Sale/Bai

Sale contracts could be classified in two different ways. The first classification is based on how
the price of the sold property is determined. If a property is sold for a price mutually agreed by
the parties without any reference to its cost price, the contract is considered a bargain
(musawamah) sale. The second classification is based on the time the price is paid and the subject
matter is delivered. Trust sales (buyu'al‐amanah) are a type of sales in which the seller is under
obligation to disclose to the purchaser the cost price. Trust sales are further subdivided into cost‐
plus‐profit sale (murabahah), sale with no profit (tawliyah), and sale with loss (wadi'ah). Deferred
Payment Sale (Bay'Bi‐thaman Aajil) is a sale contract in which the sold property is delivered to
the purchaser upon signing the sale agreement, whereas the price is postponed to a future date
or paid by installments. Future Commodity Sale (Bay'al‐Salam) is a sale transaction in which the
price of a specified amount of a commodity deliverable at an agreed upon future time is paid
immediately upon signing the contract. Manufacturing Sale (Bay'al‐Istisna’) is a contract with a
seller who provides both raw materials and labor to manufacture a specifically defined product
for a known price and deliver it at a specified date. Currency exchange (Bay'al‐sarf) is defined as
the sale or exchange of a price for a price in the same or different currency and each price is a
consideration for the other.

What Is the Difference Between Musawamah and Murabahah?

Musawamah (bargaining sale) is a type of sale (ba’i or bay’) in which the cost price is not
disclosed or referred to. In other words, the seller is not obligated to reveal the original cost of
the commodity being exchanged to the buyer. Hence, the price to be agreed on is potentially
subject to bargaining powers of both parties.
On the other hand, murabahah (cost-plus sale) is a special type of the so-called trust sales
(buyu’ al-amanah). Murabahah necessitates that the seller reveals to the potential buyer the
exact cost price of the object of sale. The two parties, then, agree on the transaction’s mark-
up (profit) that will be added to the original cost, with both forming the murabahah price
(thaman al-murabahah).
In a nutshell, when the cost price is concealed to the buyer, the sale is referred to as
musawamah. But if it is disclosed, the sale is called murabahah.

What is the Difference Between Ba'i (Bay') and Ijarah?

Generally, ba’i (or sale) involves the transfer of ownership against payment of the thaman
(price), while ijarah is based on the transfer of usufruct (manfa’ah) in return for ujrah (rental).
In other words, in ijarah the leased property or item remains in the ownership of the lessor
and only its usufruct is transferred to the lessee for a specified period of time. Technically,
ijarah is a sale contract as it involves the sale of usufruct, i.e., the right to use a property for a
specific period of time. In contrast, a sale involves the transfer of ‘ayn (property) and its
 usufruct altogether (the usufruct is said to be transferred once and for all). The shari’a rules
and precepts regarding sales closely apply to ijarah.
Ijarah can be combined with sale in a contract known as ijarah thumma al-ba’i (also ijarah
muntahia bittamleek), in which the ownership of the leased property is transferred to the
lessee at the end of ijarah tenor according to specific terms and conditions. In this type of
hybrid ijarah, the lessee has an option to purchase the leased property at the expiration date
of ijarah. Therefore, it comprises two separate contracts: a contract of lease and a successive
contract of sale. For example, a leasing company may purchase a vehicle based on a promise
from its customer who takes it on lease and undertakes to purchase it at the end of the lease
period. During the ijarah period, ownership is not passed on to the lessee, i.e., the lessor
assumes the ownership risk during that period. This includes insurance costs and maintenance
expenses, etc.

What Is the Difference Between Salam and Istisna'a?

Istisna’a is a special case of salam and both involve the future delivery of a specified object.
Istisna’a is mainly used in the fields of manufacturing (both small scale and large scale),
construction, Build, Operate and Transfer (BOT), etc. However, salam is mostly confined to the
trading of commodities, particularly those that require from the seller (al-muslam ileihi) no
additions or alterations.
In this sense, salam and istisna’a have a number of similarities and dissimilarities, including:
Aspect Salam Istisna'a Remarks
1. Underlying asset Commodity Manufactured object The underlying is
known by
specification, with
deferred delivery
2. Price Paid in advance May be paid in Istisna’a is more
advance or in flexible in terms of
installments, or payment
deferred to a future
date
3. Contract bindingness Binding/ lazim Binding/ lazim Salam is binding in
essence. Istisna’a is
made binding based
on maslaha
Offsetting/ paralleling Parallel salam Parallel istisna’a Provided that the
two contracts are
not connected. The
same applies to
parties’ liabilities
and rights
What is the Shari’a Objection to Conventional Lease?
Islamic shari’a has no reservations against using an asset or property in exchange for rental
payment. The contract of conventional lease is based on the transfer of the right to use a
property to another person against payment of rent. Similarly, ijarah (Islamic lease) is the
transfer of theusufruct of a particular property to another person in exchange for a specified
rent amount. It could also involve the employment of the services and efforts of a person for
a consideration (wages, rewards, etc). In this sense, the practice of ijarah is virtually identical
to a conventional lease. However, there are some tangible differences between Islamic and
conventional leases.
Those difference can be summarized in the Shari’a objections to conventional lease, which
include:
 Ownership: in conventional lease, ownership can be transferred anytime, while in ijarah
ownership remains with the lessor.
 Rental outset: in conventional lease, rental begins upon transfer of funds, while in ijarah it
begins when the lessee starts using the object of ijarah.
 Rental determination: in conventional lease, lease rentals can be directly referenced to
interest rates. Conversely, in ijarah, rentals could not be directly linked to interest rates as
the amount and timing of lease payments should be agreed in advance. However,
benchmarking against LIBOR (or IIBR) is permitted with ijarah where the rent is readjusted
for each ijarah period taking into account market conditions.
 Risks/maintenance expenses: in conventional lease, the risks and costs associated with the
leased property are borne by the lessee alone, while in ijarah both the lessee and the lessor
bear such risks and costs depending on the cause, nature and extent of damages and wear
and tear.
 Penalty interest in case of default: conventional lease usually provides for default interest
on late payment of rent, whereas shari’a compliant lease (ijarah) doesn’t permit this.

What is the Difference Between Ju'alah and Ijarah?

Ijarah, by definition, is a contract of lease whose subject matter is a known service (khedmah),
and in which the consideration (badal) becomes due on an incremental basis in proportion to
the passage of time and effort exerted (services provided). On the other hand, ju'alah is a
contract of service whereby a party commissions another (a worker) with a task whose
achievement is probabilistic rather than sure- i.e., the task may be achieved or may be not),
and task undertaker (the worker) is entitled to the agreed amount (ju'l) only if the task is
achieved.

What Is the Difference Between Wa'ad and Muwa'adah?

Promising or unilateral promising (wa’ad) is an undertaking or commitment issued by one party
to the contract, known as the promisor, to the other party, called the promisee, (e.g., the
 purchaser/reseller or the purchase orderer in murabaha to the purchase orderer). Shari’a
(Islamic religious law) regards wa’ad as binding on the party who makes it, unless a force
majeure intervenes and hinders its fulfillment. However, a promise is binding from a shari’a
perspective if it is contingent upon a cause and the promisee has incurred costs because of the
promise. Mutual or bilateral promising (muwa’adah) is a promise vis-à-vis another promise.
For example, in murabaha to the purchase orderer associated with a binding mutual promise,
if the purchaser (who was instructed to purchase an object) accepts the request of the
instructing orderer, the contract of sale would be concluded after the object of sales becomes
in the instructed purchaser’s possession. This sale, from a shari’a standpoint, is considered to
be in fulfillment of the binding mutual promise between the two parties. When the purchaser
offers the object to the orderer, the latter should accept it based on the binding mutual
promise. As such, the contract of sale is formally established.
However, in trading in currencies, bilateral promising to purchase and sell currencies is
impermissible by shari’a if the promise if binding, regardless of the purpose of trading (pure
trading, hedging currency risk, etc). Yet, a unilateral promise (wa’ad), i.e., a promise from one
party without the other, is permissible whether it is bonding or non-binding.

What is the Difference Between an Istisna'a Contract and a Construction

Contract?
The contract of istisna’a is a contract of sale which involves the future delivery of specified
items to be manufactured or constructed by a manufacturer or a builder who is obliged to
provide both the services and materials needed to fulfill the contract.
The construction contract can be viewed as an ijarah contract if it is confined to providing
services only (i.e., the labor force and expert skills for construction), while the materials are
provided by the customer who engaged the builder to carry out the construction work.
However, if the construction contract requires the builder to provide both the labor and
materials needed for construction, then the contract is an istisna’a contract.

A comparison between Hawalah, Wakalah, and Kafalah

Hawalah Wakalah Kafalah
Definition Hawalah means “change” Wakalah refers to a Kafalah is an Arabic
or “transfer” and usually contract in which a word for
refers to the transfer of party (muwakkil) responsibility,
debt from original debtor authorizes another amenability or
to the legal personality. party as his agent suretyship. It often
(wakil) to perform a refers to an act of
particular task, in someone adding
matters that may be himself to another
delegated, either person, and making
voluntarily or with himself liable to
imposition of a fee perform the
 (Bank Negara responsibility,
Malaysia, 2015). together with the
person.
Accounting and Auditing AAOIFI (2010) According to
Organization for Islamic Shariah Standard AAOIFI Shariah
Finance Institutions No. 23 defines Standard No. 5,
(AAOIFI) Shariah Wakalah as “the act kafalah are
Standard No. 7 define of one party guarantees that are
Hawalah as transfer of a delegating the other intended to secure
debt liability from the to act on its behalf obligations and
transferor to the payer. on what can be a protect amount of
subject matter of debts, either from
delegation.” being uncollectible
or from being in
default (AAIOFI,
2010).
The effect of Hawalah is Ibn Al-Qudamah
that the creditor can no defines kafalah as a
longer claim debt from conjoining of the
original debtor since the guarantor’s liability
claim should be made to the liability of the
against the new debtor guaranteed. Thus,
named in Hawalah the debt would be
contract (Al-Zuhayli, established on both
2003). of them (Al-
Zuhayli, 2003).
Legality The hadith reported by Al- The evidence of Kafalah can be seen
Bayhaqi, in which the permissibility is in the Sunnah of
Prophet ‫ ﷺ‬have said: derived from the the Prophet
“Delinquency of rich text in Al-Quran Muhammad S.A.W.,
debtors is a form of hadith and ijma’. where Abu Qatadah
transgression, so if one of One of the text is “… asked the Prophet
you has his debt so send one of you to pray for a man to
transferred to a rich with this silver coin whom he (Abu
person, let him accept the of yours to the city Qatadah) had been
transfer of debt” and let him look to a guarantor for a
(Narrated by Ahmad and which is the best of debt (Al Bukhari,
the author of six books of food and bring you Al-Jami’ Al Sahih,
Hadith as well as Ibn provision from it ….” 3/94).
Shaybah and Al-Tabarani (Surah Al-Kahf,
in his ‘Awsat on the verse 19)
authority of Abu
Hurayrah).
Al-Zuhayli (2003) From the ijma’ the In more recent
recorded that majority of jurists agreed that times, AAOIFI
the jurist view this Hadith wakalah is Shariah Standard
that it is preferred to permissible and No.5 has stated
accept the transfer of recommended that guarantees are
 debt, since it is not an based on ta’awun allowed with
obligation. concept (helping regards to contracts
each other) of exchange and
also contracts of
property.
Condition According to Hanafis as There are four (4) In Kafalah there are
reported by Al-Zuhayli conditions four (4) basic rules
(2003), there are five (5) pertaining to the and conditions the
conditions pertaining to basis of wakalah parties must adhere
the transfer of debt. contract. (Bank to (Al-Zuhayli,
1. The language of the Negara Malaysia, 2003; Badri &
contract must be 2015) Bouheraoua, 2013;
intended for offer and Dusuki, 2011).
acceptance to transfer 1. The muwakkil
debt, and it can be in oral shall authorize a 1. Guarantor who is
or in written form. specific wakil and of sound mind, has
2. The principal debtor notify him of his legal capacity and
must be of eligible person appointment. willingly give his
to enter into contract and consent and
freely consent to the 2. The Wakil (Bank) agreement to the
transfer of debt, meaning agent (wakil) to contract.
no coercion involved perform a particular
because coercion task, in matters that 2. Debtor, he does
invalidate the transfer. may be delegated, not need to have
3. The creditor must have either voluntarily or legal capacity and
the same criteria of the with imposition of a can even be a
principal debtor but with fee minor, insane
additional condition which person or a
is issuance of acceptance 3. Subject matter in bankrupt.
by creditor in order to wakalah contract
signify recognition of the should be known to 3. Creditor who
transfer. agent and it is not must be known to
4. The transferee must permissible to all parties.
fulfil similar conditions delegate someone
like the creditor just now. to perform unknown 4. Guaranteed
5. The debt must be thing. object or asset. This
fungible debt and should asset must be an
be binding. When such 4. Offer and actual asset that is
debt complied with the acceptance may be possible to collect
two conditions, the debt is expressed verbally from the guarantor.
eligible to be transferred. or by appropriate It should be an
There are other opinions documentation or by asset that can be
with regard to the any other methods legally owned and
conditions of Hawalah accepted by sold should the
contract, but the author customary business debtor fail to fulfil
mainly highlights the practice which does his obligations.
opinion from the Hanafis. not contravene the
 Shariah principles.

Diminishing Musharakah
As a participatory mode with profit-and-loss sharing Musharakah is considered
to be the most desired mode of Islamic financing. And Diminishing
Musharakah is now being used extensively in many areas for financing fixed
assets such as houses and motor cars. It is used mostly when one party who
wants to own an asset cannot afford to pay the full price and takes the
assistance of financing from another party which ends up with the complete
ownership of the asset by the first party who purchase the share of the other
party over a period of time while at the same time complying with the rules
of the Shari’ah. When used in home financing, Diminishing Musharakah can
be viewed as a form of shared ownership with a leasing sale-back
arrangement, which makes it different from an interest-based mortgage.

DM arrangements allow equity participation and sharing of profits on a pro-

rata basis, they also provide a method through which the bank keeps on
reducing its equity in an asset against periodical payments, ultimately
transferring ownership of the asset to the client.The procedure involved in
Diminishing Musharakah is that the Islamic bank enters with a client into a
partnership in which they both invest in the equity capital required to finance
a project, and possibly also participate in the management; both share in the
profits according to a pre-determined basis or in losses according to their
investment. The bank would be also responsible for major maintenance, repair
and insurance in respect of its share of a property. The client makes rental
payments based on the level of equity held by the bank, with each payment,
the bank’s equity reduces followed by a reduction in the rental calculated on
the reducing equity. The client purchases the bank’s equity by the capital
repayments, accordingly, its share is progressively increasing and the bank’s
equity is diminishing until the bank has no equity and thus the client acquires
complete ownership. Similarly, the rental payments keep reducing with the
bank’s diminishing equity in the asset until no further rental payment has to
be made.

A home financing transaction under DM involves the combined purchase of a

house by the Islamic bank and the client and the bank’s leasing its share to
the client. The transaction involves the creation of a joint ownership in the
property and the rent of the Islamic bank’s share to the client for an agreed
period of time. For example, the Bank may contribute 90% and the Buyer
10% of the purchase price. The client makes the promise to purchase the
bank’s share and purchases the units at different stages. Over a period of up
to 20 years, the client will make monthly purchase instalments through which
the Bank will sell its share of the home to buyer. The bank leases out its share
to the client for the use of the property with the option to buy it, the bank
receiving agreed rental payments for the use of the property. Periodically, the
client purchases a pre-agreed percentage of the bank’s share in the property,
thereby increasing the client’s ownership in the property and reducing the
bank’s share by a similar amount. The rental paid on the bank’s share is
adjusted according to the bank’s diminishing share; and the transaction ends
with the transfer of ultimate ownership of the entire property to the client
upon successful completion of the lease term. if a client wishes to purchase
the bank’s remaining share in the property prior to the agreed date, the
Diminishing Musharakah agreement will be terminated upon payment.