Understand the power of conversation.

Browse F.A.Q. Topics

Islamic Contracts

  • Qard
    Loan. Lit: to cut or cut off. It is so called because the property (in terms of wealth) of a person (the lender) is cut off and transferred to a needy person (the borrower)without expecting any return or profit. The borrower is required to repay only the principal amount to the lender on demand. The Qur'an encourages people to contribute generously to social welfare and helping the needey in society, and "if the debtor is in difficulty, grant him time till it is easy for him to repay. But if you remit it by way of charity that is the best for you...".  As charging interest is prohibited, Qard is always associated with with 'Hasan', which literally means 'kindness to others', and referred to a a voluntary act with good intention. Qard should not be confused with Dayn, which refers to debt arising as result of a credit transaction. Loan under Shari'ah can be classified as Salaf and Qard, the former being a loan for a fixed time and the latter on demand. Also see Qard Hasan and Loans with Service Charge.
  • Mudharabah
    Mudharabah refers to a contract made between provider of capital (depositor) and an entrepreneur or fund manager (the Bank) to enable the Bank to carry out business ventures within the Syariah guidelines whereby both parties agree to share the profits from investment according to a mutually agreed ratio.
  • Musharakah
    Musharakah refers to a joint enterprise in which partners (or parties) to the enterprise share the profit and loss of the enterprise. Musharakah has far reaching implications for Islamic banking and finance in the modern context and provides an excellent alternative to the interest-based economy.
  • Ijarah
    Ijara is an exchange transaction in which a known benefit arising from a specified asset is made available in return for a payment, but where ownership of the asset itself is not transferred. The ijara contract is essentially of the same design as an instalment leasing agreement. Where fixed assets are the subject of the lease, such can return to the lessor at the end of the lease period, in which case the lease takes on the features of an operating lease and thus only a part amortisation of the leased asset’s value results. In an alternative approach, the lessee can agree at the outset to buy the asset at the end of the lease period in which case the lease takes on the nature of a hire purchase known as ijara wa iqtina (literally, lease and ownership). Some jurists do not permit this latter arrangement on the basis that it represents more or less a guaranteed financial return at the outset to the lessor, in much the same way as a modern interest-based finance lease. The terms of ijara are flexible enough to be applied to the hiring of an employee by an employer in return for a rent that is actually a fixed wage. Some generally agreed conditions for ijara are as follows :
    1. The leased item should be transferred to the lessee on completion of the lease agreement and should be of a condition that is fit for performance of the required tasks. The lessor should transfer the leased items to the lessee in their completed form.
    2. The usufruct of the leased item should have value.
    3. The amount and timing of the lease payments should be agreed in advance, though the agreed schedule and amount of those payments need not be uniform.
    4. The lease payment schedule becomes active upon complete acquisition of the usufruct of the leased goods, whether such usufruct is in fact enjoyed by the lessor or not.
    5. The period of the lease must be specified.
    6. The conditions of usage of the leased items must be stated.
    7. The lessor must have full possession and legal ownership of the asset prior to leasing it.
    8. The leased asset must continue to exist throughout the term of the lease. Items which are consumed in the process of usage, ammunition for instance, cannot be leased.
    9. In contrast with most conventional finance leases, the responsibility for maintenance and insurance of the leased item under ijara remains that of the lessor throughout.
    10. A price cannot be pre-determined for the sale of the asset at the expiry of the lease. However, lessor and lessee may agree the continuation of the lease or the sale of the leased asset to the lessee under a new agreement at the end of the initial lease period.
    11. In the event of late payment of rental, the ijara may be terminated immediately.
    12. The lessor may claim compensation for any damage caused to the leased assets as a result of negligence on the part of the lessee.
  • Wadiah
    Wadiah corresponds to safekeeping, custody, deposit and trust. In Islamic finance, wadiah refers to the deposit of funds or assets by a person with an Islamic bank. In this arrangement, the depositor deposits his funds or assets with the bank for safekeeping and in most of the agreements the bank charges a fee for the safe custody of the depositor’s funds. There are two basic types of wadiah:
    • Wadiah yad amanah refers to property is deposited on the basis of trust (guarantee safe custody).
    • Wadiah yad Dhamanah refers to savings with guarantee or safe-keeping.
    The term wadiah relates to the old concept of amanah where one person hands over his or her assets to other person for the purpose of safekeeping. The concept of Wadiah has been implemented in different Islamic countries such as Malaysia and Bangladesh [1]. Generally, Islamic banks charge an accounts maintenance fee for wadiah accounts, which can be attributed to the administrative costs incurred by the bank in managing the assets or funds in safe custody.
  • Bai Salam
    Bai-Salam  may be defined as a contract between a Buyer and a Seller under which the Seller sells in advance the certain commodity (ies)/product(s) permissible under Islamic Shari‘ah and the law of the land to the Buyer at an agreed price payable on execution of the said contract and the commodity (ies)/product(s) is/are delivered as per specification, size, quality, quantity at a future time in a particular place.
  • Bai Inah
    Buying an object for cash  then selling it to the same party for a higher price whose payment is deferred so that the purchase and sale of the object serves as a ruse for lending on interest. It equates to a double sale by which the borrower and the lender sell and then resell an object between them, once for cash and once for a higher price on credit, with the net result of a loan with interest.
  • Tawarruq
    Tawarruq is an Islamic financial product which allows clients to raise money quickly and easily, in theory without breaking Muslim bans on interest. A customer buys an easily saleable asset from an Islamic bank at  a marked up price, to be paid at a later date, and quickly sells the asset to raise cash.
  • Istisna’a
    Istisna’a is a contract of exchange with deferred delivery, applied to specified made-to-order items. General agreement upon principles of practice is difficult to identify, however it is often stated that: a) the nature and quality of the item to be delivered must be specified. b) the manufacturer must make a commitment to produce the item as described. c) the delivery date is not fixed. The item is deliverable upon completion by the manufacturer. d) the contract is irrevocable after the commencement of manufacture except where delivered goods do not meet the contracted terms. e) payment can be made in one lump sum or in installments, and at any time up to or after the time of delivery. f) the manufacturer is responsible for the sourcing of inputs to the production process.
  • Murabahah
    Murabahah was originally an exchange transaction in which a buyer purchases items from a seller at a specified profit margin payable to the seller. It is assumed that the seller will divulge his costs accurately, such that the profit-margin can be agreed accurately. Hence this type of sale is a form of ‘trust sale’ since the buyer must trust that the seller is disclosing his true costs.

Contact Us