Executive Diploma in Islamic Banking & Finance
Assignment Questions: Module - II
Assignment– 2
By: Muhammad Yaqoob
____________________________________________________
Describe the basic rules of Bai and also elaborate the basic
difference between Salam& Istisna?
The Jurisprudence of Bai (Sale)
In Islamic law, a sale is not merely an exchange of goods; it is a contract
governed by the removal of Gharar (excessive uncertainty) and Riba
(usury).
The Essential Pillars of a Valid Sale
Existence and Certainty: The subject matter must exist. For
example, you cannot sell the "unborn calf of a cow" because its
existence is uncertain. This rule prevents gambling-like
speculation.
Mal (Valuable Property): The item must have legal utility. Selling a
handful of sand in a desert is invalid because it lacks "value" in
that context, just as selling prohibited items (Haram) is invalid
because they lack "legal value."
Ownership and Risk (Daman): A fundamental maxim is "Profit
accompanies Risk." To earn a profit, the seller must own the item
and bear the risk of its destruction before the sale.
Constructive vs. Physical Possession: Modern finance often uses
Constructive Possession, where the seller has the legal title and
the risk of loss, even if the goods are still in a third-party
warehouse.
Comparative Analysis: Salam vs. Istisna
While both are exceptions to the "existence" rule, they serve different
economic sectors.
Feature Bai Salam (Forward Sale) Bai Istisna (Manufacturing)
Logic Designed to provide Designed for large-scale
working capital to farmers construction or custom
or small producers. manufacturing.
Payment Strict Rule: 100% of the Flexible: Payment can be
price must be paid at the upfront, linked to
time of the contract. This "milestones," or deferred
prevents "trading debt for until after completion.
debt."
Subject Commodities (Wheat, Oil, Unique, manufactured items
Matter Rice). They must be (A custom yacht, a bridge, a
"standard" goods available software system).
in the market.
Example A bank pays a farmer $\ A company hires a builder to
$10,000$ today for $500$ construct a warehouse;
tons of wheat to be payments are made as each
delivered in 6 months. floor is finished.
2. What is Murabaha and briefly describe how many steps involves
in Banking MurabahaTransaction?
Murabaha: The Trust-Based Sale
Murabaha is categorized as Bai-ul-Amanah (a Trust Sale). Unlike a
regular sale where the profit is secret, in Murabaha, the seller must
honestly disclose their cost. If the seller misrepresents the cost, the
buyer has the legal right to nullify the contract.
The 6 Steps of Banking Murabaha
In Islamic Banking, Murabaha is a financing tool where the bank acts as
a middleman.
1. Request & Promise: The customer identifies a machine costing $\
$100,000$ and asks the bank to buy it. The customer signs a
"Promise to Purchase" (Wa’ad).
2. Agency (Wakalah): The bank, not being an expert in machinery,
appoints the customer as its Agent to select the machine from the
supplier.
3. The Purchase: The customer (as the bank’s agent) selects the
machine. The bank pays the supplier $\$100,000$ directly.
4. Transfer of Risk: For a brief moment, the bank owns the machine.
If it is destroyed at this point, the Bank loses its money, not the
customer. This "ownership risk" is what makes the profit Halal.
5. The Execution of Sale: The bank now sells the machine to the
customer at a markup.
Calculation Example: > If the cost is $C$ and the profit margin is $P$,
the Murabaha price ($MP$) is:
$$MP = C + P$$
If the bank adds a $10\%$ margin on $\$100,000$, the $MP = \
$110,000$.
6. Deferred Payment: The customer takes possession and pays the
$\$110,000$ in installments over a set period.
The most common mistake in Murabaha is when the bank and the
customer sign the "Sale Contract" before the bank actually owns the
goods. This would be "selling what you do not own," which is strictly
prohibited. The timing of the signatures is the difference between a
Shariah-compliant transaction and a conventional interest-based loan.
Thank You