Bai al-istijrar

Definition Bai al-istijrar

In Islamic finance, it is a contract (of ba'i or bay') whereby a supplier agrees to deliver a
specific commodity/item to a customer, on an ongoing basis (weekly, monthly, etc), at an
agreed price and method of payment. This type of contract is typically resorted to in cases
where different quantities/units are repetitively purchased from a single seller over a period
of time. Sometimes, it also refers to transactions in which the seller delivers varying
consignments in different installments to consummate the full purchase. The terms and
conditions of bai al-istijrar may be similar to any normal cash or credit sale.

Bai al-istijrar is an Arabic term that means recurring sale or repeat sale or supply
contract.

Condition / Features
In the case where the seller discloses the price of goods at the time of each deal/transaction
the sale becomes valid only when the buyer takes possession of the goods. The amount is
paid after all transactions have been completed.
If the seller does not disclose each and every time to the buyer the price of the subject
matter, but the parties concerned know that it is being sold on market value and the market
value is specified and determined in such a manner that it does not vary and it does not
lead to differences of the parties.
If at the time of taking possession, the price of the subject matter is unknown or the parties
agree that whatever the price shall be, the sale will be executed. However, if there is any
difference with the market price, the sale will not be valid until settlement of the payment is
made. After the payment of price the buyer's usage of the subject matter will be valid from
the time of taking the possession.
The Bank enters into agreement separately with the suppliers and the clients to purchase
and sell the goods/commodities at predetermined/agreed price on the basis of Istijrar.
The supply and delivery will be made in phases with in the specified time period.
It is permissible to take cash/collateral security from the client to guarantee the
implementation of the promise/agreement or to indemnify the damages.
It is also permissible to obtain mortgage/guarantee/cash security to secure the investment
under Istijrar.
Availability of the goods as per specification of the client is a basic condition for
agreement under Istijrar.

signing an

The Bank or the suppliers as per order of the Bank shall deliver the specified goods to the
Client within the stipulated period and at a specified place as per Contract.
The Bank shall sell the goods at a higher price (Cost + Profit) to earn profit. The cost of
goods sold and profit agreed upon therewith shall separately and clearly be mentioned in

the Bai-Istijrar Agreement. The profit agreed upon may be mentioned in lump sum or in
percentage of the purchase/cost price of the goods. But, under no circumstances, the
percentage of the profit shall have any relation with time or expressed in relation with time,
such as, per month, per annum etc.
The price once fixed as per agreement and deferred cannot be increased further.
It is permissible for the Bank to authorise any third party to buy and receive the goods on
Bank's behalf. The authorisation must be under separate contract

Application Bai istijrar

Work with the supplier of the client (where the bank will come in between to facilitate the
process). In this case islamic bank enter into a contract with the suppliers on the basis of
istijrar.
It will purchase asset from them at a market price. Whenever the bank has anew client, it
can purchase the asset from the supplier on the basis of istijrar and sell it to the client on
the basis of murabahah on deferred payment basis.
In case of selling the goods/commodities under Bai-Murabaha by purchasing through Letter
of Authority against the dealership, the Bank may exercise Istijrar with the supplier.
In case of establishing physical ownership of the Bank on the goods/commodities to be sold
under Bai-Murabaha is difficult due to some reasons, such as, arrival of goods at the
destination at late night, location of the Branch is far away from the station of
goods/commodities etc., but the same is possible in constructive form by other means (e.g.
acquiring ownership by purchasing the goods over telephone or accepting valid quotation),
the Bank may exercise Istijrar with both of the Banks supplier and Client.
In case of purchasing the goods/commodities in numerous deals from a single/few
supplier(s), the Bank may exercise Istijrar with the supplier.
In case purchased goods are delivered in instalments and payment is made after completion
of supplies, the Bank may exercise Istijrar with the supplier.
In case of selling the goods/commodities in numerous deals to a particular client, the Bank
may exercise Istijrar with the client.
In case of selling the goods/commodities under Bai-Murabaha by purchasing through Letter
of Authority against the dealership to a particular client, the Bank may exercise Istijrar with
the client.
In case of availing investment in single deal/payment of the price after completing the
supplies against purchasing goods/commodities in numerous instalments by a particular
client the Bank may exercise Istijrar with the client.

Mudharabah (profit sharing)

Definition Mudarabah
"Mudarabah" is a special kind of partnership where one partner gives money to another for
investing it in a commercial enterprise. The investment comes from the first partner who is
called "rabb-ul-mal", while the management and work is an exclusive responsibility of the
other, who is called "mudarib.
Mudharabah is a profit sharing arrangement between two parties, that is, an investor and
the entrepreneur. The investor will supply the entrepreneur with funds for his business
venture and gets a return on the funds he puts into the business based on a profit sharing
ratio that has been agreed earlier.
The principle of Mudharabah can be applied to Islamic banking operations in 2 ways:
between a bank (as the entrepreneur) and the capital provider, and between a bank (as
capital provider) and the entrepreneur. Losses suffered shall be borne by the capital
provider.

Modul Operandi

Here is how it works:

1. You supply funds to the bank after agreeing on the terms of the Mudharabah arrangement.
2. Bank invests funds in assets or in projects.
3. Business may make profit or incur loss.
4. Profit is shared between you and your bank based on a pre-agreed ratio.
5. Any loss will be borne by you. This will reduce the value of the assets/ investments and
hence, the amount of funds you have supplied to the bank.
Types of Mudarabah
There are 2 types of Mudarabah namely:

1. Al Mudarabah Al Muqayyadah: Rab-ul-Maal may specify a particular business or a

particular place for the mudarib, in which case he shall invest the money in that particular
business or place. This is called Al Mudarabah Al Muqayyadah (restricted Mudarabah).

2. Al Mudarabah Al Mutlaqah: However if Rab-ul-maal gives full freedom to Mudarib to

undertake whatever business he deems fit, this is called Al Mudarabah Al Mutlaqah
(unrestricted Mudarabah). However Mudarib cannot, without the consent of Rab-ul-Maal,
lend money to anyone. Mudarib is authorized to do anything, which is normally done in the
course of business. However if they want to have an extraordinary work, which is beyond
the normal routine of the traders, he cannot do so without express permission from Rab-ulMaal. He is also not authorized to:
a) keep another Mudarib or a partner.
b) mix his own investment in that particular Mudarabah without the consent of Rab-ul Maal.

Condition Mudarabah

1. Capital provider /investor (rabb al-mal)

He must have legal

Requisite capacity to appoint an agent

2. Entrepreneur (amil/mudarib)

An entrepreneur must process the necessary capasity to be appointed as an agent

3. Capital

The capital must be in the form of absolute currency or not

4. Currency or not

The capital in the contract of mudarabah must be in the monetary currency

The contract will be invalid if the capital injected into the business is in the form of debt

The capital must be delivered to the entrepreneur

5. Profit and losses

Contracting parties must have the knowledge as to the proportion of profit percentage by
the parties or otherwise the contract will be invalid

The profit will be shared between the rabb al-mal and the mudarib according to a predetermined profit sharing ratio

Reserve the right to change the ratio of distribution of profit at any time and to define
the duration for which the aggreement to be valid

the contract will be rendered void had the mudarib be held liable to the loss incurred
The contract only becomes void to the extent the mudarib be held liable bearing the loss
while the rest of the contract remained intact.

6. Expression ( offer and accceptance)

Requirement of ijab and qabul are needed in forming the contract of mudarabah

Application of Mudharabah

Mudharabah is considered to be an important mode by the Islamic banks in their

relationship with the depositors who tender their moneys to the bank as capital owner. This
money is invested by the bank as Mudharib on the basis of profit sharing according to
specific pre-agreed raties.

The Islamic banks use this product to finance capable professionals such as physicians,
engineers, traders or craftsmen. The bank provides required finance as a capital owner in
exchange for a share in the profit to be agreed upon.

It is worth noting that this mode carries high risk for the bank because the bank delivers
capital to the Mudharib who undertakes the work and management and the Mudharib is held
responsible for loss only in case of negligence. The Islamic banks take necessary
precautions to minimize risk and to ensure better execution of Mudharabah transaction.

rahnu ( morgage )
Definition Ar- rahnu (morgage)

Ar-Rahn, or mortgage or collateral, is defined in the Islamic jurisprudence as possessions

offered as security for a debt so that the debt will be taken from it in case the debtor failed
to pay back the due money.

Ar-Rahn is a permissible contract in Shariah. It is known from the Sunnah that when the
Prophet of Allah, Muhammad (SAW), passed away, his shield was with a Jewish man in
Medina as a collateral.

CONDITIONS OF AL-RAHN
1. The indebted party cannot be coerced into putting up a collateral;
2. An orphans property cannot be put up as a collateral by the trustee, unless under
exceptional circumstances;
3. The property held as collateral must be liquid;
4. The property held as collateral must be distinct from other properties;
5. The ownership does not change, therefore the owner is responsible for the cost of upkeeping
the property even when it is pledged as a collateral. Likewise, the owner continues to enjoy
any secondary benefits to the property;
6. There is disagreement among the scholars on whether the property pledged as a collateral
can be used. Many of the scholars say that the property cannot be used by either the debtor
or the borrower, while many argue that the owner (the borrower in this case) can continue
to use the property;
7. If the property held as collateral is lost or damaged while in possession of the trustee,
without any negligence on his part, there is no guarantee by the trustee;
8. The ownership of the property cannot be transferred until the debt is settled or the debtor
allows for such a transaction;
9. If the borrower cannot pay back at the expiry of the term, the judge will order the property
pledged as collateral to be sold in the open market, even if it is the residence of the
borrower

Ar-Rahnu Transaction

One who wants to borrow money from Ar-Rahnu provider just needs to bring with him or her
valuables such as gold or jeweleries as mortgage of money that he or she borrows. Amount
of borrowing is based on the percentage of the valuables or marhun. Usually between 50 to
70 per cent. Customer will be charged based on the worth of wealth of valuable based on
principle of Al-Wadiah Yad Dhammanah. Fees of keeping the valuables is based on worth or
value of gold (marhun) but not based on total borrowing. More often than not gold is used as
guarantee of borrowing because gold is easy to sell back, chances to auction if the borrower
could not settle their loans. Apart from that genuineness of valuables can be easily
determined and the risk of misvalue of pawn items can be easily dealt with (Skully, 1994).

Modul Operandi

The Vendor

The Bank

The Customer

How its work :

1. Customer identifies the asser to be acquired, signs the S&P Agreement with the Vendor. Pav
10% deposit
2. Bank purchases the asset from customer at purchase price (90%)
3. Bank subsequently sells back the asset to the customer at selling price (purchase price +
profit margin)
4. Charge the asset to the bank and pays the selling price by instalments
Modern Application
Rahn in the contemporary application may take either a form papers such as:

Property documents

Vehicle papers

Sukuk

Shared

Or object like ornaments, jewelries and other

Wakalah ( Agency )
Definition Wakalah (agency)
Wakalah as the delegation of one person (the principle) for another (the agent) to take his
place in a known and permissible dealing.
AAOIFI shariah standard has also defined agency as the act of one party delegating the
other to act on his behalf in what can be subject matter of delegation
This is a contract whereby a person (principal) asks another party to act on his behalf (as his
agent) for a specific task. The person who takes on the task is an agent who will be paid a
fee for his services.
For example, A customer asks a bank to pay someone under certain terms. The bank is
therefore the agent for carrying out the financial transaction and the bank will be paid a fee
for its services.

Modus operandi
1. The customer deposit some amount of money
2. The bank invest the fund

Bank work as an agent to invest the money

Types of Wakalah
Wakalah can be divided as follows;
(al-Wakalah al-`Ammah) General Wakalah
This refers to a general delegation of power. For example, if the principal says: I delegate
to you all my affairs. In this case, the principal has transferred and delegated the power to the
agent. The exemption of the delegated power covers harmful things to the principal like gift
(hibah) or divorce. Thereby, the agent has no authority to divorce the principals wife unless the
later specifically mentioned that in the contract.
(al-wakalah al-Khassah) Specific Wakalah
Particular wakalah is made only for certain known transactions for example, buying or
selling certain known house or a car. The agent is bound to sell or buy that particular house
or car.
(al-Wakalah al-Muqayyadah) Restricted Wakalah
This is wakalah where the agent has to act within definite conditions. For example, I
delegate you to buy a house at such a price, or until such a time or based on instalments.
The agent has to strictly observe these conditions. If the conditions are not met, the
transaction is not binding on the principal.
(al-Wakalah al-Mutlaqah) Unrestricted Wakalah
This is where there is no condition put in place for the transaction. For example, if the
principal says to his agent: I delegate you to buy a land. Without mentioning specific price
or type, in this case, according to the majority of jurists and two companions of Abu Hanifah,
( Abu Yusuf and Muhammad al-Shaibani). the agent has the authority to buy land within
the prevailing practices and customs. And if he acts contrary to the custom, then the
transaction depends on the approval of the principal Meaning to say, the agent has to buy
that land in such a way that the principal will not be cheated. However, Abu Hanifah argues
that an agent is not bound by the customs as custom differs from one place to another

Conditions Wakalah

The principle (muwakkil)

is the contractual party in the agency relationship. (principle)

The agent (wakil)

is a person who has the power to affect the legal position of another person.

The offer (ijab) and acceptance (qabul)

are the essential elements of making a contract. Must be clear for the contract to be valid.

The subject matter (muwakkal bih)

Things or subject matter that is being entrusted for, or the business deals involved

Condition related to contracting parties :

o

The agent must be someone that is capable of performing the responsibility and fulfill the
minimum requirement

Principle should know the agent

The wakalah contract ends with the accomplishment of the entrusted task or mission.

Condition related to the object of agency contract:

The subject matter must be clearly specified in the contract by the authorizer.
Should be eligible for legal authorization.
The entrusted agent will not be held responsible for any damage expect for cases of proven
negligence or ignorance on part of the agent.

Modern Application

In the contemporary application, wakalah contract is widely used in structuring various

Islamic banking, capital market and takaful fee-based products.

Application of wakalah contract includes:

Wakalah bi al-istismar (agency for investment)
Sukuk
Letter of Credit

wadiah (safe custody )

Definition wadiah
Wadiah means custody or safekeeping. In a Wadiah arrangement, you will deposit cash or
other assets in a bank for safekeeping. The bank guarantees the safety of the items kept by
it.
Literally it comes from the word wadaa which means leaving or avoiding something
Legally it refers to leave something to someone to take care of. According to Hanafi jurists, it
means giving the authority to somebody to look after ( ) his property
Whereas, according to Shafie and .Maliki wadiah is an authorization of the owner of the
property to others to look after his property

Modus Operandi

1. Ijab (offer)
2. Qabul (acceptance)

How it works:
1. You place money in a bank and the bank guarantees to return the money to you.
2. You are allowed to withdraw the money anytime.
3. Bank may charge you a fee for looking after your money and may pay hibah (gift) to you if it
deems fit.
4. This concept is normally used in deposit-taking activities, custodial services and safe deposit
boxes.

Condition Al-Wadiah
Conditions for contracting parties
Al-muwaddi is the depositer or the owner of the property
Al-wadi is the depositee or the custodian of property
Both parties must be person of sound mind and eligible to do a contract (ahliyaah al adaa)
Both parties must be eligible to be a wakil (agent) and trustee
Al-wadi must ensure his capability to safe-keep the deposit
Conditions for wadiah (deosited property)
It must be valuable from shariah view point, must be owned and deliverable
It must be a form of property that can be possessed physically

Types of Wadiah
Wadiah can be classified into 2 types namely: wadiah yad amanah (trust) and wadiah yad
dhamanah (guarantee)
1-Wadiah Yad Amanah ( Safe Custody based on trust)

The custodian should keep the deposits as if he is keeping and taking care of his own
property.

The custodian should not reponsible for any damage of the property so far it has not
resulted from his negligence

The custodian is not entitled to any profits gained from the contract.

The custodian should not utilize or take benefit of the deposit

2-Wadiah Yad Dhamanah (Guaranteed Safe Custody)

This type of wadiah is a combination of safekeeping (wadiah) and guarantee (dhaman)

The wadiah is based on guarantee whereby the evidences custodian guarantees the refund
of the property kept with him and ensures to refund the item upon request.

The custodian is entitled to use the deposited property for trading or any purposes

The custodian has a right to any income derived from the utilization of the deposited item
and liable for any damages or loss

The custodian owns the profit and under his discretion to give some portion of it as a
gift(hibah) to the depositor. The gift cannot be in the form of a pre-agreed agreement.

The custodian must return the deposited property to the owner at any time upon the
request of the depositor

Application of the contract of Wadiah

Operates under the contract of Wadiah Yad Dhamanah (guaranteed custody).
The bank accepts deposits from its customers looking for safe custody and convenience.
The bank requests permission to make use of the customers funds for investment purposes.
The customers may withdraw their balances at any time.
Profit generated from the use of the customers funds belongs to the bank.
However, the bank may at its absolute discretion rewards the customers by declaring profits
to them.

DISCRETIONARY REWARD
Under the contract of Wadiah, the custodian i.e. the Bank is not allowed to mention or to
promiseany reward on the deposit received.
The owner/depositors too cannot demand any rewards or return from their Bank on their
savings.
Wadiah is purely a contract on safe custody of goods without any promise on rewards or
returns.

Tanazul ( waive of right / cessation of right to

claim )
Definition Tanazul

An act to waive certain rights of claim in favour of another party in a contract. In Islamic
finance, applied where the right to share some portion of the profits is given to another
party.
Can be defined as cessation of the right to claim

Can also be defined as isqat al-haq, which means to drop claims of a right.

Is an act to waive certain right of claim in favour of another party in a contract

In islamic finance, it is applied where the right to share some portion of the profit is given to
another party.

Example

For example, in a mudarabah contract, the capital providers may agree to limit the rate of
return to a defined percentage whereby the excess can be given to the manager as an
incentive or performance fee.

The decision of the investors to waive their right to the profit is based on the principle of
tanazul, which is specified as a condition of the contract to waive such a right.

Principle of tanazul
+ Involves the waiving of rights in favour of someone else
+ Often seen where the capital providers agree to waive their right to a portion of the profits in
a venture in favour of a manager on the project.

Application of Tanazul in Sukuk

the joint-ownership of a piece of land, the rights to shuf'ah has not yet arise. such rights will
only be available once the joint owner wishes to sell his part of the land.
that such tanazul does not have a binding effect because according to these jurists, the
reason which leads to shuf'ah is the sale of the intended land, and not the ownership of the
adjacent land. taking a closer look at these views, one may notice that in shuf'ah the subject
matter concerned is a right which cannot be ascertained until it manifests itself for profit
and thus cannot be guaranteed in partnership

Condition of tanazul

+ that any condition stipulated shall be given effect as long as it does not transgress the
rulings in the Quran and Sunnah
+ that are stipulated by the parties to the contract, the intention of which is to protect thier
right (or one of them), or to secure certain benefit to both of them (or only one of them)
+ which only allows one partner to gain profit whilst the other suffers the loss
+ when all profit is agreed to be given to one party, then such condition is against muqtada
'aqad, and the contract is nullified