Islamic Commercial Contracts / Concepts In BSN


A contract which refers to the sale and purchase transaction for the financing of assets on a deferred and installment basis with a pre-agreed payment period. The sale price will include a profit margin.


Sale contract followed by repurchase by the seller at a different price.


A contract which begins with an ijarah contract for the purpose of leasing the lessor's asset to the lessee. Consequently, at the end of the lease period, the lessee will purchase the asset at an agreed price from the lessor by executing a purchase (bai`) contract.


A contract made between two parties to finance a business venture. The parties are a rabb al-mal or an investor who solely provides the capital and a mudarib or an entrepreneur who solely manages the project. If the venture is profitable, the profit will be distributed based on a pre-agreed ratio. If the business is a loss, it will be borne solely by the provider of the capital unless the loss caused by the Mudharib’s negligence and misconduct.


A contract referring to a sale and purchase transaction for the financing of an asset whereby the cost and profit margin (mark-up) are made known and agreed to by all parties involved. The settlement for the purchase can be settled either on a deferred lump sum basis or on an installment basis, and is specified in the agreement.


A partnership arrangement between two parties or more to finance a business venture whereby all parties contribute capital either in the form of cash or in kind. Any profit derived from the venture is distributed based on a pre-agreed profit sharing ratio and a loss is shared on the basis of capital contribution.


It is a type of a company/venture where a partner purchases the units of the share of the other partner gradually, until the customer finally hold the full ownership of the asset/ project. This concept is a hybrid concept whereby it consists of three contracts which are partnership, lease and sale.


General and regular kind of sale in which price of the commodity to be traded is bargained between seller and the buyer without any reference to the price paid or cost incurred by the former. Thus, it is different from Murabahah in respect of pricing formula. Unlike Murabahah, however, the seller in Musawamah is not obliged to reveal his cost. Both the parties negotiate on the price. All other conditions relevant to Murabahah are valid for Musawamah as well.


Monetization refers to the process of purchasing a commodity for a deferred price determined through Musawamah (Bargaining) or Murabahah (Mark-up sale), and selling it to a third party for a spot price so as to obtain cash.


A scheme which is based on the spirit of cooperation and helping each other by providing financial assistance to participants when needed and all participants mutually agree to give contribution for the said purpose.


A tax, which is prescribed by Islam on all persons having wealth above a certain amount at a rate fixed by the Shariah. According to the Islamic belief zakat purifies wealth and souls. The objective is to take away a part of the wealth of the well-to-do to distribute among eight categories of people stated in the Quran.

Islamic Commercial Concepts


A contract whereby payment is made in cash at point of contract but delivery of asset purchased is deferred to a pre-determined date.


A contract of guarantee whereby a guarantor underwrites any claim and obligation that should be fulfilled by the owner of an asset. This concept is also applicable to a guarantee provided on a debt transaction in the event a debtor fails to fulfill his debt obligation.


A gift awarded to a person.


A manfaah (usufruct) type of contract whereby a lessor (owner) leases out an asset or equipment to a client at an agreed rental fee and pre-determined lease period upon the `aqd (contract). The ownership of the leased equipment remains in the hands of a lessor.


A purchase order contract of assets whereby a buyer places an order to purchase an asset to be delivered in the future. The buyer requires the seller or a contractor to construct the asset and deliver in the future according to the specifications given in the sale and purchase contract. Both parties decide on the sale and purchase prices and the settlement can be delayed or arranged based on a schedule of work completed.


Contract of reward – a unilateral contract promising a reward for a specific act or accomplishment.


It has the same meaning as dhaman.


Something which has value and can be gainfully used according to the Shariah.


Any activity that involves betting whereby the winner takes the bet and the loser loses his bet. This is prohibited according to the Shariah.


A contract of loan between two parties on the basis of social welfare or to fulfill a short-term financial need of the borrower. The amount of payment must be equivalent to the amount borrowed. It is, however legitimate for a borrower to pay more than the amount borrowed as long as it not stated or agreed at the point of contract.


An act whereby a valuable asset is used as collateral for a debt. The collateral will be used to settle the debt when a debtor is in default.


An increase, in a loan transaction or in exchange of a commodity, accrued to the owner (lender) without giving an equivalent counter value in return to the other party. It covers interest both on commercial and consumer loans, and is prohibited according to the Shariah.


A buying and selling of currencies.


A document or certificate, documenting the undivided pro-rated ownership of underlying assets. The sak (singular of sukuk) is freely traded at par, premium or discount.


Islamic law, originating from the Qur`an (the holy book of Islam), and its practices and explanations rendered by the prophet Muhammad (pbuh) and ijtihad of ulamak (personal effort by qualified Shariah scholars to determine the true ruling of the divine law on matters whose revelations are not explicit).


Refers to the activity of a seller intentionally hiding the defects of goods. This activity is prohibited according to the Shariah.


Refers to a conspiracy between a seller and a buyer wherein the buyer is willing to purchase the goods at a higher price. This is done so that others would rush to buy the goods at a higher price, resulting in the seller obtaining a huge profit. This transaction is not permissible in Islam.


Penalty agreed upon by contracting parties as compensation which can be rightfully claimed by the creditor when the debtor fails or is late in meeting his obligation to pay back the debt.


Financial payment for the utilization of services or manfaat. In the context of today's economy, it can be in the form of salary, wage, allowance, commission, etc.


A deposit or earnest money forming part payment of the price of goods or services paid in advance, but is forfeited if the transaction is cancelled. The forfeited money is considered as hibah (gift).


Contracts of exchange.


Charitable contracts.


Contracts of partnership.


A contract which gives a person the power to nominate someone to act on his behalf, as long as he is alive, based on the agreed terms and conditions.


Goods or deposits kept for safekeeping with another person, who is not the owner. As wadiah is a trust, the depository becomes the guarantor and guarantees payment of the whole amount of the deposits, or any part thereof outstanding in the accounts of the depositors, when demanded.


Sale contract.


Reducing the amount of debt when the debtor make early settlement.


Rebate/waiver of partial or total claim against certain right or debt.


Gharar is an element of deception either through ignorance of an essential element of the goods, the price, or through faulty description of the goods, in which one or both parties stand to be deceived. E.g. gambling is a form of gharar because the gambler is ignorant of the result of the gamble.


A contract of loan between two parties on the basis of social welfare or to fulfil a short-term financial need of the borrower. The amount of repayment must be equivalent to the amount borrowed. It is, however legitimate for a borrower to pay more than the amount borrowed as long as it is not stated or agreed at the point of contract.


Debt settlement by a contra transaction.




For Mudharabah based accounts, the Bank applies the Profit Equalization Reserve (PER) mechanism which is approved by Shariah as a risk management tool to mitigate the *Displaced Commercial Risk (DCR) which the Bank is exposed to in order to maintain comparable rates of returns for accounts under the Mudharabah concept.

*DCR refers to the risk arising from the assets managed on behalf of the accountholders which may be borne by the Bank’s own capital, when the Bank foregoes part or all of its share of profits on the accountholders’ funds, and/or make transfer to the accountholders out of the shareholders’ fund investment profits as a result of commercial and/or supervisory concerns in order to increase the return to the accountholders.

This method allows the Bank to appropriate a portion of the Bank’s gross income into a reserve account i.e. the PER account, before distributing to the accountholders and the Bank in months where the profit exceeds the Bank’s expectations; and to draw funds from this reserve in months where the profit is below the Bank’s expectation, to maintain the consistency of the profit rate. The amount allocated in the PER shall be used only for DCR mitigation purposes.