UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

Archive for Islamic Finance

Al-Bai’ Bithaman Ajil (Credit Sale or Deferred Payment Sale Without Interest)



Al-Bai’ Bithaman Ajil  

This concept refers to the sale of goods on a deferred payment basis at a price, which includes a profit margin agreed upon by both parties.  The profit is not an interest payment, however, it is part of the sale price.    (Wikipedia)

Al-Bai’ Bithaman Ajil  may consist of an agreement whereby a bank buys an asset and sells the asset to a third party customer at an agreed defined price, which the customer is obliged to pay on a deferred basis such as by periodic installments over a defined period of time.  This appears to be the same as a sale and purchase agreement in conventional finance whereby the vendor permits the purchaser to pay the sale price by installments, however, in the Islamic concept, the sale must satisfy the relevant Sharia’h requirements.

In sum, Al-Bai’ Bithaman Ajil is a Sharia’h complaint sale- and- purchase agreement  for the purpose of financing an asset on a deferred payment basis with a mutually pre-determined payment period.  The sale price includes a profit margin, which is not an interest payment.  

‘The authority of the Bai’ Bithaman Ajil is found in the Sunnah in which the Prophet (PBUH) was reported to have said:

‘Three things done, which have a blessing in it, namely, credit sale, Muqaradah (Mudharabah) and a mixture of flour and barley for the purpose of invitation and not for the purpose of sale.’

One does not need to have a legal interest or be a registered proprietor of the property or have full beneficial interest in the property to be able to sell the property in an Al-Bai Bithaman Ajil transaction.  After the customer has executed the sale –and- purchase agreement with the vendor, the customer has the right ‘to sell’ the right to the property to the financing bank for the loan amount.

Nothing in Islamic Law dictates how the price for such a sale is determined. The sale amount is simply the price, which the parties mutually agree to.  Therefore, nothing prevents the seller from linking the sale price to the period of time for which the credit is extended.’ (and utilizing the time value for money concept).

((*The Law and Practice of Islamic Banking and Finance by Dr. Nik Norzrul Thani; Mohamed Ridza Mohamed Abdullah; and Megat Hizaini Hassan.  (2003))

FAQ on Bai’ Bithaman Ajil (BBA) Financing

“Frequently asked questions about BBA house financing

What is Al Bai’ Bithaman Ajil (BBA) house financing?

BBA house financing is an Islamic house financing facility, which is based on the Sharia’h concept of Al- Bai’ Bithaman Ajil (BBA). It is a contract of deferred payment sale, which includes a profit margin agreed by both parties.  Profit in this context is justified since it is derived from the buying and selling transaction as opposed to interest accruing from the principal lent out.

What are the main characteristics of a BBA house financing?

All the components, which determine the selling price have to be fixed in advance because in Islamic Finance the selling price has to be fixed at the time the contract is made.

What are the mechanics of the BBA house financing?

  1. Customer identifies the asset to be purchased.
  2. Bank determines the requirements of the customer in relation to the financing period and nature of repayment.
  3. Bank purchases the assets concerned.
  4. Bank subsequently sells the relevant asset/property to the customer at an agreed price, which consist of:
  • Actual cost of the asset to the bank i.e. financing amount; bank’s profit margin.
  • Customer is to settle the payment by installment payments throughout the financing period. (Schedule Drafted)

What are the differences between BBA house financing and an ordinary conventional housing loan?

An ordinary conventional housing loan is given on the basis of the debtor/creditor relationship where interest is charged on the loan, which is normally quoted at a certain percentage above the base lending rate (BLR) over the loan period, repayable in periodic installments. The BLR will fluctuate up or down and it will affect the total loan cost. Simultaneously, arrears in conventional loans are normally capitalized.

However, under the Islamic banking scheme, since the BBA concept is being applied, a seller-buyer relationship is established in contrast to the debtor/creditor relationship, which exists in conventional mortgages and the selling price is fixed upfront. The sales price is then repaid in periodic installments and the agreed installments will remain fixed throughout the financing period. As such, a customer’s interest rate risk is eliminated. Furthermore, arrears will not be capitalized.

Will my monthly installments change according to the BLR?

The BBA financing scheme is not tagged to the BLR. Thus, the installments will be fixed according to the rates declared upon in the sale-and-purchase agreement.

Is it possible to compute the selling price? Yes, the selling price is computed as per the formula:

Selling price = (monthly installment X number of financing months) + grace period profit (if any).

Note: The monthly installment is computed using the agreed profit rate on a constant rate of return and monthly rest. The grace period profit is charged when the bank is financing property under construction. As such, during the construction period, the customer will pay the grace period profit only.


Financing amount: RM100,000-00

Profit rate: 8%

Financing period: 20 years

Installment per month: RM837-00

Selling price = (RM837-00 X (20 X 12)) + 0 = RM200, 880-00

Is early settlement allowed under the BBA financing facility?

Yes.  In addition, the customer is not required to give advance notice to the bank for the early settlement.  As such, there is no early settlement penalty fees/charges imposed on the customer.

Is the customer entitled for rebate (Ibra’) in case of early settlement?

Yes, the customer will be entitled for a rebate on the concept of Ibra’ for the unearned profit at the bank’s discretion. The rebate is in the form of a reduction in the balance outstanding. The early settlement amount is the net figure after deducting the rebate.

What is the period of financing for the BBA house financing?

Normally, for house or residential property financing, the maximum repayment period is 30 years or at the age of 65, whichever is earlier. It might differ from one bank to another.

What is the margin of financing for the BBA house financing?

The margin of financing differs from one bank to another. Generally, the margin ranges from 70% to 100% against the sale & purchase value or the current market value. Again, the customer’s repayment capacity will also affect the margin of financing that the bank can offer.

Is there security/collateral requirement under the BBA house financing?

Yes, the property financed by the bank will be used as the security/collateral for the financing facility under the BBA house financing. The property is usually secured by way of first party charge.

What are the legal documents for the BBA house financing?

–         Letter of offer;

–         Property sale agreement;

–         Property purchase agreement;

–         Legal charge;

–         Assignment and power of attorney;

–         Or any other Islamic financing documents required for the house financing.

Is there any restriction in applying for the BBA house financing?

Under the BBA house financing scheme, the purpose of the financing is important. The bank must not finance a customer whose income or nature of business income is derived from a forbidden source or haram income under the requirements of the Sharia’h.

These include but are not limited to the following:

  • Customers who are selling alcohol, drugs, pork and items relating to them;
  • Customers who are operating gambling business and entertainment outlets selling liquor;
  • Customers who are involved in immoral business such as prostitution;
  • Properties that are going to be used for haram activities.

Can a non-Muslim apply for the BBA house financing?

Yes, the same financing facility is available to the non-Muslim.

Can a foreigner or non-resident apply for the BBA house financing?

Yes, the financing facility is also open to a foreigner or non-resident. However, they are subjected to the BNM ECM 6, which includes that the property value must be RM250,000-00 and above;  FIC approval is required; and the maximum margin of financing is 60%.

What is Mortgage Takaful?

Mortgage Takaful is the equivalent of the MRTA, whereby protection on the financing amount will be given in case an unfortunate incident was to strike the customer.  Even though this kind of protection is not compulsory, most banks are making it a financing condition as it is beneficial to the customers and their next of kin.

Most banks are providing financing assistance for the Takaful premium. Normally, the mortgage Takaful premium will be included in the financing amount and will be subjected to the agreed margin of financing.

What are the advantages of the BBA house financing?

–         The total cost of the property purchased is determined at the time of contract or aqad;

–         There is no additional or “hidden” cost that will change the price of the property purchased;

–         The transaction is transparent;

–         There is no element of uncertainties or Gharar;

–         Customers will know exactly when the financing will end;

–         There will be no compounding of arrears and outstanding penalty charges;

–         Presently, there is no additional/penalty charge on outstanding miscellaneous charges;

–         Repayment is not subjected to fluctuation of the BLR;

–         It allows better financial planning.”

(Source: The Star, Malaysia, Contributed by Bank Negara Malaysia.)


Possibly an Interesting Paper

Equity versus Debt- Financing in Islamic Finance

In Islamic Finance, equity- financing is done primarily through the profit-sharing contracts (Uqud al-Ishtirak) of Al-Mudarabah and Al-Musharakah.

  1. Al-Mudharabah: (Origin)

“Al-Mudarabah for example can be traced back to Prophet Muhammad s.a.w. himself, who acted as a Mudharib (agent/entrepreneur) for his wife, Khadijah.  That was even before the first revelation was revealed to Prophet Muhammad s.a.w. by the Angel Jibril (Gabriel).  Such partnership performed an important economic function; they combined the three most important factors of production, namely: capital, labor, and entrepreneurship, the latter two factors being, usually, combined win one person.”  (*The Law and Practice of Islamic Banking and Finance by Dr. Nik Norzrul Thani; Mohamed Ridza Mohamed Abdullah; and Megat Hizaini Hassan.  (2003))

Mudarabah” is partnership where one partner gives money to the other partner for investing it in a commercial enterprise. The investment money comes from the first partner who is called “rabb-ul-mal” while the management and work is the exclusive responsibility of the other partner who is called the “mudharib“.

Therefore, the Mudarabah (Profit -Sharing) is a contract where one party provides 100 percent of the capital and the other party invests the capital and manages the investment project. Profits generated from the business venture are shared between the parties according to a pre-agreed ratio. In contrast to the Musharakah structure, in the event of loss in the venture, the capital provider or the rabb-ul-mal bears all the losses of the business venture. (Wikipedia)

“In the contract of Al-Musharakah (joint-venture profit sharing) a few parties may invest in a business venture in agreed proportions and all the parties have the right to participate in the management of the business venture.  On the distribution of profits, it can be negotiated between the parties and such distribution of profits need not reflect the ratio of the participation in the business venture.  In the event of a loss, all parties bear the loss in proportion to their investment ratio.”  ((*The Law and Practice of Islamic Banking and Finance by Dr. Nik Norzrul Thani; Mohamed Ridza Mohamed Abdullah; and Megat Hizaini Hassan.  (2003))

The main differences between Musharakah and Mudarabah includes that in Musharakah, each partner contributes some capital, whereas in Mudarabah, one partner provides all the capital and the other partner manages the investment.  In addition, in Musharakah, each partner is liable for loss in proportion to their investment while in Mudarabah, only the investing partner is liable for business loss.  Furthermore, in Mudarabah, only one party manages the investment while in Musharakah all partners are entitled to manage the business venture.

The equity-financing systems of Islamic and Conventional Finance are extremely similar.  However, the debt-financing systems in both modes of finance present more dissimilarities than similarities.

For example, conventional debt-financing is almost totally based on interest-based lending in complete contradiction to Islamic Finance where such lending is not allowed.  In Islamic debt-financing, as a contemporaneous underlying contract of buying and selling must be in place, there must be an underlying asset which is the subject- matter of the contract.  In addition, the Islamic debt-financing instrument of deferred contracts of exchange is not generally known in the conventional system.  ((*The Law and Practice of Islamic Banking and Finance by Dr. Nik Norzrul Thani; Mohamed Ridza Mohamed Abdullah; and Megat Hizaini Hassan.  (2003))

It is known that Islamic finance prohibits the charging of interest on loans, however, it does not reject the notion of time value of money.  Many people think that Islamic finance structures transactions in ways that just disguise interest in other forms, however, in Islamic Finance the capital provider is permitted an adequate return.  Therefore, when a structure appears to allow interest payments disguised in another form, it is actually not interest per se but time value for money.  Time Value for Money is allowed in the following situations.

  1. “If money is committed to another party to use for a period of time, compensation for the financing may not be a pre-determined amount guaranteed by the other party to the contract; instead, it should be a share in the actual profits of the venture.  Money is not treated as a commodity in the West, but as a bearer of risk, and therefore subject to the same uncertainties as those borne by other partners in the enterprise.
  2. If investors finance the acquisition of tangible goods by sale or lease, they may legitimately compensate themselves for foregone opportunities.  Profits deriving from lease payments or from credit sale may reflect, even explicitly, a time factor.”

In addition, new products should be monitored more carefully to ensure that they are in compliance with Sharia’h law.

“In the following Sunnah, Abu Sa’id al-Khudri said, “The Prophet, peace be upon him, said, Gold for Gold, silver for silver, wheat for wheat, barley for barley, dates for dates and salt for salt – like for like, hand to hand.  Whoever pays more or takes more has indulged in Riba.  The take and the giver are alike (in guilt).”

Some of the Quranic revelations and the Sunnah relating to the prohibition of Riba are as follows:

God is with the debtor until he pays his debt, as long as it is not for something God disapproves. (Ibn Majah)

Devour not usury (Riba) doubled and re-doubled (Surah Ali-Imran (3) verse 130)

Lending is allowed in Islamic Finance but without interest.  This is known as Qard-al-Hassan or benevolent loan.”

((*The Law and Practice of Islamic Banking and Finance by Dr. Nik Norzrul Thani; Mohamed Ridza Mohamed Abdullah; and Megat Hizaini Hassan.  (2003))

Interesting Paper on Debt v Equity Financing in Islamic Finance In Light of the Maqasid Al-Sharia’h

Islamic Finance: Debt v Equity Financing in the Light of Maqasid al-Sharia’h by Eddy Yusof, Ezry Fahmy, Kashoogie, Jhordy and Anwar Kamal, Asim *International Islamic University Malaysia (IIUM) April 2009

Ijarah Project Financing via Forward Lease (Ijarah Mawsufah fi Al-Zimmah)


The forward lease is a contract whereby the financier will start paying the rent to the contractor/lessor even though the asset is still under construction.  The paid rent is used to finance the construction cost.  If the project fails, the amount paid towards the rent must be refunded to the financier by the contractor/lessor.  (AMANIE)

Islamic Project Finance:

Practical Application of Forward Ijarah:

The Parameters of Forward IjÉrah and its Application in Financing Services in Islamic Financial Institutions

Islamic Project Financing via Parallel Istisna’a (Al- Istisna’a Al Muwazi)


‘Istisna’a is a contract of exchange with deferred delivery applied to specified made-to-order items.  General agreement upon principles of practice can generally be stated as:

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 completed 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 instalments and at anytime up to or after the time of delivery;

f.)    The manufacturer is responsible for the sourcing of inputs to the production process.

Istisna’a differs from Ijarah in that the manufacturer must procure his own raw materials.  Istisna’a’a differs from bay salam in that the subject matter of the contract is always a made-to-order item, the delivery date need not be fixed in advance, full advance payment is not required, and the istisna’a’a contract can be cancelled but only before the seller commences manufacture of the agreed items.

Parallel Istisna’a Project Financing

Parallel Istisna’a’ is based on two parallel contracts of Istisna’a.  In the first contract, the Islamic Financial Institution acting as a manufacturer/contractor concludes a contract with the customer who is the ultimate purchaser/buyer.  In the second contract, the IFI acting in the capacity of the purchaser concludes another contract with the ultimate manufacturer/contractor to acquire the same item as per the first contract specification. (AMANIE)

‘The bank:  Expresses its desire to order the manufacture of the commodity it has undertaken to manufacture in the first Istisna’a contract (with the same specification as in the first contract) and agrees with the maker on the price and the date of delivery.

The seller: Puts herself under obligation to manufacture the specific commodity and to its delivery on the due date agreed upon.’

Parallel Istisna’a  Contractual Relationship

السؤال : هل يمكن استخدام صيغة الاستصناع في عمليات يدخل فيها البنك وسيطاً بين العميل والمقاول أو الصناع الفعلي؟

الجواب : لا مانع شرعاً من إبرام عقد استصناع بين البنك والعميل وإبرام عقد استصناع آخر (الاستصناع الموازي) بين البنك والمقاول أو الصانع الفعلي ، أو بالعكس بأن يبدأ بالتعاقد مع المقاول أو الصانع الفعلي ، ثم التعاقد مع العميل ، حسبما يراه البنك مناسباً ، ويشترط في الحالتين عدم الربط بين العقدين ، فتكون هناك علاقة عقدية مستقلة بين البنك والعميل ، وعلاقة عقدية أخرى مستقلة بين البنك والمقاول أو الصناع الفعلي . ويتبين من هذا أن في الاستصناع والاستصناع الموازي ثلاثة أطراف واحد منها مشترك في العقدين وهو البنك ، إذ يكون صانعاً في عقد الاستصناع مع العميل ، ومستصنعاً في عقد الاستصناع الموازي مع المقاول أو الصانع الفعلي . وتكون الشروط متماثلة في العقدين إلا في الثمن لتحقيق هامش ربح للبنك ، وزمن التسليم لتمكين البنك من التسلم ثم التسليم ، ويجوز للبنك أن يوكل العميل (في الاستصناع الموازي) بتسلم المصنوع من المقاول أو الصانع الفعلي ، بعد تمكن البنك من القبض الحكمي . وإذا كانت هناك ضمانات صيانة للمعدات المصنوعة لمدة محددة حصل عليها البنك من المقاول أو الصانع الفعلي فيجوز للبنك أن ينقلها إلى العميل ، مع بقاء مسئولية البنك تجاه العميل إن حصل إخلال بتحمل الضمانات من المقاول أو الصانع الفعلي ، وذلك باعتبار البنك صانعاً وضامناً لعيوب المصنوع وهي مما لا يجوز التبرؤ منها ، بخلاف التبرؤ من العيوب في البيع العادي

المصدر : بنك المؤسسة العربية المصرفية الإسلامي


“Is it possible to conclude a manufacturing contract to formalize an arrangement, whereby the Bank acts as an intermediary between the customer and the manufacturer?


In Islamic law, nothing prevents the Bank from concluding a contract of manufacturing between themselves and the customer and concluding another contract of manufacturing (parallel manufacturing) between themselves and the constructor or actual manufacturer, or vice versa.

So, firstly, the Bank concludes a contract with the actual manufacturer. Then, the second contract is concluded with the customer, according to what the bank sees is suitable. The two contracts are separate contracts. Hence, there will be a contractual relationship between the Bank and the manufacturer (1st contract) and a contractual relationship between the Bank and the customer (2nd contract).

It is obvious from this that in a parallel manufacturing contract, there are three parties. One of them is the Bank, which is involved in two separate manufacturing contracts, in different capacities. In the first contract, the Bank enters the contract as a mustasni’an (customer). In the second contract, the Bank enters the contract as a manufacturer. The conditions for the two contracts are same, except in the price (in the second contract, it includes a margin for the Bank), period of delivery, and receipt and delivery for the Bank.

It is also permissible for the Bank to appoint the customer as their agent, to receive/take possession of the manufactured asset on their behalf. If there are guarantees of maintenance of manufactured asset for a specific period that the Bank has obtained from the manufacturer, it is permissible for the Bank to transfer it to the customer.

However, the Bank is still responsible if the manufacturer does not perform his duties, as agreed. This is because the Bank entered into the second contract while assuming the role of a manufacturer. Thus, the Bank is responsible for defects and cannot acquit themselves from it.”

Issued by the Arab Institute of Islamic Banking.’a/211-parallel-istisna’a-contractual-relationship.html



Istisna’a Financing of Infrastructure Projects…dp.pdf


Istisna’a Construction Financing



Fatwa on Istisna’a, Contracting, and Salam

Ijarah in Islamic Finance





“Ijarah means lease, rent or wage. Generally, Ijarah concept means selling the benefit of use or service for a fixed price or wage. Under this concept, the Bank makes available to the customer the use of service of assets / equipments such as plant, office automation, or motor vehicles for a fixed period and price.” (Wikipedia)

“Ijarah gives the Lessee the right to access the equipment on payment of the first installment. This is important as it is the access and use (and not ownership) of equipment that generates income.” (

Advantages of Ijarah

“Ijarah provides the following advantages to the Lessee:

  • Ijarah conserves the Lessee’ capital since it allows up to 100% financing.
  • Ijarah gives the Lessee the right to access the equipment on payment of the first installment. This is important as it is the access and use (and not ownership) of equipment that generates income.
  • Ijarah arrangements aid corporate planning and budgeting by allowing the negotiation of flexible terms.
  • Ijarah is not considered Debt Financing so it does not appear on the Lessee’ Balance Sheet as a Liability. This method of “off-balance-sheet” financing means that it is not included in the Debt Ratios used by bankers to determine financing limits. This allows the Lessee to enter into other lease financing arrangements without impacting her overall debt rating.
  • All payments towards Ijarah contracts are treated as operating expenses and are therefore fully tax-deductible. Leasing thus offers tax-advantages to for-profit operations.
  • Many types of equipment (i.e computers) become obsolete before the end of their actual economic life. Ijarah contracts allow the transfer of risk from the Lesse to the Lessor in exchange for a higher lease rate. This higher rate can be viewed as insurance against obsolescence.
  • If the equipment is used for a relatively short period of time, it may be more profitable to lease than to buy.
  • If the equipment is used for a long period but has a very poor resale value, leasing avoids having to account for and depreciate the equipment under normal accounting principles.


Ijarah thumma al bai’ (hire purchase)

Parties enter into contracts that come into effect serially, to form a complete lease/ buyback transaction. The first contract is an Ijarah (lease) that outlines the terms for leasing or renting over a fixed period and the second contract is a Bai that triggers a sale or purchase once the term of the Ijarah is complete. For example, in a car financing facility, a customer enters into the first contract and leases the car from the owner (bank) at an agreed amount over a specific period. When the lease period expires, the second contract comes into effect, which enables the customer to purchase the car at an agreed to price.

The bank generates a profit by determining in advance the cost of the item, its residual value at the end of the term and the time value or profit margin for the money being invested in purchasing the product to be leased for the intended term. The combining of these three figures becomes the basis for the contract between the Bank and the client for the initial lease contract.   (wikipedia)

“In cases where a buyer cannot afford to pay the asked price for an item of property as a lump sum but can afford to pay a percentage as a deposit, a hire-purchase contract allows the buyer to hire the goods for a monthly rent. When a sum equal to the original full price plus interest has been paid in equal installments, the buyer may then exercise an option to buy the goods at a predetermined price (usually a nominal sum) or return the goods to the owner. Hire purchase enables one to eventually secure ownership of the new asset. The cost can be spread over its useful life and paid for from revenue. Payment patterns can be tailored to suit individual needs, generally involving a deposit, followed by a series of monthly or quarterly installments. Hire purchase is suitable for individuals and businesses of all sizes. Funding is on balance sheet and one has a choice of fixed or variable interest rate agreements.” (


Ijarah wal iqtina is a contract under which an Islamic bank provides equipment, building, or other assets to the client against an agreed rental together with a unilateral undertaking by the bank or the client that at the end of the lease period, the ownership in the asset would be transferred to the lessee. The undertaking or the promise does not become an integral part of the lease contract to make it conditional. The rentals as well as the purchase price are fixed in such manner that the bank gets back its principal sum along with profit over the period of lease.” (


Refinancing of assets owned by the client in a sale and leaseback arrangement is allowed under certain circumstances. The bank being the owner of the asset is paid rent, fixed or variable as agreed by the parties. The rental amount is often linked to Libor.

This structure involves two different contracts.  (1) Sale of asset by the customer to the financier at cash price.  (2) An option is given to the customer/developer to purchase back the asset after the expiry of the lease period.  Usually the repurchase price is tantamount to the price which the financer bought the asset.  (AMANIE)

Usufruct Financing via Ijarah Contract (Operating Lease)

The lessor is the owner of the asset who has granted the right to use the asset to the lessee.  After the expiry of the lease period, the lease may be extended or may not be renewed following which the leased asset will return back to the lessor.  The lessee has to pay a certain agreed rental during the lease period.  (AMANIE)

 International Accounting Standard (IAS) 17 defined an operating lease as a lease other than a finance lease.  Literally this is an agreement to lease certain items just like a Financial Lease but within a shorter time (usually between 12-24 months).  The lessor or the lessee can terminate the agreement at anytime on the basis that the lessor will be responsible for any damage occurring to the leased item.  This lease type is very similar to a normal rental agreement.

Asset-Financing via Ijarah Muntahhiya bi Tamlek

I.E., The financier purchases the house from the vendor and leases it to the customer with a call option to purchase the house in the following alternative arrangements.  (1) Token payment of purchase price; (2) Last rental payment is deemed to be the purchase price; (3) Gift; (4) Actual price of the house (based on financial modeling).  This structure requires two contracts, one for the lease and one for the sale.  (It is prohibited to have two sales in one.)  A Put Option is used to require the lessee to purchase the leased asset in the case of (1) Pre-payment; (2) Default payment.  (The formula would be the outstanding principle plus takaful cost – unearned profit).  (AMANIE)

Finance Lease

 “According to the International Accounting Standard 17, a finance lease is defined as a lease that transfers substantially all the risks and rewards incidental to ownership of an asset… title may or may not pass.  A finance lease is also defined as an agreement to lease certain equipment with a fixed period of time-mostly medium to long, where the leasing company will not provide any service or maintenance, repair or insurance of the leased item. The lessor will calculate payment, depending on the price of the item, plus interest and benefit.  Neither the Lessor nor the Lessee can terminate the agreement.”



Murabahah in Islamic Finance




Personal Financing: A bank may give the borrower cash for personal consumption or to buy an asset.  In this case, a bank credits the customer’s bank account with the cash. 

Asset Financing: A bank may facilitate a customer to purchase an asset by offering alternative payment plans such as installments or deferred lump sum payment.  The Islamic Bank actually delivers the asset to the customer. 

While asset financing enables the customer to own a particular asset, personal financing enables the customer to obtain cash for his consumption including the purchase of an asset.  (AMANIE)


‘Murabahah or murabaha (Arabic مرابحة, more accurately transliterated as murābahah) is a particular kind of sale, compliant with shariah, where the seller expressly mentions the cost he has incurred on the commodities for sale and sells it to another person by adding some profit or mark-up thereon which is known to the buyer. As the requirement includes an “honest declaration of cost,” murabahah is one of three types of bayu-al-amanah (fiduciary sale). The other two types of bayu-al-amanah are tawliyah (sale at cost) and wadiah (sale at specified loss).

It is one of the most popular modes used by banks in Islamic countries to promote riba-free transactions. Different banks use this instrument in varying ratios. Typically, banks use murabahah in asset financing, property, microfinance and commodity import-export.[1]

The seller may not use murabahah if mudarabah or musharakah are practicable. Since those profit-sharing modes of financing involve risks, they cannot guarantee banks any income. Murabahah, with its fixed margin, offers the seller (i.e. the bank) a more predictable income stream. A profit-sharing instrument, conversely, is preferable as it shares the risks more equitably between seller and buyer.

There are, however, practical guidelines in place which aim to ensure that the murabahah transaction between the bank and the customer is one based on trade and not merely a financing transaction. For instance, the bank must take constructive or actual possession of the good before selling it to the customer. Whilst it can be justified to charge an additional margin to the customer to reflect the time value of money in terms of actual payment not being received from the customer at time zero, the bank can only impose penalties for late payment by agreeing to purify them by donating them to charity.’

Commodity Murabahah

‘Under a Commodity Murabaha financing or Tawarooq, a Bank purchases and takes title to the relevant assets (usually precious metals such as Palladium) from a third party broker. The Bank then sells the assets to the Borrower at cost plus a specified profit. Payment of the sale price is usually deferred and may be structured in accordance with the wishes of the parties. The Borrower will enter into a contract to sell the assets to the Broker for the cost price. The net result is to create a deferred payment obligation from the Borrower to the Bank. Bank and Customer will usually enter into a succession of such transactions to create monthly, quarterly or semi-annual payment obligations.

The Commodity Murabaha has been criticised by Islamic Scholars who say it should only be used as a structure of last resort where no other structure is available. In most transactions the commodities never change hands and usually there are no commodities at all, merely cashflows between banks, brokers and borrowers. Often the commodity is completely irrelevant to the Borrower’s business and there is not even enough of the relevant commodities in existence in the world to account for all the transactions taking place.[2]

I.E., Under this structure, the surplus bank may initially purchase an asset from LME at USD 10 Million (or equivalent to the amount that the deficit bank is in need of).  Next, the surplus bank will sell the asset to the deficit bank at USD 10.5 million which is payable in one week (equivalent to the period of investment).  Upon the acquisition of the asset by the deficit bank, the deficit bank may sell the asset to the market/LME for USD 10 million cash.  This USD 10 million is essentially intended for money market purposes.  (AMANIE)

Murabahah v Lending on Interest


Murabahah Presentation,Salam%20&%20Istisna%20)/Murabaha%20-%20Process,%20Documentation%20&%20Practical%20Issues%20by%20Ahme.pdf

Murabahah as A Mode of Finance


Murabahah Explained

Sharia’h Parameters Murabahah

Fatwa on Murabahah

Wakalah in Islamic Finance


Bank as Agent

“Wakalah means agency, or the delegating of a duty to another party for specific purposes and under specific conditions. Under this concept, the bank acts as your agent in completing a particular financial transaction. As your agent, the Bank will be paid a certain amount of fee for the services it provides.”

Bank/Company as Agent

‘Wakalah is a contract whereby somebody (principal) hires someone else to act on his behalf i.e. as his agent for a specific task. The agent is entitled to receive a predetermined fee irrespective of whether he is able to accomplish the assigned task to the satisfaction of the principal or not as long as he acts in a trustworthy manner. He would be liable to penalties only if it can be proved that he violated the terms of the trust or acted dishonestly.

In the case of a financial wakalah contract, clients give funds to the bank/company that serves as their investment manager. The bank/company charges a predetermined fee for its managerial services. The entire profit or loss is passed back to the fund providers after deducting such a fee.

This contract is used by some Islamic banks to manage funds on an off-balance sheet basis. The contract is more widely used by Islamic mutual funds and finance companies.’

Detailed Explanation of Wakalah

‘Literally, Wakalah means protection or remedying on behalf of others. Legally, Wakalah refers to a contract where a person authorizes another to do a certain well-defined legal action on his behalf. It is a contract of agency, which means doing any work or providing any service on behalf of any other. An agent is someone who establishes contractual and commercial relations between a principal and a third party, usually against a fixed fee. An action performed by an agent on behalf of the principal will be deemed as action by the principal. Agency is necessitated by the fact that an agent has to perform certain tasks, which the principal has neither the time, knowledge nor the expertise to perform himself. The need for agency arises where a person has no ability or expertise to perform a certain action due, for example, to distance or size. The main features of agency are service, representation, and the authority to act for the principal. An agent may obtain a certain wage for services rendered within the incentive structure of the principal.

The contract of Wakalah is about the provision of service. Some of these services include sale and purchase, letting and hiring, borrowing and lending, assignment of debt, guarantee, pledge, gifts, bailment, taking and making payments, litigation and relinquishment, admission and acknowledgment of rights. Islamic banks use the concept of Wakalah in various Islamic products such as Musharakah, Mudarabah, Murabaha, Salam, Istisna´a and Ijarah. It is also used in payment and collection of trade bills, fund management and securitization. Banks normally charge fee for agency services rendered by them on behalf of their clients. An agency contract could be specific or general; it could be both commutative and non-commutative; the nature of activity to be undertaken should be clearly defined to avoid any disputes. For example, if Wakalah is for the sale or purchase of specific goods, the kind, quality and other necessary attributes of the commodity should be clearly mentioned.

The principal should have the power and competence to deal and own the property. For example, an insane or a minor cannot appoint agents to act on their behalf. However, it is not necessary for the person appointing an agent to have attained a minimum age. Also, a principal may appoint an agent to conduct any business transaction activity that the person would be able to undertake. However, Agency is not permissible in activities prohibited in the Sharia’h or acts of dishonesty such as theft and usurpation of property or conducting Riba-based business. It is also prohibited to appoint an agent for acts such as prayer, fasting, giving evidence, or for taking an oath. The agent must act in accordance with the instructions of the principal and exercise due care and skill. If he is appointed to sell goods on behalf of the principal, he cannot purchase these goods as a buyer. Similarly, if the principal restricts the agent to certain limits, the agent is bound to observe them.

An agent appointed to engage in buying and selling activities or to pay and receive a debt is considered to be a custodian of the principal’s property and in the fiduciary position of a trustee. And in the absence of any instructions to the contrary, an agent appointed to sell goods can sell them for cash or on credit; the agent can take a pledge of a security for payment in the case of goods sold on credit. Besides, an agent is not allowed to appoint another agent unless he himself is not capable to do it; in that case, he may appoint another agent with the consent of the principal. He must also avoid any conflict of interest such as selling goods to the principal without disclosing that such goods are owned by the agent.

In the case of Wakalah of sales, the principal appoints an agent to sell a certain property for him; the agent is responsible for making payment and receiving goods on behalf of the principal. He has the authority for claiming the price, exercising the right of option of voiding a sale on account of defective goods or inspection and returning goods as well as similar rights and liabilities associated with sale transactions.

Finally, Wakalah is a non-binding contract; the principal or the agent may withdraw at any time by mutual agreement, unilateral termination, discharging the obligation, destruction of the subject- matter and the death or loss of legal capacity of the contracting parties. If the agent concludes a contract that contravenes the terms and conditions of the agency, the contract is not binding on the principal and its validity depends on his approval. In case where an agent concludes a contract that apparently contravenes the conditions, but the contract is beneficial to the principal, it is binding on him.’



Wakalah Deposit (Product)

“Wakalah Deposit is a deposit product, which the profit is derived from a specific investment. This deposit product is based on the Sharia’h principle of Wakalah, whereby, it refers to a contract between two (2) parties, i.e. the owner of the capital (Muwakil) and the Bank (Wakil). The investor, who is the owner of the capital, places a specified sum of money with the Bank, which acts as the Wakil in investing the funds in specific investment activities of the Bank with the objective of making profits.”

Wakalah in Investment (Product)

‘Either a surplus or a deficit bank may initiate this transaction.  For example, a surplus bank, which is seeking to have a return of investment of ‘x%’, may approach a deficit bank for a short period of investment.  The surplus bank (the principal) will appoint and authorize the deficit bank (the agent) to invest the monies of the surplus bank provided the investment return shall not be less than “x%.” The deficit bank will not accept this offer if it thinks it cannot generate that rate of return or it may accept the offer but will not be investing in any investment portfolio if the expected return is expected to be less than ‘x%’.  However, if the realized profit is more than “x%”, the principal will normally waive this amount to the agent as a fee or an incentive fee.’  (Amanie)


Example Corporate Wakalah Agreement by Association of Islamic Banking Institutions Malaysia

Example of Interbank Wakalah Placement Agreement by Association of Islamic Banking Institutions Malaysia



More Links to Information about WAKALAH



Sources of Data:

Materials handed out at the Amanie Islamic Finance School Workshop in Dubai, UAE on December 14-15, 2008.

The Sukuk Musharakah Structure


“What Does Musharakah Mean?
A joint- enterprise or partnership structure (with profit/loss sharing implications) that is used in Islamic finance instead of interest-bearing loans. Musharakah allows each party involved in a business to share in the profits and risks. Instead of charging interest as a creditor, the financier will achieve a return in the form of a portion of the actual profits earned according to a predetermined ratio. However, unlike a traditional creditor, the financier will also share in any losses.

Investopedia explains Musharakah
Musharakah plays a vital role in financing business operations based on Islamic principles, which prohibit making a profit on interest from loans. For example, suppose that an individual (A) wants to begin a business, but has limited funds. Individual (B) has excess funds and wishes to be the financier in Musharakah with A. The two people would come to an agreement to the terms and begin a business in which both share a portion of the profits and losses. This negates the need for A to receive a loan from B.”

In the Musharakah Structure, both parties contribute capital to the joint-venture.  Cash or in-kind assets are permissible (capital) and may be contributed in any proportion amongst the partners.  In this structure, the profit can be fixed according to the proportion of capital or can be negotiable.  However, the loss must be shared in accordance to the capital contribution of each party and each partner is limited in liability to the extent of the partner’s capital contribution.  A partner may have recourse to another partner who is managing the joint-venture in the case of negligence or misconduct.  Common Musharakah activities include:  construction and manufacturing; trading; services; investment related activities, etc.

In sum, Sukuk Musharakah is a partnership arrangement between two parties or more to finance a business venture whereby all parties to the agreement contribute either cash or in-kind capital for the purpose of financing the business venture.  The profit derived from the business venture shall be distributed based on a mutually pre-agreed profit ratio while any losses will be shared on the basis of equity participation.  (Amanie)

Musharakah According to Wikipedia

Musharakah (joint venture) is an agreement between two or more partners, whereby each partner provides funds to be used in a venture. Profits made are shared between the partners according to the invested capital. In case of loss, each partner loses capital in the same ratio.

If the Bank provides capital, the same conditions apply. It is this financial risk, according to the Sharia’h, that justifies the bank’s claim to part of the profit.  Each partner may or may not participate in carrying out the business. A working partner gets a greater profit share compared to a sleeping (non-working) partner.

The difference between Musharakah and Mudharabah is that, in Musharakah, each partner contributes some capital, whereas in Mudharabah, one partner, e.g. a financial institution provides all the capital and the other partner, the entrepreneur, provides no capital. Note that Musharakah and Mudharabah commonly overlap.[34]

Legal Structure of Sukuk Mudharabah and Sukuk Musharakah

  1. Use of the proceeds of the issuance of the certificates will be used by the Issuer to pay the Issuer’s capital contribution to the Mudharabah or Musharakah, as the case may be.
  2. The transaction documents may include the Mudharabah/Musharakah Agreement; the Management Agreement; the Purchase Undertaking; the Declaration of Trust; and the Agency Declaration.
  3. The Sukuk Certificates have limited recourse as the certificates are not debt obligations of the Issuer.  The certificates represent entitlements solely to the trust assets.  Therefore, recourse to the issuer is limited to the trust assets and the proceeds of the trust assets are the sole source of payment on the certificates.
  4. In a dissolution event, the certificate holder can require the issuer to serve an exercise notice and exercise the option under the Purchase Undertaking to require the obligor to purchase the issuer’s units at the exercise price and to enforce any pledge, if any, if the obligor fails to pay.  Dissolution events must be clearly defined in both positive and negative covenants.  (Amanie)


The Parties to the Musharakah Agreement

The Issuer could be a party or partner to the Musharakah; an agent to the Musharakah Investor; or Manager (Mudharib) under the principle of Mudharabah.  The Mudharabah/Musharakah Investors may not be the manager.  The day-to-day business of the venture shall be performed by the Issuer.  (Amanie)

Purchase Undertaking

It is the obligation of the Obligor to execute a purchase undertaking in favor of the Issuer/Investors.  This purchase undertaking will be on the Relevant Exercise Price on the Relevant Exercise Date.  The Relevant Exercise Price could be: 1.) an amount equal to the aggregate of the outstanding Sukuk Amount and the scheduled Accumulated Sukuk Return Amount, or 2.) an amount which is equivalent to the fair value or market value of the Trust Assets.  (Amanie)

The financial ratio or balance sheet of the Musharakah Asset is relevant for Sharia’h compliance purposes.  In addition, the commencement of actual work is relevant to the rendering of the permissible trading of Sukuk.  (Amanie)

According to the Islamic Life Forum:

 Musharakah: This simply refers to a partnership. This is like a joint-venture agreement, which stipulates the conditions of a partnership. For this joint-venture to be in line with Islamic law, both parties must participate in profits and losses, not just in profits. This technique can be used for short-term financing.

In Detail:

Musharakah is a type of Shirkat-ul-Amwal, which literally means sharing. In the context of business, it 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.

In a Musharakah, the party investing the capital shares equally in both the profit and loss, which is different from an interest-based system where the upside is limited while the downside is very nearly non-existent.

The Basic Rules of Musharakah:

Since Musharakah is, in essence, a contract, all conditions and rules of a contract must be met. Apart from those, there are some basic rules that apply specifically to Musharakah.


Distribution of Profits:

  1. The proportion of profit to be distributed among the partners must be determined and agreed upon at the time of the contract. Otherwise, the contract is not valid under Sharia’h.
  2. According to Imam Malik and Imam Shafi’i, it is necessary that each partner’s share in the profit is exactly equal to the proportion of initial investment into the partnership.
  3. According to Imam Ahmed, the ratio of profit distribution may vary, without restriction from the ratio of investment.
  4. According to Imam Abu Hanifah, the ratio of profit distribution may vary, however, for silent partners (non-active partners, who only contribute capital), it cannot be any higher than the ratio of investment.

Distribution of Loss:

All the Muslim jurists are unanimous that each partner’s share in loss must be exactly equal to the ratio of initial investment. Anything to the contrary will render the contract invalid.

The Nature of Capital:

There are the following opinions on this:
  1. According to Imam Malik and some Hanbali jurists, the nature of capital is not a restriction in a Musharakah arrangement. Therefore, in-kind (non-cash) contributions by partners are allowed. The share in partnership will be determined based on the market value of the commodity contributed.
  2. According to Imam Abu Hanifah and Imam Ahmed, no in-kind contributions are allowed in a Musharakah arrangement. This is because they believe it poses problems if the partnership needs to be liquidated or redistributed.
  3. Imam Shafi’i makes a distinction between replaceable commodities and irreplaceable commodities (like cattle). The view is rather complex and not important for our purposes.

For the purposes of modern business, the view of Imam Malik has been widely accepted.

Management of Musharakah:

The norm is for each partner to take part in the management of the partnership, with each partner acting as an agent of the partnership and any work done by one partner deemed to be authorized by all partners. However, if the partners wish they can contract under alternate arrangements for the management of the partnership.

Termination of Musharakah:

It is agreed upon by the jurists that a partnership is terminated if:

  1. One of the partners terminates the partnership;
  2. One of the partners dies (where the heirs get the choice to continue the partnership or liquidate it to draw their share from the partnership);
  3. One of the partners becomes insane.

If the remaining partners wants to continue the business under any of the above scenarios, it is achievable with mutual agreement. The remaining partners would have to purchase the share of the out-going partner.
Another question raised is whether the partners can agree, at the time of contracting, that the partnership will not be terminated unless all partners agree to the termination. Though the earlier fiqh books are silent on the issue, there is nothing in the Sharia’h that would prohibit such an arrangement.




Source:Usmani, Chapter 1.
Taken from:




Data Sources:

Materials handed out at the Amanie School’s Islamic Finance Workshop in Dubai, UAE on December 14-15, 2008.

The Sukuk Mudharabah Structure


“The Arabic word “mudharabah” means to travel the earth for trade or business. It is even a term mentioned in the Quran, the holy book of Islam revealed to the Prophet Muhammad (S) by the angel Gabriel. It is written: “Others (making dharb on earth) traveling through the land, seeking of Allah‘s bounty” [74:20]. The term refers to those who can almost be called nomadic businessmen, traveling around the world seeking God’s help and sustenance in business and trade.” (Huma Rashid)

This Islamic Finance structure is designed to allow entrepreneurs to carry out large-scale business projects, where one party provides the capital and the other party or the entrepreneur provides the know-how and management.  The party, which provides the management, can also sub-invest the capital to another party to manage the investment.  In terms of liability, the party providing the financing is liable to the extent of her capital, while the manager loses her time, work, and expected profit.  Basically, only the party who provides the capital is liable for losses. The party providing the capital has no recourse to the manager except in the case of negligence and misconduct.

In this structure, it is possible to arrange profit distribution based on ratio or percentage.  However, pre-arranging a fixed amount of profit is not possible unless subject to certain conditions.  Waiver of certain profit based on performance is permissible.  Mudharabah activities include construction and manufacturing, trading, services, investment, etc.  This structure is generally used to encourage public participation in large investment projects.

“The worker should not use the money of Mudharabah for traveling or other expenses, unless she specified that to the owner of the capital and the latter agreed to it. The worker works in the Mudharabah to get a part of the profit only.  Therefore, she is not supposed to get anything extra unless it is made clear at the start of the Mudharabah or the nature of the business that they do requires it.

The profit of the Mudharabah is not to be divided between the two before the end of the contract unless they both have agreed to that. This is because there may be a loss in the trade. If the profit is divided before the end of the contract and loss occurs later, there will be no funds to cover this loss. For this reason, the worker is not entitled to any of the profit until the completion of the contract.

The worker is a trustee in this contract, so she should fear Allah, subhanahu wa ta’ala, in what she is entrusted.  Her claim of destruction or loss should be accepted. She should be believed in what she states about things purchased, whether they are for her own use or for the Mudharabah.”  (

If the Mudharabah contract is nullified, then the profit remits to the owner of the capital because it is an increase in her money and the worker gets paid for the work she completed.

According to Huma Rashid, “Mudharabah in Shar’iah, or Islamic law, refers to the payment of a specific amount of money to a person who uses it for business and makes a profit from it or an investment.   This form of contract was present during the time of the Prophet (S) and he approved of it and it was also approved by his first four caliphs and others.

Ibn al Qayyim said, “The mudharib is a trustee, an employee, a deputy and a partner. She is a trustee when she takes the money; a deputy when she uses it, an employee in the work that she executes, and a partner in the profit. For Mudharabah to be (Islamically) valid, the share of the worker should be named.”

The Arab Muslims were prominent businessmen and responsible for much of the economic growth and triumph enjoyed by the Middle East and outreaching parts of the world for many, many centuries. In addition to that, the Qu’ran was not only a moral and religious guide, but a social, legal and business guide that instructed its followers on how to conduct themselves in business and other legal matters.”

Data Sources:

Rulings on Partnerships in Mudharabah

Interesting Paper on Mudharabah

Materials handed out at the Amanie Islamic Finance School Workshop in Dubai, UAE on December 14-15, 2008.

Sukuk Al Ijarah

Sukuk Al Ijarah is an Islamic bond where in which the issuance is backed by the buying, selling, and leasing of properties.

Example of Sukuk Ijarah Structure:

Sukuk Certificates of equal value are issued by the owner of a leased asset or a tangible asset to be leased by promise.  The certificates can also be issued by a financial intermediary acting on behalf of the owner with the intent of selling the asset and recovering its value through subscription with the result that the holders of the Sukuk certificates become owners of the assets.

Certificates of Ownership of Usufructs of Existing Assets

  1. Certificates of equal value issued by the owner of an existing asset either on her own or though a financial intermediary with the goal of leasing the asset and then receiving the rental income from the revenue of the subscription so that the usufruct of the assets passes into the ownership of the holder(s) of the certificate(s).
  2. Certificates of equal value issued by the owner of the usufruct of an existing asset (lessee) either on her own or through a financial intermediary with the goal of sub-leasing the usufruct and receiving the rental income from the revenue of the subscription so that the holder(s) of the certificates become the owners of the usufruct asset.

Certificates of Ownership of Usufructs of Described Future Assets

  1. These are certificates of equal value issued for the purpose of leasing out tangible future assets and for collecting the rental income from the subscription revenue so that the usufruct of the described future asset passes into the ownership of the holders of the certificates.

Certificates of Ownership of Services of a Specified Party

  1. These are certificates of equal value issued for the purposes of providing services through a specified provider and obtaining service charges in the form of subscription income so that the holders of the certificates become owners of these services.

Certificate of Ownership of Described Future Services

  1. These are certificates of equal value issued for the purpose of providing future services through described provider and obtaining the fee in the form of subscription income so that the holders of the certificates become owners of the services.

Key Points

  • A promise by the originator to purchase back the leased asset at par value either at the maturity date or in the event of default.
  • The rental is floating based on LIBOR Benchmark.
  • The insurance cost is borne by the Sukuk investor, but to be set off against the selling price under the promise to purchase back.
  • In most cases of Sukuk Al Ijarah, (which are asset-based), the transfer of title to the SPV/Issuer/ Trustee is based on beneficial ownership transfer not legal ownership transfer.

Information taken from materials handed out at the Amanie Islamic Finance School Workshop in Dubai, UAE on December 14-15, 2008 and


Interesting Articles —$100-Million-Sukuk-Al-Ijarah.html

UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance