How sale contracts in Shariah work

In-Depth Analysis

In Shariah terms, a sale (or Dai in Arabic) is an exchange of one item (or items) for another and refers to both the activities — buying or selling. The sale means the exchange of an owned item or commodity for another different item or commodity with the transfer of ownership and possession for both. The sale excludes non-beneficial exchanges which result in no benefit to either of the exchanging parties. For example, the exchange of 10 kilograms of Grade 1 quality wheat with 10 kilograms of same quality wheat is not considered a sale under Shariah. The Quran strongly urges buying and selling: 'God has permitted trade and forbidden usury' (Quran 2:275). 'But take witnesses whenever you make a trading contract' (Quran 2:282). Prophet Mohammed said about honest traders: 'The truthful and honest trader is among the prophets, the righteous and the martyrs' (Tirmidhi). The sale contracts commonly used by Islamic banks worldwide are: Murabahah (cost-plus sale), Salam (forward sale with payment upfront), Istisna (manufacturing contract), and Ijarah (lease). The investment contracts are: Mudarabah (profit-sharing partnership), Musharakah (equity partnership), and Wakalah (agency). How to distinguish between these two types of contracts? The core aspect that differentiates them is that when entering into a sale contract, the seller comes to know the extent of the profit (or loss) it is making; while in the case of investment contracts, the end result is known upon the completion of the investment period for which the contract was entered into. Shariah requires core elements of a sale transaction: the presence of the willing seller and eager buyer, the straightforward language of the offer and the acceptance of both considerations to the subject matter and the price, the Shariah permissibility of the subject matter itself, the transfer of ownership and possession of the subject matter sold and bought, and finally the payment of price either at sight or on deferred basis.