Islamic Banking Product Contracts / Concept In BSN

BAI` BITHAMAN AJIL (BBA)

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.

BAI` AL-`INAH

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

AL-IJARAH THUMMA AL-BAI’ (AITAB)

• Al-Ijarah Thumma Al-Bai’ (AITAB), which refers to two contracts which are Ijarah (lease) and Bai’ (buy and sell) contracts, which are undertaken separately and sequentially.

• Under the Ijarah contract, the hirer (customer) leases the vehicle from the owner (Bank) at an agreed rental over a specified period. Upon expiry of the lease period or an early settlement or events of defaults, the hirer (customer) enters into Bai’ contract to purchase the vehicle from the owner (Bank) at an agreed price. Additionally, the Wakalah (agency) contract is used, where Bank appoints the customer as its agent to handle the vehicle’s maintenance during the lease period.
  

MUDARABAH

• Mudarabah is a contract between a capital provider (rabbul mal) and an entrepreneur (mudarib) under which the capital provider provides capital to be managed by the entrepreneur.

• Any profit generated from the capital is shared between the capital provider and the entrepreneur according to a mutually agreed Profit-Sharing Ratio (PSR) whilst financial losses are borne by the capital provider provided the such losses are not due to the entrepreneur's (Bank) misconduct (ta'addi), negligence (taqsir), or breach of specified terms (mukhalafah al-shurut).
  

MURABAHAH

Murabahah refers to a sale and purchase transaction where the cost-plus-profit is disclosed to the customer and agreed by all parties involved. Payment can be made in full, by instalments or in stages, as specified in the sale and purchase agreement.

MURABAHAH TO THE PURCHASE ORDERER (MPO)

• Murabahah to the Purchase Orderer (MPO) is a sale contract with a disclosure of the asset cost price and profit margin to the purchaser (customer).

• Under this contract, the customer places an order and provides a purchase undertaking (Wa’d) to purchase the vehicle before the Bank acquires it. The Bank appoints the customer as its agent to identify the asset (the vehicle), and the customer undertakes to purchase the selected vehicle from the Bank under a Murabahah arrangement. Upon purchasing the vehicle from the vehicle dealer, the Bank subsequently sells the vehicle to the customer. The customer may then make payment by instalments over an agreed financing tenure.
  

MUSYARAKAH

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.

MUSYARAKAH MUTANAQISAH

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.

MUSAWAMAH

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.

TAWARRUQ

• Tawarruq (Commodity Murabahah) consists of two sales and purchase contracts. The first involves the sale of an asset by a seller to a purchaser on a deferred basis. Subsequently, the purchaser of the first sale will sell the same asset to a third party on a cash and spot basis.

• The Tawarruq concept also involves a Wakalah contract (Agency) using a dual-agency arrangement (Financing):
  

1. 1. The Bank acts as an agent on behalf of the customer to conclude the purchase the commodity from the Bank on a Murabahah basis (Cost + profit).
      
   2. The Bank acts as an agent to sell the commodity on behalf of the customer to a third party.
      

• The Tawarruq concept also involves a Wakalah contract (Agency) using a dual-agency arrangement (Deposit):
  

1. 1. The appointment of the Bank who act as an agent on behalf of the eligible customer to buy the commodity from a third party.
      
   2. The appointment of the Bank who act as an agent on behalf of the eligible customer to conclude the selling of the commodity to Bank on Murabahah basis.
      

TAKAFUL 

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.

ZAKAT

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 Banking Products Contract

BAI` AS-SALAM

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

DHAMAN 

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.

HIBAH 

A gift awarded to a person.

IJARAH 

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.

ISTISNA`

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.

JU`ALAH

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

KAFALAH

It has the same meaning as dhaman.

MAL 

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

MAISIR

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

QARDH HASAN

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.

RAHN 

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.

RIBA

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.

SARF

A buying and selling of currencies.

SUKUK

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.

SHARIAH

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).

TADLIS AL-`AIB 

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

TANAJUSH

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.

TA’WIDH

Ta’widh refers to compensation imposed by the party arising from the actual loss suffered due to the delayed in payment of financing/debt/profit amount by the party.

UJRAH

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.

`URBUN

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).

'UQUD AL-MU'AWADAT

Contracts of exchange.

'UQUD AL-TABARRUAT

Charitable contracts.

'UQUD AL-ISHTIRAK

Contracts of partnership.

WAKALAH

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

WADIAH

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.

BAI’

Sale contract.

DHA’ WA TA’AJJAL

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

IBRA’

Ibra' means an act by a person relinquishing his rights to collect payment due from another person. In the context of Islamic banking, the bank may grant ibra’ to its customers of a salebased financing who settled their debt prior to the agreed settlement period as stipulated in the agreement concluded by both parties.

GHARAR

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.

QARD HASAN

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.

MUQASAH

Debt settlement by a contra transaction.

WA’AD

Wa’ad refers to a unilateral promise which refers to an expression of commitment given by one party to another to perfom certain action in the future.

HAMISH JIDDIYYAH

• Hamish Jiddiyyah refers to a security deposit placed to secure the undertaking to purchase an asset before execution of the sale and purchase agreement.

• It may be used to cover the actual loss incurred by the other party if the customer fails to honour the wa’ad or commitment.