In the August 2016 issue of ISFIRE, we started with a one-pager to introduce standardisation of notation in Islamic economics, banking and finance (IEBF). This has emerged as a major project since then, as a number of universities engaged in the instruction of IEBF have started to adopt what were initially named as ISFIRE Notes, and subsequently renamed as Cambridge Notes. So far, we have issued 10 Cambridge Notes:
- Cambridge Note 1 on Bai’ (issued in February 2018)
- Cambridge Note 2 on Riba (issued in June 2018)
- Cambridge Note 3 on Murabaha (issued in August 2016)
- Cambridge Note 4 on Salam (issued in October 2016)
- Cambridge Note 5 on Mudaraba (issued in December 2016)
- Cambridge Note 6 on Ijara (issued in February 2017)
- Cambridge Note 7 on Musharaka (issued in February 2018)
- Cambridge Note 8 on Istisna’ (issued in April 2018)
- Cambridge Note 9 on Sukuk (issued in June 2019)
- Cambridge Note 10 on Wa’ad (issued in August 2019)
In the last issue of ISFIRE, we revised Cambridge Note 1 on Bai’ in light of feedback from the readership of ISFIRE and academia. In this issue, we have revised Cambridge Note 2 on Riba to seek further feedback from the relevant stakeholders in the industry.
WHY IS THERE A NEED FOR STANDARDISATION OF NOTATION IN ISLAMIC FINANCIAL EDUCATION?
There is no standard notation in the books written on Islamic economics and finance. In the absence of a standard, authors use their discretion to notate different Islamic financial contracts.
This has not only created pedagogical confusion but has also hampered true understanding of Islamic financial contracts. We believe that the standardisation of notation will bring the following benefits to IEBF:
- It will help develop consistent pedagogical tools to be used for education and training in IEBF;
- Precise notation will also help in understanding the true nature of the contracts, their elements and their implications for product development and structuring;
- The notation must also help standard setting bodies, especially Accounting & Auditing Organisation for Islamic Financial Institutions (AAOIFI), which are involved in issuing Shari’a Standards; and
- Disciplines of Islamic Economics and Islamic Banking & Finance must benefit from the standardised notation, as a wider body of literature will notate the contracts consistently.
Once Cambridge IIF has issued a sufficient number of notes, we aim to hold a special workshop on Standardisation of Notation in IEBF, to finalise all these notes into standards. In this respect, a Board on Standardisation of Notation in Islamic Economics, Banking and Finance is under formation. The interested individuals are invited to submit their expressions of interests to Professor Humayon Dar by emailing on hdar@cambridge-iif.com.
Cambridge Note 1 on Bai’
- (A.X.B; P) represents a spot sale contract between A (seller) and B (buyer) to buy/sell a commodity X for the price P. Both the object of sale X, and price P, must be exchanged on spot. A variant of this contract may be notated as (A.X.B; P|T0), explicitly mentioning the time, T0, when the exchange of object of sale and its price be affected.
1a. (B.X.A; P) represents a spot sale contract between B (seller) and A (buyer) to buy/sell a commodity X for the price P.
Note: The first party in these Notes must always be a seller and the second party shall be a buyer.
- (A.X.B; Y) is a barter exchange between A (seller, i.e. owner of the commodity X) and B (buyer, i.e. owner of the commodity Y) on a spot basis, whereby the commodity Y is
deemed as the price of the commodity X. Another possible way of notating the barter exchange is (A.X.Y.B), whereby A exchanges a commodity X that they own, for a commodity Y owned by B.
Note: The first commodity in these Notes must always be owned by the seller and the second commodity shall be owned by the buyer.
(A.X.B; P|T , T ) represents a sale contract between A (seller) price P|T1 to be paid by B at a later time T1, allowing the buyer to receive the commodity upfront at time T0.
3a. (A.X.B; P|T1, T0) is essentially bai’ mu’ajjal or what is also known as bai’ bithaman ‘aajil, or a deferred payment sale contract.
4. (A.X.B; P|T0, T1) represents a sale contract between A (seller) and B (buyer) to buy/sell a commodity X for the price P|T0 to be paid upfront by B at time T0, allowing the seller to deliver the commodity during time period T or on a specific date at the end of T1.
4a. (A.X.B; P|T0, T1) is essentially a salam contract as per Cambridge Note 4 on Salam.
5. ([A.X.B; P1|T1],[B.X.A; P2|T2]) is an arrangement that combines two sale contracts such that A sells a commodity X to B for a price P1 at time T1 and B sells the same commodity X to A for price P2 at time T2. This may be a notation for bai’ al-‘ina whether P1 = P2 or P1 ≠ P2 and T1 = T2 or T1 ≠ T2.
Cambridge Note 2 on Riba
1. (A.X.B) represents an (unconsidered) exchange of an asset X between two parties, A and B, whereby A transfers ownership of X to B, without any reference to a consideration or price. This may also be known as an exchange of gift.
2. (A.X.B; B.X.A) represents exchange of an asset X between A and B, whereby A transfers ownership of (an amount of) X to B, while B also simultaneously transfers ownership of (an amount of) X to A.
3. (A.X.B; B.X.A |T0, T1) represents exchange of an asset X between A and B, whereby A transfers ownership of (an amount of) X to B at time T0, and B transfers ownership of (an amount of) X to A at time T1.
4. (A.X1,B; B.X2.A) represents exchange of an asset X between A and B, whereby A transfers ownership of an amount X1 of X to B, while B also simultaneously transfers an amount X2 of X to A; such that X1 = X2 or X1 ≠ X2.
5. (A.X1,B; B.X2.A) is an agreement between two independent parties, A and B, which may lead to riba if A transfers ownership of an amount X1 of X to B who also transfers an amount X2 of X to A; such that X1 ≠ X2.
6. (A.X1,B; B.X2.A |T0) is an agreement between two independent parties, A and B, which may lead to riba if A transfers ownership of an amount X1 of X to B who also simultaneously (at time T0) transfers an amount X2 of X to A; such that X1 ≠ X2.
7. (A.X1,B; B.X2.A |T0, T1) is an agreement between two independent parties, A and B, which may lead to riba if A
transfers ownership of an amount X1 of X to B at time T0, and B transfers an amount X2 of X to A at another time T1; such that X1 ≠ X2.
8. (A.X1,B |B.X2.A |T0, T1) is definitely and unambiguously a riba agreement between two independent parties, A and B, if A transfers ownership of an amount X1 of X to B in exchange for B transferring an amount X2 of X to A, such that X1 ≠ X2, irrespective of whether T0 = T1 or T0 ≠ T1.
9. (A.X.B; B.X.A; P1, P2|T0) may represent two mutually exclusive trades whereby party A sells (an amount of) a commodity X to a party B for price P1 and simultaneously party B sells (an amount of) a commodity X to party A for price P2. The two trades take place at time T0.
10. (A.X.B; B.X.A; P1, P2|T0) shall not lead to riba as long as the two trades are mutually exclusive and are not conditional upon each other, even if P1 ≠ P2.
11. (A.X.B; B.X.A; P1, P2|T0) shall lead to bai’ al-‘ina if the two trades are not mutually exclusive or are conditional upon each other, if P1 ≠ P2.
Cambridge Note 3 on Murabaha
1. (A.X.B; PMUR ,ΠMUR , T) represents a classical Murabaha arrangement between A (seller) and B (buyer) to buy/sell a commodity X for the murabaha price PMUR and Murabaha profit of ΠMUR for T as the date of payment of the price.
2. (A.X[1].B; PMUR, ΠMUR, T) represents a commodity Murabaha arrangement between A (financier) and B (financee) arranged by a single commodity broker 1; whereby PMUR is the murabaha price, ΠMUR is the murabaha profit, and T is the duration of the financing period (in years, months, or days, etc.).
3. (A.X[1.2]X.B; PMUR, ΠMUR, T) represents a commodity murabaha between two commodity brokers, 1 and 2.
4. (A.X[1].B; PMUR, ΠMUR, T, D(.), R(.)) represents a commodity murabaha arrangement between A (financier) and B (financee) arranged by a single commodity broker 1; whereby PMUR is the murabaha price, ΠMUR is the murabaha profit, and T is the duration of the financing period (in years, months, or days, etc.); D(.) and R(.) represent default and rebate clauses, respectively, such that: Default Penalty = a Xi; and Rebate amount = b Xj whereby Xi = amount outstanding at the time of default; Xj = amount outstanding at the time of early settlement date; and 0 ≤ a ≤ 1 and 0 ≤ b ≤ 1.
5. (A.X[1].B; PMUR, ΠMUR, PMURIK, T / N, PEX) represents a commodity murabaha based Islamic mezzanine financing arrangement between A (financier) and B (financee) arranged by a single commodity broker 1; whereby PMUR is the murabaha price, ΠMUR is the murabaha profit, PMURIK is the payment in kind (one-off balloon payment at the end of the financing period) and T is the duration of the financing period (in years, months, or days, etc.); N is the number of shares that B promises to sell to A in the event of default for an agreed price PEX.
Cambridge Note 4 on Salam
1. (A.X.B; PSAL|T0, T1) represents a classical salam contract between A (seller) and B (buyer) to buy/sell a commodity X for the salam price PSAL|T0 to be paid upfront by B at time T0, allowing the seller to deliver the commodity during time period T1 or on a specific date at the end of T.
2. ([A.X.B; PSAL1|T0], [B.X.C; PSAL2|T1], T2) represents a salamparallel- salam arrangement, involving three independent parties, A, B and C, whereby A sells a commodity X to B for a salam price, PSAL1|To, paid by B upfront at T0, to receive the delivery during time period T2 or on a specific date at the end of T2. The salam-parallel-salam arrangement also involves B selling the commodity X to another independent party C that pays salam price, PSAL2|T1, to B at the time of entering into the salam contract, i.e., at T1 ∀ T0 ≠ T1, to deliver the commodity X during time period T2 or on a specific date at the end of T2.
3. (A.X.B.X.C; PSAL1|Ti, PSAL2|Tj, T) represents a three-partite salam-parallel-salam contract, whereby A sells a commodity X to B for a salam price, PSAL1|Ti, paid by B upfront at Ti, and B sells the commodity X to C for a salam price, PSAL2|Tj, whether Ti = Tj or Ti ≠ Tj; the deliveries take place during time period T or on a specific date at the end of T. This is a null and void contract that does not fulfil the requirement of independence of the two salam transactions.
Cambridge Note 5 on Mudaraba
1. (A.K.B; Π, α; -Π, 1; T) is a simple mudaraba contract between a Party A (capital provider) and a Party B (the managing party) in such a way that A receives α percentage of the profit, Π, if any. K is the capital contribution (money) by A; while T is the mudaraba time period. In case of loss, i.e., -Π, A shall have to bear it with α = 1.
2. A.K.B; Π0, α; Π1, 0; -Π, 1; T) is a mudaraba contract that stipulates that the capital providing party (Party A) will receive α percentage of the profit if the realised profit is up to a threshold level of profit, Π0; any profit over and above this threshold, i.e., Π1, will be retained by the managing party, i.e., the share of A will be zero (0). However, in case of the loss, -Π, A shall have to bear it with α = 1.
3. If a mudaraba contract is notated with (A.K.B; α, T), it shall always be deemed as a short version of (A.K.B; Π, α; -Π, 1; T).
Cambridge Note 6 on Ijara
1. (A, X, B; R = r1+ r2 + … + rt, T) represents a simple ijara contract between A (lessor) who leases an asset X to another person B (lessee) for a total rental value of R to be paid in instalments of r1, r2, …, rt, for a period of T.
2. (A, X, B; R = r1 + r2 + … + rt, T; P1, P2) represents an ijara wa iqtina’ contract between A (lessor) who leases an asset X to B (lessee) for a total rental value of R to be paid in instalments of r1, r2, …, rt, for a period of T; with an understanding that B will have to buy the asset for a price, P1, should it happens to default on rental payment during the term of the lease, and if that (event of default) does not occur B will buy the asset X at the end of the lease period for a price, P2.
3. (A, Y, B; R = r1 + r2 +…+ rt , T) represents an ijara mausufa dzimma contract between A (lessor) who leases an asset Y (which has yet to come into existence) for a total rental value of R to be paid in instalments of r1, r2, …, rt, for a period of T (which may coincide with the time that Y must take to come into existence).
4. If an ijara contract is notated with (A, X, B; R, T), it shall be deemed as an ijara that requires a lump-sum amount of rental either at the start of the lease period or at the end of it.
5. An ijara contract notated with (A, X, B; R0, T) shall imply that the rental amount is required to be paid in lump-sum at the start of the lease period; and an ijara contract notated with (A, X, B; Rt, T) shall imply that the rental amount is required to be paid in lump-sum at a specific time in future, which may include the end of the lease period.
Cambridge Note 7 on Musharaka
1. (A.KA.KB.B, Π, α; -Π, βi; T) is a musharaka contract between Party A and Party B whereby both parties contribute capital, KA and KB, respectively, to a venture, in such a way that A receives α percentage of the profit, Π, if any, and B therefore receives (1-α) percentage of the profit, Π. In case of loss, i.e., -Π, both parties shall bear loss in accordance withβi, whereby i = A or B; βA = KA/K and βB = KB/K, and K = KA + KB. T is the time period for musharaka; and α and β may differ.
2. (A.KA.KB.B, Π, βi; T) is a simple musharaka contract between Party A and Party B whereby both parties contribute capital, KA and KB, respectively, to a venture, in such a way that A receives βA percentage of the profit, Π, whether positive or negative, and B receives βB percentage of the profit. In other words, β = α.
3. If a musharaka contract is notated with (A.KA.KB.B; α, β; T), it shall always be deemed as a short version of (A.KA.KB.B, Π, α; -Π, βi; T).
Cambridge Note 8 on Istisna’
1. (A.X.B; P1|T1, P2|T2, … Pn|Tn; ΡIST=Σn i=1 Ρi,Tn) represents an istisna’ contract between A (seller) and B (buyer) to buy/sell commodity X (which may be manufactured by A during the contract period) for total price of PIST, payable in instalments P1, P2, … Pn, until the time of the delivery Tn, by when the whole price must have been paid.
2. ([A.X.B; P1|T1, P2|T2, … Pn|Tn; ΡIST1=Σn i=1 Ρi,Tn], [B.X.C; P1|T1, P2|T2, … Pn|Tm; ΡIST2=Σm j=1 Ρi,Tm) represents an istisna’-parallelistisna’ arrangement, involving three independent parties, A, B and C, whereby A sells a commodity X to B for price, PIST1, paid by B in instalments, to receive the delivery on a specific date at the end of T. The istisna’-parallel-istisna’ arrangement also involves B selling the commodity X to another independent party C that pays price PIST2, to B in instalments ∀ i ≠ j and/or PIST2≥PIST1, to receive the commodity X on a specific date at the end of T ∀ Tm≥Tn.
3. A short version of the istisna’ contract stated in (1) can be written as IST(A.X.B; ΡIST=Σn i=1 Ρi,Tn).
4. A short version of the istisna’-parallel-istisna’ arrangement stated in (2) can be written as IST1(A.X.B; ΡIST1=Σn i=1 Ρi,Tn ), IST2(A.X.B; ΡIST2=Σm j=1 Ρi,Tm).
Cambridge Note 9 on Sukuk
1. (A.X.B, C; N, α, Ρ|Ρ = αN; T, ti|i = 1,2,3,…n) is a sukuk issued by an issuer A on asset to be bought by investor B, with a notional price of N. The return on the sakk will be determined by the net revenue Ρ, generated by the asset X by way of dealing with a party C. The issuer will ensure that Ρ is equivalent to an amount added to notional N in such a way that Ρ = αN ∀ 0>α>0. The sakk is issued for a time period T and the return may be distributed in instalments on dates ti. The notional N must be returned at the end of the sukuk period T.
2. (A.X.B, C; N, α, Ρ|Ρ = αN; T, ti|i = 1,2,3,…n) is a general notation for sukuk and may be specified for different types of sukuk.
3. For example, for sukuk al-ijara, (A.X.B, C; N, α, Ρ|Ρ = αN; T, ti|i = 1,2,3,…n) will represent a sakk issued by an issuer A on an asset X to be bought by investors B, with a notional price of N. The return on the sakk will be determined by the rental Ρ, which will be generated by leasing the asset to the party C involved in the structure (normally an obligor).
4. The relationship between A, B and C will be determined by sale contracts (C.X.A; P|T0) and (A.X.C; P|Tn) as per Cambridge Note 1 on Bai’, and lease contract (A, X, B; R = r1 + r2+…rn, T)) as per Cambridge Note 5 on Ijara.
5. Thus, a sukuk al-ijara may be notated like ((A.X.B, C; N, α, Ρ|Ρ = αN; T, ti|i = 1,2,3,…n)| (C.X.A; P|T0), (A, X, B; R = r1 + r2 +… + rn, T), (A.X.C; P|Tn); Ρ = R)).
Cambridge Note 10 on Wa’ad
1. <A.X.B, P|b> represents a promise or undertaking (wa’ad) between A (promisor) and B (promisee) to buy a commodity/ asset X for the price P. Both the object of purchase/sale X, and price P, may be exchanged at a future date when a Bai’ or a sale and purchase agreement may be executed pursuant to the promise. <B.X.A, P |b> represents a promise or undertaking (wa’ad) between B (promisor) and A (promisee) to buy a commodity/asset X for the price P.
2. <A.X.B, P|s> represents a promise or undertaking (wa’ad) between A (promisor) and B (promisee) to sell a commodity/ asset X for the price P. Both the object of purchase/sale X, and price P, may be exchanged at a future date when a Bai’ or a sale and purchase agreement may be executed pursuant to the promise. <B.X.A, P|s> represents a promise or undertaking (wa’ad) between B (promisor) and A (promisee) to sell a commodity/asset X for the price P.
3. The notation <•> implies a non-binding arrangement as opposed to the notation (•) that refers to a binding contract.
4. <A.X.B, P|b; To, T1> represents a promise or undertaking (wa’ad) between A (promisor) and B (promisee) at time T0 to buy a commodity/asset X for the price P at a future date T1. Both the object of purchase/sale, X, and price, P, may be exchanged at the future date T1 when a Bai’ or a sale and purchase agreement may be executed pursuant to the promise. This also applies to a promise to sell, i.e., <A.X.B, P|s, To, T1>.
5. [<A.X.B, P|b>, <B.X.A, P|s>] is an arrangement in which A promises to buy X for a price P, and B simultaneously promises to sell X for the same price P.
6. <A.X.B, P ∀ P = Pm1 + Δ |b; To, T1> represents a promise or undertaking (wa’ad) between A (promisor) and B (promisee) at time T0 to buy a commodity/asset X for the price P = Pm1 + Δ, where Pm1 is the future market price of the commodity/ asset X at a future date T1 and Δ is an incremental which may be positive, negative or even zero. The same holds for a promise to sell, i.e., <A.X.B, P ∀ P = Pm1 + Δ |s; To, T1>.
7. A promise to purchase between A (promisor) and B (promisee), i.e., <A.X.B, P |b; To, T1>, and a promise to sell between B (promisor) and A (promisee), i.e., <B.X.A, P |s; To, T1>, are considered equal and opposite promises.
8. Two promises will be considered as equal and diagonal promises if they must affect a binding arrangement in future. For example, <A.X.B, P ∀ P ≥ Pm1 |b; To, T1> and <B.X.A, P ∀ P < Pm1 |b; To, T1> are two equal and diagonal promises, as B will call upon the first promise to purchase (given by A) if the promised price P is actually greater than the future market price Pm1. Also, A will call upon the second promise (given by B) if the promised price P is less than the future market price Pm.
