The Rationale of Shari’ah Supporting Contracts:

A Case of Murabahah to Purchase Orderer (MPO)

Nur Haziyah binti Haji. Abdul Halim (G1729624)

Nafisah Ruhana binti Jamaluddin (G1721550)
Intisaar Kaamilah binti Budiman (G1629180)

MSc. Islamic Banking and Finance

International Islamic University Malaysia (IIUM)
9 Ramadhan 1439/ 25 May 2018
Table of Contents
ABSTRACT .................................................................................................................................... 3

1. INTRODUCTION ................................................................................................................... 4

1.1 Background ...................................................................................................................... 5

1.2 Problem Statement ........................................................................................................... 6

1.3 Research Questions .......................................................................................................... 6

1.4 Research Objectives ......................................................................................................... 6

1.5 Scope of the Research ...................................................................................................... 7

1.6 Significance of the Research ............................................................................................ 7

1.7 Organization of Paper....................................................................................................... 7

2. LITERATURE REVIEW ........................................................................................................ 7

2.1 Shariah Supporting Contracts .......................................................................................... 8

2.2 Types of Shariah Supporting Contracts ........................................................................... 9

2.3 Overview of Murabahah to Purchase Orderer (MPO) ................................................... 11

3. RESEARCH METHODOLOGY .......................................................................................... 13

4. FINDINGS AND DISCUSSION .......................................................................................... 13

5. CONCLUSION AND RECOMMENDATIONS .................................................................. 16

REFERENCES ............................................................................................................................. 18

2
 ABSTRACT

Purpose – The purpose of this research is to provide several justifications on the rationale of
utilizing several supporting contracts in a Murabahah to Purchase Orderer (MPO) transaction.
Design/methodology/approach – This research is a qualitative and descriptive research based
on library and online research. A content analysis will be used to achieve each of the research
objectives.
Findings – This paper has found that the utilization of most of the supporting contracts in MPO
transaction is to mitigate risk and to provide assurance that one party will perform their
responsibilities. The execution of these supporting contract will also ensure a smooth flow of
transaction where it assures that the objective of engaging into this transaction is met and thus
protect both contracting parties’ interest. Furthermore, the use of these supporting contracts will
also enables Islamic Banks to compete with the conventional counterpart as to gain sustainability
in this banking industry.
Originality/value – Analyzing the process of Murabahah to Purchase Orderer (MPO) and
contracts present in the transaction in order to identify and present the rationale behind the
utilization of these supporting contracts.
Keywords – Shariah Supporting Contracts, Murabahah to Purchase Orderer (MPO)
Paper type Research paper

3
1. INTRODUCTION

Trade and commerce are strongly encourage in Islam. The Holy City of Mecca was known to
be the centre of commercial activities and trading that allows Prophet Muhammad (S.A.W)
to preach about Islam. The existence of trade has allowed early Muslim traders to travel to
distant lands for business opportunity and simultaneously introduced Islam as the holy and
true religion for all mankind. The prophet himself has also involved in trading activities
where he was the mudarib while Sayyidatuna Khadijah (R.A) acted as the rabbul mal and
that the prophet was known to be a successful businessman. Thus, conducting business
activities are regarded as a lawful source of income. However, it should be noted that trade
should be fair for both parties and conducted based on shariah principle. The Qur’an states in
Surah al-Baqarah, verse 275:

‫َ نِ ياَّ ُْم‬ ‫نُ نَِ لشَْ ن ن‬ ‫لشرَب اَل ي ُقوِو اُ إنيَل اكَن ي ُقوم لشي ن‬
‫ن‬ ْ ‫لشي ن‬
‫ ِّ اَٰش ا‬ ‫ا ا‬ ُ َ
‫ا‬ ْ‫ي‬
ْ َّ‫لش‬ ‫ه‬
ُ َ
ُ ‫ب‬
‫ي‬ ‫خ‬
‫ا‬ ‫ت‬
‫ا‬ ‫ي‬
‫ا‬ ‫ي‬‫ذ‬ ُ ‫ا ا‬ ُ ‫ا ا‬ ُ
‫ا‬ ‫و‬ ‫ل‬
ُ ‫ك‬
ُ ‫َي‬
‫اا‬َ‫ي‬ ‫ذ‬
‫ن ن ن‬ ‫قانش ُول إنيَّنان لشْبا ْْ ُع نِثْل ن‬
ُ ‫لشراَب َا اََ اانها ُ اِ ْوظةا م َِ يَِنه َانَتا اَهٰ َالاه‬
‫لَّلل ُ لشْبا ْْ اع او احيرام ن‬
‫اح يل ي‬
‫لشراَب ۗ اوأ ا‬ ُ
ُ‫نب لشنين نَ ۖ ُه ْم َن اَْهن اخنشن ُدو ا‬
ُ ‫اص اح‬
ْ ‫َأ‬
‫ِن سلاف وأاِر إن اَل ين‬
‫لَّلل ۖ اواِ َْ اظ اند َاأ ُوشائن ا‬ ُ ُ ْ ‫ا ا ا ا‬
“Those who consume interest cannot stand (on the Day of Resurrection) except as one stands
who is being beaten by Satan into sanity. That is because they say, “Trade is like interest.”
But Allah has permitted trade and has forbidden interest. So whoever has received an
admonition from his Lord and desists may have what is past, and his affair rests with Allah.
But whoever returns to (dealing interest or usury)- those are the companions of the fire; they
will abide eternally therein” (Quran.com, 2018)

The above verse clearly states that trade associates with riba (interest) is forbidden.
This is because it resulted in inequality and distress among society as a whole. Other
prohibited elements in Islamic transactions include gharar (uncertainty) and maysir
(gambling). These elements are argued to be injustice and indirectly create social harm in the
form of inflation, unemployment, volatility instability and environmental degradation
(Uddin, 2015).

4
 To avoid and protect customers from riba, Islamic banks have utilized several shariah
contracts to meet the demand of customers and simultaneously creating an alternative
banking solution to the Muslim ummah. Shariah contracts in Islamic banking and finance can
be categorized into trading contracts, contracts of participation and supporting contracts. The
use of these contracts will depend on the nature of the products Islamic banks offered. It
provides customers the same facility and service as the conventional banks but these products
are based on shariah contracts and thus, it is shariah compliant.

1.1 Background

Islamic banking and finance industry in Malaysia has impressively developed in providing
competitive products and services to meet the current needs and demands of business and
trade particularly in this digitalized era. (Mihajat, 2015) stated that more complex and
complicated contracts will be used in Islamic banking as compared to the previous banking
products. Thus, in order to meet the demand and survive the competition, new Islamic
banking products and services will use more than one contract in one transaction. (Ahmed,
2014) also agreed that most Islamic financial products would involve one primary contract
and multiple supporting contracts. For instance, in a simple murabahah financing contract, a
bank is required to firstly buy an asset before selling it to the customer at a mark-up price. In
this contract however, will involve a promise from the customer to purchase the asset, an
agency contract where the bank appoints the customer as an agent to purchase the asset from
the vendor, a sale contract between the vendor and the bank, a sale contract between the bank
and the customer and collateral or guarantee agreement to mitigate the credit risks. From this
transaction, it can be identified that several contracts have been used which include the
primary contract murabahah, wa’d, wakalah and kafalah.

Despite the existence of several legal issues on the combination of several contracts
into a single transaction, it is lawful for Islamic banking and finance to combine more than
one contract to structure shariah compliant products provided that they follow the shariah
guidelines and parameters on hybrid contracts (Mihajat, 2015). Shariah also permits the use
of contracts to support and facilitate trading and mobilization of capital (Ahmed H. O.,
1990). The existence of supporting contracts in Islamic financial products are believed to
have assist a smooth flow of the transaction for the customers. It is called supporting

5
 contracts because they do not stand by themselves rather they are being utilized with other
types of contracts (Lee, 2017).

1.2 Problem Statement

While Islamic Banking and Finance industry has put much effort in developing their products
and services to meet the demand and satisfy the needs of customers while simultaneously
ensure that products are in line with shariah principles, they have been heavily criticized for
being very similar to the conventional products and that some products are deemed to have
not fulfill the shariah requirements. Islamic banking products have also been criticized of
having much complexity in their structure, making it unfamiliar to the customers. It is known
that a certain Islamic financial product will involve a dominant contract while being
supported by several supporting contracts. This structure has been viewed as complex and
complicated.

While proponents of Islamic banking and Finance argued that the existence of these
supporting contracts are being utilized for the purpose of preserving contracting parties’
interest, the opponents have claimed that these will incur cost structure. In an article by
(Kearney, 2014), he identified that the complex structure of Islamic banking and financing
products are to blame for not being able to have a consistent profitability. Furthermore, he
emphasized that the complex structure will add to the cost structure of the products.

1.3 Research Questions

This paper is designed at providing answers to the following questions:

1. What are the supporting contracts embedded within Murabahah to Purchase Orderer
(MPO)?
2. What are the rationale behind the identified supporting contracts?

1.4 Research Objectives

This paper specifically tries:

1. To identify the supporting contracts in Murabahah to Purchase Orderer (MPO).

2. To examine and analyze the rationale behind the identified shariah contracts.

6
1.5 Scope of the Research

The scope of this research is to identify several rationale behind the utilization of supporting
contracts in murabahah financing particularly the Murabahah to Purchase Orderer (MPO).
This type of murabahah refers to the transaction where the Islamic bank will purchase an
asset upon the request of the customer from a third party seller and later will resell it to the
customer based on Murabahah contract. In order for this whole financing process to take
place, several contracts are believed to have been adopted and used in this transaction.
Hence, the authors will specifically identify and emphasize the rationale of these supporting
contracts in Murabahah to Purchase Orderer (MPO).

1.6 Significance of the Research

The significance of this research is to provide several justifications on the rationale of having
several supporting contracts within the complex structure of Murabahah to Purchase Orderer
(MPO). This research is also important because it provides a better awareness on the reasons
behind the use of these identified contracts.

1.7 Organization of Paper

Rest of the paper is structured as follows. Chapter Two presents several literature reviews on
general overview on supporting contracts and its types that could be used in a certain
transaction. A brief structure and flow of Murabahah to Purchase Orderer (MPO) will also be
presented in the literature review. In Chapter Three, the methodology used in this research
have been mentioned. Chapter Four discusses the findings and discussion on the rationale
and purpose behind the utilization of the identified supporting contracts. This will be
followed by the conclusion and recommendations in Chapter 5.

2. LITERATURE REVIEW

In this literature review, the authors will firstly provide the definition of shariah supporting
contracts and the general purpose behind the utilization of these contracts in an Islamic
transaction. Several types of shariah supporting contracts will also be highlighted in this
literature review. Following this, a basic flow or modus operandi of Murabahah to Purchase

7
 Orderer (MPO) will be presented in this literature review to provide readers with basic
understanding on the events that have taken place in this financing facility. It will also
provide the authors the ability to identify several shariah supporting contracts embedded
within this financing. Provision on the regulations of utilizing these contracts in MPO by
Bank Negara Malaysia (BNM) will also be given in this section of the paper.

2.1 Shariah Supporting Contracts

To meet society’s demand for financing and simultaneously compete with conventional
banks, Islamic banks have developed and designed the same financing facility as the
conventional banking does but in accordance with shariah principles. In order to provide the
same financing facility as the conventional but remain shariah compliant, Islamic banks have
engaged and embedded several contracts into a financing transaction. Although it makes
Islamic banking products more complex than the counterpart, it provides better risk
protection and benefits for both contracting parties.

Contracts such as wadi’ah and al-rahn are named as supporting contracts because they
serve the purpose of strengthening the application of other Islamic commercial law contracts
(Isa, n.d). The utilization of these type of contracts are believed to have supported the main
primary contract used in a transaction to develop a solid transaction process. It is to ensure
that the conducted transaction will match the purpose of financing for the customer. Apart
from this, supporting contracts like wakalah and kafalah is believed to have been executed to
ensure shariah compliance in every stage of a transaction and to ensure a smooth flow of
transaction.

Supporting contracts are also known to make a transaction more transparent and clear.
(Kholbutayev, 2009) stated that supporting contracts are also designed for effective and
transparent execution of contracts. It enhances the transparency of a transaction to prevent
any doubts on its compliance to shariah principles. The importance of supporting contracts
has also been highlighted in (IslamicBankers, 2015) where these contracts are essential
because they act to complete many aspects of services, products and banking. Furthermore,
the existence of shariah supporting contracts are believed to facilitate trading (Sulaiman,
2017).

8
2.2 Types of Shariah Supporting Contracts

There are several shariah supporting contracts being used in Islamic banking products and
services. Among the supporting contracts embedded within Islamic banking products and
services includes:

● Kafalah (guarantee)

Kafalah literally means responsibility. Kafalah involves an act or performance from a

person to ensure the performance of a certain actor promise by another person (Lee,
2017). Bank Negara Malaysia in Policy Document about Kafalah mention that the
nature of Kafalah is binding on the guarantor and it is to provide assurance on the
fulfilment of an obligation of the guaranteed party’s liability.

● Wakalah (agency)

Wakalah literally means representation, delegation, or agency. Bank Negara Malaysia

in the Policy Document about Wakalah define that Wakalah refers to a contract where
a party, as principal (muwakkil) authorizes another party as his agent (wakil) to
perform a particular task on matters that may be delegated, with or without imposition
of a fee.

● Wadiah (safe custody)

Al-Farabi mention that Wadiah is derived from the verb wada’a means to leave,
lodge or deposit (Qaed, 2014). Wadiah is a contract of safekeeping of property
between the owner of the property and another party who is entrusted to keep the
property. Wadiah is based on amanah or trust of one party to another to keep is
property (Lee, 2017).

● Hiwalah (transfer of debt)

Hiwalah literally means move, shifting from one place to another. According to
Zuhayli, Hiwalah means transferring a debt from one debtor (transferor) to another
(transferee). Once the transferee has accepted the transfer of the debt, the transferor
would be released from any obligation. The creditor can now claim his debt only
from the transferee (Lee, 2017).

9
● Hibah (gift)

Hibah literally means gift, present, donation, or grant. Bank Negara Malaysia in the
Policy Document about Hibah define Hibah to a transfer of ownership of an asset
from a donor (wahib) to a recipient (mawhub lahu) without any consideration. The
nature of Hibah is a form of benevolent (tabarru`) contract.

● Ibra’ (Rebate)

Definition of ibra’ anccording to Shariah Advisory Council (SAC) of Securities

Commission Malaysia 2012-2014 refers to an act of releasing absolutely or
conditionally one’s rights and claims on any obligation against another party which
would result in the latter being discharged of his/its obligation or liabilities towards
the former. The release may be either partially or in full. Ibra’ means surrendering
one's claim and rights over a certain thing (Lee, 2017). In the Guidelines on Ibra’
(Rebate) for Sale Based Financing, BNM refers Ibra’ or ‘rebate’ to an act by a person
relinquishing his rights to collect payment due from another person. Hence, BNM
also stated that Granting of ibra’ by Islamic Financial Institution is an important
consideration for the Islamic Financial Institution to remain competitive with
conventional financial institutions, as conventional financial institutions allow
customers to pay the principal and accrued interests up to the date of early settlement
only.

● Wa’d (promise)

Wa’d literally means a promise to do something. Bank Negara Malaysia under the
Concept Paper on Wa’d define that wa`d is a unilateral promise or undertaking which
refers to an expression of commitment given by one party to another to perform
certain action(s) in the future.

● Rahn (mortgage)

Rahn literally means constancy and continuity, or holding and binding. Bank Negara
Malaysia under the exposure draft on Rahn define that Rahn is a contract between a
pledgor (rahin) and a pledgee (murtahin) whereby an asset is pledged as collateral
(marhun) to the pledgee to provide assurance that the liability or obligation against

10
 the pledgee will be fulfilled. The specific nature of rahn is to provide assurance that a
pledgor will fulfill the obligation to meet the pledgor’s liability to the pledgee.

● Hamish Jiddiyah (security deposit)

Hamish Jiddiyah is a collateral to ensure that the customer will honour his promise in
a Wa’d given prior to an actual aqad (Lee, 2017). Under Murabahah Policy Document
issued by Bank Negara Malaysia mention that Hamish Jiddiyah can be one of the
assurances to arrange a Murabahah contract. It is mentioned in policy document that
the seller may require the purchaser to place a security deposit (Hamish Jiddiyah) to
secure the promise (Wa’d) to purchase the asset.

2.3 Overview of Murabahah to Purchase Orderer (MPO)

One type of murabahah contracts is called Murabahah to the Purchase Orderer (MPO) or
murabahah lil amer bil shira / murabahah lil wa’aed bil shira (Investment and Finance,
2005). In the policy document by Bank Negara Malaysia on Murabahah, this is defined as
“an arrangement whereby the purchase orderer (purchaser) promises (wa’d) to purchase an
identified and specified asset from a seller on murabahah terms upon the latter’s acquisition
of the asset”. From here, the three contracting parties of this type of murabahah contract can
be identified. Firstly, it is the seller, namely the Islamic financial institution who will acquire
the asset from the second party, the vendor or supplier and the remaining third party of MPO
is the purchaser or the customer of the Islamic financial institution. MPO is named as it is
because the customer being orderer, is beforehand making the promise to purchase and
subsequently then enters into the murabahah contract with the Islamic financial institution. It
should be highlighted that the fact that it is a tri-partied murabahah, there is no buy-back
involved and could be an alternative to the already terminated bay al-Inah in Malaysia.
Overall in practice, it is being used by banks for purchases of assets like cars and houses, not
only in Malaysia but worldwide by Islamic banks too as it is also common in Islamic trade
finance (Khalid, 2011). More detail of this transaction mechanism, the modus operandi is as
Diagram 1 below:

11
 Diagram 1:
Basic Modus Operandi of Murabahah to Purchase Orderer

Source: Zariah Abu Samah (2018)

Based on the above diagram, an asset has been identified by the customer from the vendor.
They would then approach the Islamic financial institution, usually bank, to request for
financing to purchase the identified asset. The purchase of the asset can take place in two
ways. The bank will either appoint the customer as an agent to purchase the asset on its
behalf under an agency agreement or the bank will purchase the asset on its own. In the case
where the customer acts as an agent to purchase the asset, the bank will disburse the funds to
the vendor to purchase and the customer (agent) will now take possession of the asset on
behalf of the bank, even though the ownership of the asset remains with the bank. The
customer later offers to purchase (being the orderer) the asset and the bank agrees to sell the
asset on the agreed terms and price under murabahah contract. In this contract, the customer
is obligated to pay the agreed price to the bank according to the agreed terms and conditions
and finally be in ownership of the asset.

12
3. RESEARCH METHODOLOGY

This research is a qualitative and descriptive research where the authors will qualitatively
describe and identify the supporting contracts in murabahah term financing. This is to
provide some rationale behind the utilization of the contracts within the transaction. The
authors will also describe the flow of murabahah term financing in order to give readers an
overview of the transaction.

This research is mostly done through a library and online research by gathering
information and data from books, conference papers, past literatures and journal articles. To
identify the types of supporting contract and analysing the rationale behind the contracts, a
content analysis approach will be used.

4. FINDINGS AND DISCUSSION

The transaction of murabahah financing particularly Murabahah to Purchase Orderer is

understand to be completed in several stages. In the first stage, customer will approach and
request for financing to purchase asset. If there is a specific asset or property that customer
intends to acquire, a details of the asset or property will be provided by the customer. If the
customer has not identified the asset, he should provide specifications with regards to the
asset such as the price, place, supplier, the manufacturer and so forth. After identifying or
providing the specifications of the asset, the bank will start purchasing the asset as requested
by the customer. This marks the second stage.

If there is no specific request from the customer, the bank is free to buy an asset
according to the specifications requested by the customer. In this stage, bank may purchase
the asset either on its own or the bank may appoint customer as an agent to purchase the asset
on its behalf under the contract of wakalah and deliver it to the bank. The bank will then
disburses the fund to the vendor for the purchase of asset and the agent or customer takes
possession of the asset on behalf of the bank. In the last stage, customer will make an offer
under the contract of wa’d to purchase the asset from the bank. The bank will then sell the
asset to the customer at an agreed term and price based on the concept of murabahah. It
should be noted that customers seeking for financing may need to provide collateral for the

13
financing based on the contract of al-Rahn. Bank may request a third party guarantee based
on kafalah in the event of default payments.

Therefore in assisting and completing this transaction, several shariah contracts have
been executed. It can be identified that the primary contract used in this transition is
murabahah while supported by several supporting contracts such as wakalah (agency), wa’d
(promise) and hamish jiddiyah (security deposit). However apart from hamish jiddiyah,
several other supporting contracts such as kafalah (guarantee) and rahn (pledge) may also be
utilized as an assurance to arrange the murabahah contract depending on the bank. Bank may
or may not use these contracts in the financing. This can be illustrated in the diagram 2
below.

Diagram 2:

Contracts used in Murabahah to Purchase Orderer

The contract of wakalah takes place when the customer was assigned by the bank to
act as an agent on behalf of the bank to buy the asset. The wakalah contract should be
arranged in a contract separate from the sale and purchase contract of the murabahah and it
should be evidenced by legal appropriate documentation and records. In this transaction,

14
wakalah is believed to facilitate exchange of asset between the bank and the customer
himself. The need of wakil in this transaction arises because the bank does not have the
ability or expertise to perform such action due to several reason such as distance, size or
numbers. Furthermore, since the customer intend to acquire the asset in the first place, he
should have a clear image on the asset he desired. Thus, the appointment of customer as an
agent tend to mitigate the risk of wrongly purchased asset by the bank. In a nutshell, the use
of wakalah as a supporting contract is to facilitate the acquisition of asset by the customer
based on his specification.

Wa’d literally means a promise to do something. Wa’d takes place during the purchase
undertaking by customer to buy the asset from the bank. The existence and usage of wa’d in
this murabahah transaction is to address and mitigate the risk of inability to purchase the
asset from the bank. The use of wa’d is also believe to ensure commitment of the customer to
undertake the purchase. It shows the customer’s commitment to perform their contract as
mutually attended completely. It provides assurance that the commodity will be purchased by
the customer. Furthermore, wa’d is believed to have protected the bank in event where
customer default in purchasing the commodity. This is create cost to the bank as the bank
may need to find another purchaser and arrange for delivery. Hence, wa’d is used to avoid
further incurred costs and mitigate the risk of non-performing.

Hamish jiddiyah is also involve in this transaction where the customer is required to
pay a security deposit to guarantee his commitment to purchase the asset. The utilization of
Hamish Jiddiyah in this transaction is to provide assurance of performing the purchase and as
a mechanism to cover the loss incurred by banks in events of uncertainty. The security
deposit may be used to compensate against the actual loss incurred in the event where the
customer fails to purchase the asset. However, it should be noted that hamish jiddiyah is not
part of the sale price unless both contracting parties have agreed. The existence of hamish
jiddiyah in this transaction will provide benefits to both parties. The amount of hamish
jiddiyah or security deposit will be returned to the customer if he is able to purchase the asset
successfully. On the other hand, the bank is able to cover any cost incurred in the event
where customer backs out from his obligation to purchase the asset. Hence, hamish jiddiyah
can be viewed as a shield for Islamic banks in covering their losses.

15
 As the main intention of this transaction is to obtain financing, several other contracts
may be used by Islamic banks as an assurance on customer obligations and responsibility.
Contracts like rahn and kafalah could be used in this transaction depending on the bank’s
decision and product offering.

A request for a collateral from the customer based on al-rahn may happen in this
transaction. The term al-rahn is synonymous to collateral, pledge or pawn. Al-Rahn in this
transaction implies as a collateral requested by banks in event of default. It seen as a risk
mitigation strategy implemented by Islamic banks to ensure payments will be made. The
contract of rahn has also seen to be a security. The presence of rahn is to avoid and prevent
loss faced by banks in the event where customers are unable to deliver the payment. In a
nutshell, the presence of a collateral as a security under al-rahn could secure uncertainty
events such as default risk, breach of contracts or the possibility of inability to pay either
deliberately or unintentionally in the future after the financing facility has been given to the
customers.

The contract of kafalah may support the murabahah financing transaction whereby a third
party guarantor is requested by Islamic bank. This is to provide assurance for fulfilment of
obligation by the customer. Kafalah will assure that the guarantor will fulfil the obligation in
event where the customer is unable to perform their obligation. The use of kafalah in
supporting the murabahah transaction is believed to have benefited both parties in this
transaction. In customer’s side, it may reduce the lack of uncertainty in the customer’s
business transaction while in banker’s side, they are able to mitigate future risk as a result of
giving out financing facility to the customers.

5. CONCLUSION AND RECOMMENDATIONS

In conclusion, it can be said that the use of these supporting contracts have enabled Islamic
banks to provide the same financing features to as the conventional banks. The use of these
contracts is to fit in the conventional features in this financing product as to provide an
alternative banking and financing solutions. In order to compete in this banking industry,
Islamic banks need to offer similar products that customers are familiar with. Hence, it is

16
believed that the use of these supporting contracts have enable Islamic banks to provide a
familiar financing solution in accordance to Islamic principle.

Furthermore, all supporting contracts identified above have been used to mitigate risk
associated within the transaction. It prevents Islamic banks from incurring any losses due to
customers’ action. The existence of several supporting contracts in murabahah term financing
is also believed to have facilitate the trading and mobilizing of funds. This is agreed by
(Ahmed H. O., 1990). It provides a smooth flow of the transaction to ensure funds are being
mobilized and channeled accordingly. These contracts have provided both contracting parties
the ability to conduct financial transaction based on shariah principles. The utilization of
these supporting contracts in Islamic banking products and services also aims to provide an
alternative way for customers seeking financing without engaging with riba and ensuring
masalahah of the Muslim ummah.

17
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Bank Negara Malaysia. 2013. Murabaha

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Bank Negara Malaysia. 2017. Kafalah Policy Document.

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