1. APPLIED SHARI`AH IN
FINANCIAL TRANSACTIONS
Associate Professor Dr Engku Rabiah Adawiah
Ahmad Ibrahim Kulliyyah of Laws
International Islamic University Malaysia
rabiah@iiu.edu.my
eradawiah@yahoo.com

2. INTRODUCTION
Shari`ah law works in financial transactions (mu`amalat)
by way of interpretative efforts (ijtihad) of the primary
sources (Quran & Sunnah); & using various secondary
sources & techniques of arriving at legal rules
Shari`ah law declares that the original status of each and
every contract is permissibility unless proven otherwise
(al-asl fi al `uqud al-ibahah)
This doctrine of permissibility gives flexibility and opens
up opportunities for innovation and creativity in “Islamic
financial engineering” and product development
2

3. CONTEMPORARY ISLAMIC FINANCIAL
SERVICES
Islamic Capital
Islamic Banking Takaful
Market
Financing Equity Market Takaful
Financing Equity Market Takaful
Deposit &
Deposit & Bond Market Retakaful
Bond Market Retakaful
Investment
Investment
Bank Negara Securities Commission Bank Negara
IBA 1983 - Islamic Bank SCA 1993 Takaful Act 1984
BAFIA 1989 – Islamic CA 1965
Windows
3

4. KEY ISLAMIC COMMERCIAL CONTRACTS
Gratuitous Trading Investment Supporting
Gratuitous Trading Investment Supporting
Contracts Contracts Contracts Contracts
Contracts Contracts Contracts Contracts
Gift Leasing Sale Mudarabah Kafalah
Gift Leasing Sale Mudarabah Kafalah
Waqf Musharakah Rahn
Waqf Musharakah Rahn
Bay`
Bay`
Operational
Operational
Loan Bithaman Hiwalah
Bithaman
Loan Hiwalah
Lease
Lease
Ajil (BBA)
Ajil (BBA)
Ibra’ Wadiah
Ibra’ Wadiah
Financial
Financial
Murabahah
Murabahah
Lease
Lease
Wakalah
Wakalah
Salam
Salam
Jualah
Jualah
Istisna’ etc.
Istisna’ etc. Muqasah 4
Muqasah

5. SALE CONTRACTS & SOME
APPLICATIONS IN ISLAMIC
FINANCIAL SERVICES
Murabahah & Bay` bithaman Ajil (BBA)
Application in Asset Financing
Application in Sukuk issuance

6. MURABAHAH & BAY` BITHAMAN
AJIL (BBA)
Both contracts are contracts of sale and purchase (bay`)
Sale and purchase is a contract of exchange (`aqd al
mu`awadah)
The exchange is between the two counter values, i.e.,
goods and price
Sale and purchase presupposes the transfer of
ownership between the parties (regardless of any formal
registration of transfer)
6

7. SPECIAL FEATURES FOR MURABAHAH
& BAY` BITHAMAN AJIL (BBA)
Murabahah BBA
• It is a sale and purchase • Sale where payment of price
contract based on trust (bay` is deferred
al amanah) • Final price should be
• Full disclosure and contractually agreed and
transparency between the known to both parties
parties • Time and mode of payment
• Cost and amount of mark-up should be ascertained
are disclosed • No need to state the cost
• Payment of price can be spot price and amount of mark-up
or deferred, depending on the (if disclosed – also a
agreement between the murabahah)
parties (if deferred – also a
BBA)
7

8. MURABAHAH & BBA
(Modus Operandi for Asset Financing)
Property Purchase
Asset Owner
Financier
Purchase Price
Asset
STEP ONE 8

9. MURABAHAH & BBA
(Modus Operandi for Asset Financing)
Property Sale
Financier Customer
Sale Price
(Purchase Price + Mark-up)
Asset
STEP TWO
9

10. OBSERVATIONS
The Islamic banking practice in Malaysia tends to
confine BBA to long term asset financing and
Murabahah to short & medium term financing.
This has nothing to do with any Islamic law requirement.
BBA in Islamic law is simply a method of payment, i.e.,
“deferred payment” and thus, it applies to all kinds of
sales where the payment is deferred whether on the
basis of instalments or lump sum payment at the end of
the tenor.
10

11. APPLICATION OF MURABAHAH/BBA IN
SUKUK (BASIC STRUCTURE – MALAYSIA)
Primary Subscriber pays
3
3
the Purchase Price
Primary
Primary
Issuer
Issuer
Subscriber
Subscriber
1 2
1 2
Issuer’s
Assets
Issuer Purchase of Assets by
identified Assets the Primary Subscriber
at Purchase Price
11

12. APPLICATION OF MURABAHAH/BBA IN SUKUK
(BASIC STRUCTURE – MALAYSIA) Cont’d…
Murabahah/BBA
Creation of the Debt
Resale of the assets at the
Selling Price
1 Primary
1 Primary
Issuer
Issuer Subscriber
Subscriber
3
3
Trading
Murabahah/BBA
Murabahah/BBA
IDS/Bonds
IDS/Bonds
2
2
Secondary
Secondary
Market
Market
The issuer issues the sukuk evidencing the debt (sale
price) arising from the second leg of the sale of
assets (which is a Murabahah/BBA)
The Securitization
12
process

13. COMMENTS
Murabahah/BBA sukuk are just tradable in Malaysian
domestic market or perhaps some regional markets that
adopt the Malaysian fatwa on bay` al `inah and bay` al
dayn
Not suitable for global / GCC market
13

14. IJARAH CONTRACT & SOME
APPLICATIONS IN ISLAMIC
FINANCIAL SERVICES
Ijarah – Islamic lease
Application of Ijarah as Operating Lease
Application of Ijarah as Lease followed by
Purchase (AITAB)
Application of Ijarah in Sukuk Issuance

15. IJARAH – ISLAMIC LEASE
Ijarah contract is a form of exchange contract (`aqd al
mu`awadah) – usufruct vs rent.
Ijarah is a contract that results in the transfer of the right
to use (usufruct).
The ownership of the asset remains with the owner cum
lessor.
In practice, ijarah can be used as operating lease or
lease contract with an option to purchase – al ijarah
thumma al bay` (AITAB).
15

16. OPERATING LEASE (Modus Operandi)
Purchase Agreement
Supplier
Financier
Purchase Price
Asset
STEP 1
16

17. OPERATING LEASE (Modus Operandi)
Lease Agreement
Customer
Financier
Rental Payment
Asset
STEP 2
17

18. AL IJARAH THUMMA AL BAY’ - AITAB
(Modus Operandi)
Purchase Agreement
Supplier
Financier
Purchase Price
Asset
STEP 1
18

19. AL IJARAH THUMMA AL BAY’ - AITAB
(Modus Operandi)
Lease Agreement /
2nd Schedule HPA 1967
Customer
Financier
Rental Payment
Asset
STEP 2
19

20. AL IJARAH THUMMA AL BAY’ - AITAB
(Modus Operandi)
Sale Agreement
Customer
Financier
Sale Price
Asset
STEP 3
20

21. APPLICATION OF LEASE TO SUKUK
(ISLAMIC SECURITIES)
Nature of Sukuk al Ijarah:
represents a share in a leased asset (pro-rata
ownership by the sukuk holders of the leased asset)
share entitles to economic benefits under the lease
(enables the sukuk holders to enjoy rental income &
capital gain from disposal of the leased asset, if
any)
subject to the obligations / liabilities (to bear the risk
of loss and damage of the leased asset)
21

22. MALAYSIAN GLOBAL SOVEREIGN
SUKUK: TRANSACTION SUMMARY
Malaysian Global Sukuk Inc.
Issuer
Baa2 (Moody’s) and BBB (S&P)
Rating
USD 600 million
Size
Reg-S
Format
Sukuk al Ijarah (floating rate)
Type
Tenor 5 year bullet
USD LIBOR + 95 bps
Yield & Coupon
Bahrain, Luxembourg & Labuan (LFX)
Listing
June 2002
Launch/Pricing Date
51% Mid-East; 30% Asia; 15% Europe;
Investor Distribution
4% US 22

23. USD600m MALAYSIAN GLOBAL SOVEREIGN
SUKUK: TRANSACTION STRUCTURE
Government of
Government of
Malaysia
Malaysia
6. Payment of rentals
2. Lease of land parcels
9. Exercise price at dissolution
8. Sale at dissolution
10.Dissolution Amount
7. Periodic rental payments
1. Sale & Transfer of
3. Sukuk issuance
Beneficial Title for
USD600m
Federal Lands Sukuk Holders
Federal Lands Sukuk Holders
SPV: Malaysian
SPV: Malaysian
Commissioner (Investors)
Commissioner (Investors)
Global Sukuk Inc.
Global Sukuk Inc.
5. Proceeds
4. Payment of Proceeds
from sale of sukuk
23

24. PARTNERSHIP CONTRACTS &
SOME APPLICATIONS IN
ISLAMIC FINANCIAL SERVICES
Musharakah
Application of Musharakah in Project Financing
Mudarabah
Application of Mudarabah in Project Financing
Application of Musharakah & Mudarabah in
Sukuk Issuance

25. MUSHARAKAH
Meaning of “musharakah”:
“an arrangement whereby two or more persons contribute
to the capital with their property for the purpose of trading
with the joint capital, the profit of which, shall be shared
among the partners”
25

26. MUSHARAKAH PROJECT FINANCING
Contract of Musharakah
Capital contribution – X:Y
Financier // Bank Company
Financier Bank Company
• Profit: shared
according to
agreed ratio or
X%
according to ratio Capital
of capital
contribution
• Loss shared
according to ratio
of capital Y%
contribution
Invests in
Invests in
Project
Project
project
project
Revenue
Revenue
26

27. MUDARABAH
Meaning of mudarabah:
“an arrangement whereby the owner of some property
(termed as rabb al mal) gives a specified amount of capital
to another person (termed as mudarib) who is to act as the
entrepreneur to trade with the capital, the profit of which
will be shared between the two parties according to the
terms of their agreement. The losses will be borne by the
rabb al mal as the financier, whilst the mudarib suffers the
frustration of a fruitless effort”
27

28. MUDARABAH PROJECT FINANCING
Contract of Mudarabah
Financier Company
Financier Company
Profit Sharing ratio – X:Y
(Rabb al Mal) (Amil // Mudarib)
(Rabb al Mal) (Amil Mudarib)
Y% to
rabb al
mal CAPITAL
Profit shared
in accordance
to pre-agreed
proportions
X% to mudarib
(X:Y)
Project
Project Invests in
Invests in
Revenue
Revenue project
project
Loss borne
Totally by
28
rabb al mal

29. BASIC STRUCTURE OF MUSHARAKAH SUKUK
Issues sukuk
Investors Issuer
Investors Issuer
Contract of Musharakah
Capital contribution – X:Y
• Profit: shared
according to
agreed ratio or X%
according to ratio
Capital
of capital
contribution
• Loss shared
according to ratio
of capital Y%
contribution
Revenue
Revenue Invests in
Invests in
of
of Project
Project
Project
Project
29

30. ASSAR SENARI RM150m MUSHARAKAH
SUKUK: TRANSACTION STRUCTURE
Sukuk
Sukuk Company
Issue Sukuk Musyarakah Company
1
1
Holders
Holders
(Investors)
(Investors)
Invest Capital Invest Capital
1
1
(87%) (13%)
5
5
Musyarakah
Musyarakah
Lease
Venture User
Venture User
completed Agreements
Agreements
Owned by IOT (RMXXX Million)
(RMXXX Million)
2
2
Profit sharing
(Starts 2nd Year) Trustee
Trustee
Company Investors
X% Y%
Project Manager
(As Agent of Trustee)
Completed IOT
Completed IOT
3
Construct & Lease Oil
3 Oil
4
4
Companies
Companies
IOT
Construction period 12 – 18 Months
30

31. WINGS FZCO: TRANSACTION STRUCTURE
Emirates as obligor Emirates as lessee Emirates as lessee
Emirates as obligor Emirates as lessee Emirates as lessee
Lease of New Emirates Lease of New
Rental
Group Headquarters Rental
Engineering
Centre
Exercise Price MUSHARAKAH
MUSHARAKAH
Sale of units
Wings FZCO Emirates
Wings FZCO Emirates
as partner as partner
as partner as partner
Land parcels
Proceeds:
valued at
USD550m
USD100m
Emirates
Wings FZCO Emirates
Wings FZCO
a) Issues Sukuk – evidence proportionate share in Musharakah
d c b a
d c b a
b) Proceeds – USD550m: used for construction of Group
Headquarters & Engineering Centre
c) Periodic Distribution Amount
Investors
Investors
31
d) Dissolution Distribution Amount

32. BASIC STRUCTURE OF MUDARABAH SUKUK
Issues Mudarabah Sukuk
Investors Issuer
Investors Issuer
Contract of Mudarabah
(Rabb al Mal) (Amil // Mudarib)
(Rabb al Mal) (Amil Mudarib)
Y% to
rabb al
Profit shared
mal
in accordance
CAPITAL
to pre-agreed
proportions
(X:Y)
X% to mudarib
Outcome
Outcome Invests in
Invests in
of
of project
project
project
Loss borne project
Totally by
rabb al mal 32

33. PG MUNICIPAL MUDARABAH SUKUK
Security
Trustee
Rabb al Mal 1
Sukuk
Holders
Profit sharing
1st Mudarabah - Invest Capital (Bond
SPV Investors
Issue Mudarabah
X% Y%
Proceeds) – RM80 m
Bonds (AAA – RAM)
PG Municipal
Mudarib 1
Profit (SPV) &
Rabb al Mal 2
2nd Mudarabah
PG Local Authority
(Administrator)
Profit sharing
Administrator Investors
Mudarib 2
X% Y%
Profit from
Tax Collection Manage and Administer
Tax Collections 33

34. ISLAMIC DEPOSIT SERVICES
PRODUCTS: SOME
APPLICATIONS
Islamic Deposit Services Products
Islamic Savings / Current Account – Wadi`ah
Islamic Accounts – Mudarabah
Islamic Deposits – NIDC
Islamic Deposits – Murabahah Commodity

35. DEPOSIT SERVICES PRODUCTS
Negotiable
Negotiable
Current // Murabahah Sale and Buy
Current Murabahah Sale and Buy
Investment Islamic
Investment Islamic
Saving Commodity Back
Saving Commodity Back
Account Deposit
Account Deposit
Account Deposit Arrangement
Account Deposit Arrangement
Certificates
Certificates
Wadi`ah Yad Murabahah
Wadi`ah Yad Murabahah
Mudarabah Bay’ al `Inah Bay’ al Dayn
Mudarabah Bay’ al `Inah Bay’ al Dayn
Damanah & Tawarruq
Damanah & Tawarruq
Mudarabah
Mudarabah
35

36. ISLAMIC SAVING & CURRENT
ACCOUNTS
Some Islamic banks use the concept of wadi`ah yad
damanah (guaranteed safe custody) in their Islamic saving &
current account
Other Islamic banks use mudarabah contracts for Islamic
savings & current accounts
For Islamic investment accounts – normally mudarabah
contract is used.
36

37. FEATURES OF WADI`AH YAD DAMANAH
(GUARANTEED SAFE CUSTODY)
The custodian (bank) is both a trustee and guarantor
The deposit need not be separated/segregated
The deposit can be used for trading, etc.
The custodian (bank) has a right to any income derived from
the utilization of the deposit
Depositor can take back the deposited asset at any time
Wadi’ah Yad Damanah is more like Qard (loan); thus, all
principles of loan would be applicable
Wadi`ah Yad Damanah (like loan) cannot generate any pre-
agreed benefit/income to the depositor, over and above the
principal amount of deposit. Failure to safeguard this may
result in riba
37

38. MUDARABAH ACCOUNT
(MODUS OPERANDI)
CAPITAL Provide
Work with
capital
capital
RABB AL MAL
RABB AL MAL
MUDARIB
MUDARIB (Capital provider-
(Capital provider-
(Manager-Bank)
(Manager-Bank) depositors)
depositors)
Profit Losses
Profit Losses
• Shared between mudarib + rabb al mal • Born solely by rabb al mal
• Profit sharing according to a contractually • Mudarib will only be personally
agreed ratio liable if the loss is caused by his
• Profit sharing cannot be a fixed amount/a fixed negligence
38
percentage of capital contribution

39. NIDC (MODUS OPERANDI)
Sells asset
Customer
Customer
Bank
Bank
(Depositor)
(Depositor)
(e.g. equipments for RM100,00)
Method of payment: cash – “Islamic Deposit”
Buys-back asset
Customer
Customer
Bank
Bank (Depositor)
(Depositor)
(e.g. equipments for RM100,00 + X%)
Method of payment: deferred over a period of 5 years Bank
also issues NIDC to evidence the indebtedness created by
the deferred payment sale 39

40. MURABAHAH COMMODITY DEPOSIT-I
Customer buys on a spot basis USD10 million worth
1
1 of LME metal warrants (“commodity”) from Broker A
Customer
Customer
3
3
Customer sells the
commodity to the
Bank at USD10
million plus a profit
2 USD10 million
2
margin payable on a
LME Broker
LME Broker
deferred payment
A
A
basis
5 USD10 million
5
LME Broker
LME Broker Bank
Bank
B
B
Bank sells on a spot basis the Commodity
4
4 to Broker B for USD10 million 40

41. APPLICATION OF ISLAMIC
CONTRACTS IN TAKAFUL
Contract among Takaful Participants – Tabarru`
Contract between Takaful Participants & Takaful
Operator

42. CONTRACT AMONG TAKAFUL
PARTICIPANTS: TABARRU’
Takaful Participants
Mutual Indemnity Donation Mutual Indemnity
Takaful Fund
42

43. CONTRACT BETWEEN TAKAFUL
PARTICIPANTS & TAKAFUL OPERATOR
Takaful Participants
Donation
Takaful Funds
Possible Contract/s:
• Mudarabah
• Wakalah
• Ju`alah
• Wadi`ah yad
Manage
damanah
Takaful Operator
Investment Pay Claims
Investment Pay Claims 43

44. CONCLUSION
There is a wide range of contracts that can be applied in
structuring & developing Islamic financial services products
The choice of contracts depends on the purpose and needs of
the parties (financial institutions & their clients)
For example, sales contracts have been widely used for the
purpose of financing, especially for asset financing
Other contracts like leasing and partnership are also widely
applied in project financing and securitization transactions
Takaful industry uses more of donation, agency & investment
contracts
There is always room for more application & diversification of
Islamic contracts in Islamic financial services products
44

45. THANK YOU
Wassalam