All the Islamic financial contracts that are dominantly in practice are actually based on promise not sale contracts and by its nature a promise is non-binding but due to prudential requirements it is treated as binding.
3. first introduced by the Hanafi jurist,
Imam Abu Yousuf (d.798) as the
Chief judge (qadi al-qudat) during
Harun al Rashid’s reign in context of
an Istisna’ contract
The Binding
Promise
4. The Promise Background
for a valid sale
contract, either the
object of sale or its
price may be absent
at the time of
contract but both
cannot be absent
object deferred sale
& price deferred sale
(prepaid & post paid
sales) are valid
But sale where both
price and object are
deferred is an invalid
sale
5. Price deferred
Sale
Object
deferred Sale
Selling an asset that
exists in the balance
sheet for a price that
will be paid in future
– Bai’ bithaman
aajil - BBA
Selling an asset
that doesn’t exist
in the balance
sheet for a price
that is paid now –
Salam sale
Creating demand Creating supply
7. Creating supply
A4 Size
Paper
with a
logo
Plain
A4 Size
Paper
In both cases
the object of
sale is not
present, thus
price must be
paid in advance
for a valid sale
contract
Istisna’
Sale
Salam
Sale
8. Hence Istisna’ is a sub-
set of Salam because due
to the nonexistence of
the object of sale, the
price must be paid in
advance to make the
contract valid
9. But what if the potential
buyer in Istisna’ is short of
cash and needs financing?
Consensus: In
this case no valid
sale contract is
possible
Imam Abu
Yousuf: if not sale
contract make it
binding promise
10. The Binding Promise
in Istisna’
For Istisna’, first introduced by the Hanafi jurist,
Imam Abu Yousuf (d.798) as the Chief judge (qadi al-
qudat) during the Harun al Rashid’s reign
View of Imam Abu Yousuf is adopted by
- The Majalah al-Ahkam al-Adliyah, the Ottoman
Codification of Islamic Law
- The OIC Fiqh Academy
- The IDB Shariah Board
- The AAOIF Shariah Board
11. MPO Binding Promise
In financial Murabahah (murabahah for
purchase order -MPO), the bank is selling on
credit an asset that doesn't exist in its
balance sheet
There could not be a valid sale contract as price is
deferred and object doesn’t exist, the MPO starts
as a non-binding promise with an option to
inspect
However, for prudential reasons, the AAOIFI and
IFSB standards adopt MPO as binding promise
12. Promise in Ijarah
In Ijarah also the bank doesn’t posses
the asset to be leased on its balance
sheet, buys the asset like in MPO
based on promise by the client to lease
and rents to the client as operating
lease or as lease ending in ownership
for the client
13. Promise in DM
In Declining Musharakah
(DM), the client promises to
buy the shares of the bank
subject to the market prices that
will prevail at the time of each
purchase
14. Promise in Sukuk
In Ijarah Sukuk, the originator
promises to repurchase the
Sukuk assets on the initial price
at the time of maturity of the
contracts
15. Promise in Swap
In a fixed to floating rate profit
swap, one party promises to sell a
commodity in an equal series of
Murabahah sale contracts
synchronizing with the installment
payments on a long dated fixed rate
Murabahah
16. Reciprocal Promise in
FX Swap
In a foreign exchange swap, both
parties make mutual promise for
future series of exchanges of two
currencies on rates prevailing at the
promise date
17. Pitfall of Promise
Without any exception, all the
financial sales on which Islamic
banking is based are in fact
promises not sales or we can say
that the valid sale contracts have
been replaced by a promise
18. Sale not what you don’t
posses has conveniently
been replaced by a
promise which simply
circumvents a genuine and
valid sale contract