20{,}000
Result
✅ Permissible deferred murābahah pricing.
6. Application of Murābahah in Islamic Finance
Murābahah is widely used for:
Example
Islamic bank purchases:
✅ Islamic vehicle financing through murābahah.
PART II — BAY’ AL-ISTISNĀ‘ (MANUFACTURING SALE)
1. Definition of Istisnā‘
Literal Meaning
Istisnā‘ means:
requesting manufacture.
Technical Definition
Istisnā‘ refers to:
a contract to manufacture or construct specified assets for future delivery at agreed price.
Example
A company commissions:
✅ Istisnā‘ contract.
2. Legality of Istisnā‘
The legality of istisnā‘ is based on:
3. Types of Istisnā‘
A. Ordinary Istisnā‘
Two parties only:
Example
A homeowner appoints contractor to build house for:
✅ Ordinary istisnā‘.
B. Parallel Istisnā‘
Two independent istisnā‘ contracts involving:
Example
First Contract
Bank sells factory project to customer for:
Bank appoints contractor for:
20{,}000{,}000 - 17{,}000{,}000 = 3{,}000{,}000
20{,}000{,}000 - 17{,}000{,}000 = 3{,}000{,}000
Result
✅ Parallel istisnā‘.
4. Basic Rules and Conditions of Istisnā‘
1. Asset Must Be Clearly Specified
Specifications must include:
2. Asset Must Be Manufacturable
Examples:
✅ houses
✅ aircraft
✅ machinery
3. Materials Supplied by Manufacturer
If purchaser supplies materials:
4. Delivery Date Must Be Specified
BNM:
5. Place of Delivery
Required if transport/logistics involved.
6. Price
Price:
7. Possession
Ownership transfers upon:
5. Application of Istisnā‘ in Islamic Finance
Istisnā‘ is widely used for:
Example
Islamic bank finances:
✅ Sharī‘ah-compliant project financing.
PART III — BAY’ AL-SALAM (FORWARD SALE)
1. Definition of Salam
Literal Meaning
Salam means:
advance payment.
Technical Definition
Salam refers to:
a sale contract in which the buyer pays full price upfront for commodities delivered later.
Example
A buyer pays:
✅ Salam contract.
2. Legality of Salam
Salam is permitted based on:
“Whoever pays money in advance for something should pay it for a specified measure or specified weight for delivery on a specified date.”
Wisdom of Salam
Salam supports:
3. Difference Between Salam and Istisnā‘
Salam
4. Types of Salam
A. Ordinary Salam
Two parties only:
B. Parallel Salam
Two separate salam contracts involving:
Example
First Salam
Bank purchases wheat for:
Bank sells wheat for:
480{,}000 - 400{,}000 = 80{,}000
480{,}000 - 400{,}000 = 80{,}000
5. Basic Rules and Conditions of Salam
A. Price (
Ra’s al-Māl
)
B. Commodity (
Muslam Fīh
)
Commodity must:
C. Delivery Date and Place
D. No Sale Before Possession
Buyer:
6. Application of Salam in Islamic Finance
Salam is used for:
Example
Islamic bank finances:
✅ Sharī‘ah-compliant agricultural financing.
Overall Important Principle
Murābahah
➡️ Cost-plus sale.
Istisnā‘
➡️ Manufacturing/construction contract.
Salam
➡️ Forward commodity sale with upfront payment.
All three contracts:
Islamic Contract – Bay’ al-Murābahah, Bay’ al-Istisnā‘ and Bay’ al-Salam
PART I — BAY’ AL-MURĀBAHAH (MARKUP SALE)
1. Definition of Murābahah
Literal Meaning
The word murābahah is derived from the Arabic root word:
ribh
which means:
profit.
Technical Definition
Technically, Bay’ al-Murābahah refers to:
a sale contract in which the seller discloses to the purchaser:
- the acquisition cost; and
- the profit markup.
cost price + disclosed profit.
Example
A trader purchases a laptop for:
- RM4,000.
- cost price = RM4,000;
- profit = RM500.
4,000 + 500 = 4,500
Result
✅ Valid murābahah sale.
2. Legality of Murābahah
The legality of murābahah is based on:
- the Qur’ān;
- ijmā‘ (consensus);
- qiyās (analogy).
“Allah has permitted trade and prohibited ribā.”
(Qur’ān, 2:275)
Murābahah is also accepted because:
- it is a genuine sale contract;
- profit is earned through trade, not ribā.
3. Types of Murābahah
A. Ordinary Murābahah
The seller:
- purchases goods independently;
- later sells them at disclosed cost plus profit.
Example
A trader buys furniture for:
- RM10,000.
- RM12,000.
12,000 - 10,000 = 2{,}000
Result
✅ Ordinary murābahah.
B. Murābahah to the Purchase Orderer (MPO)
The customer:
- requests the seller or Islamic bank to purchase specific goods;
- promises to buy them later at markup price.
- Islamic banking.
Case Study: MPO
A customer requests an Islamic bank to purchase:
- machinery worth RM500,000.
The bank then sells machinery to customer for:
- RM600,000 payable over 5 years.
600{,}000 - 500{,}000 = 100{,}000
600{,}000 - 500{,}000 = 100{,}000
Result
✅ Murābahah to purchase orderer.
Difference Between Ordinary Murābahah and MPO
Ordinary Murābahah
- Seller purchases goods without prior customer promise.
- Direct commercial trading.
- Customer first places purchase order.
- Commonly used by Islamic banks.
- Financing-oriented structure.
4. Basic Rules and Conditions of Murābahah
1. Cost Price Must Be Disclosed
The buyer must know:
- acquisition cost.
2. Profit Must Be Disclosed
The seller must disclose:
- markup/profit portion.
3. Asset Must Be Sharī‘ah-Compliant
Examples:
✅ vehicles
✅ machinery
Invalid:
❌ wine
❌ pork
4. Murābahah Must Not Lead to Ribā
Ribawi items cannot be structured improperly through murābahah.
Example: Gold Sale
Gold may be sold through murābahah if:
- Sharī‘ah conditions of ribawi exchange are observed.
5. Pricing in Murābahah
Islamic law permits:
- higher deferred prices compared to spot prices.
“time takes a portion of the price.”
Example
Cash Price
RM100,000
Deferred Price (5 years)
RM120,000
Additional Amount
120{,}000 - 100{,}000 = 20{,}000
120{,}000 - 100{,}000 = 20{,}000
Result
✅ Permissible deferred murābahah pricing.
6. Application of Murābahah in Islamic Finance
Murābahah is widely used for:
- home financing;
- vehicle financing;
- trade financing;
- personal financing.
Example
Islamic bank purchases:
- car for RM90,000.
- RM110,000 payable by instalments.
✅ Islamic vehicle financing through murābahah.
PART II — BAY’ AL-ISTISNĀ‘ (MANUFACTURING SALE)
1. Definition of Istisnā‘
Literal Meaning
Istisnā‘ means:
requesting manufacture.
Technical Definition
Istisnā‘ refers to:
a contract to manufacture or construct specified assets for future delivery at agreed price.
Example
A company commissions:
- construction of factory machinery.
✅ Istisnā‘ contract.
2. Legality of Istisnā‘
The legality of istisnā‘ is based on:
- Sunnah;
- ijmā‘;
- qiyās;
- istiḥsān.
- requested manufacture of a ring.
3. Types of Istisnā‘
A. Ordinary Istisnā‘
Two parties only:
- purchaser;
- manufacturer.
Example
A homeowner appoints contractor to build house for:
- RM400,000.
✅ Ordinary istisnā‘.
B. Parallel Istisnā‘
Two independent istisnā‘ contracts involving:
- customer;
- Islamic bank;
- manufacturer.
Example
First Contract
Bank sells factory project to customer for:
- RM20 million.
Bank appoints contractor for:
- RM17 million.
20{,}000{,}000 - 17{,}000{,}000 = 3{,}000{,}000
20{,}000{,}000 - 17{,}000{,}000 = 3{,}000{,}000
Result
✅ Parallel istisnā‘.
4. Basic Rules and Conditions of Istisnā‘
1. Asset Must Be Clearly Specified
Specifications must include:
- type;
- quality;
- quantity.
2. Asset Must Be Manufacturable
Examples:
✅ houses
✅ aircraft
✅ machinery
3. Materials Supplied by Manufacturer
If purchaser supplies materials:
- contract may become ijārah instead.
4. Delivery Date Must Be Specified
BNM:
- mandatory delivery date.
5. Place of Delivery
Required if transport/logistics involved.
6. Price
Price:
- may be upfront;
- progressive;
- deferred.
- full upfront payment not required.
7. Possession
Ownership transfers upon:
- actual possession (qabd haqīqī); or
- constructive possession (qabd hukmī).
5. Application of Istisnā‘ in Islamic Finance
Istisnā‘ is widely used for:
- construction financing;
- infrastructure projects;
- manufacturing industries;
- ṣukūk structures.
Example
Islamic bank finances:
- apartment construction through parallel istisnā‘.
✅ Sharī‘ah-compliant project financing.
PART III — BAY’ AL-SALAM (FORWARD SALE)
1. Definition of Salam
Literal Meaning
Salam means:
advance payment.
Technical Definition
Salam refers to:
a sale contract in which the buyer pays full price upfront for commodities delivered later.
Example
A buyer pays:
- RM50,000 today
for: - future rice delivery.
✅ Salam contract.
2. Legality of Salam
Salam is permitted based on:
- Qur’ān;
- Sunnah;
- ijmā‘.
“Whoever pays money in advance for something should pay it for a specified measure or specified weight for delivery on a specified date.”
Wisdom of Salam
Salam supports:
- farmers;
- producers;
- commodity financing.
3. Difference Between Salam and Istisnā‘
Salam
- Fungible commodities.
- Full upfront payment compulsory.
- Manufactured assets.
- Flexible payment.
4. Types of Salam
A. Ordinary Salam
Two parties only:
- buyer;
- seller.
B. Parallel Salam
Two separate salam contracts involving:
- bank;
- supplier;
- buyer.
Example
First Salam
Bank purchases wheat for:
- RM400,000.
Bank sells wheat for:
- RM480,000.
480{,}000 - 400{,}000 = 80{,}000
480{,}000 - 400{,}000 = 80{,}000
5. Basic Rules and Conditions of Salam
A. Price (
Ra’s al-Māl
)
- Must be fully prepaid.
- Must be clearly known.
B. Commodity (
Muslam Fīh
)
Commodity must:
- be fungible;
- measurable;
- clearly specified;
- Sharī‘ah-compliant.
C. Delivery Date and Place
- Delivery date must be fixed.
- Delivery place specified where necessary.
D. No Sale Before Possession
Buyer:
- cannot sell salam commodity before possession.
6. Application of Salam in Islamic Finance
Salam is used for:
- short-term financing;
- agricultural financing;
- commodity financing;
- microfinancing;
- ṣukūk structures.
Example
Islamic bank finances:
- rice farmer through salam.
- prepays purchase price.
- delivers crops later.
✅ Sharī‘ah-compliant agricultural financing.
Overall Important Principle
Murābahah
➡️ Cost-plus sale.
Istisnā‘
➡️ Manufacturing/construction contract.
Salam
➡️ Forward commodity sale with upfront payment.
All three contracts:
- support real economic activity;
- avoid ribā;
- facilitate Sharī‘ah-compliant financing and trade.
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