Standardisation Of Notation In Islamic Economics, Banking & Finance

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 9 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)

In this issue of ISFIRE, we issue Cambridge Note 10 on Wa’ad.

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 standardisation of notation will help develop consistent pedagogical tools to be used for education and training in IEBF. 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’

1. (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.

(A.X.B; P|T , T ) represents a sale contract between A (seller) and B (buyer) to buy/sell a commodity X for the deferred price P|T₁ to be paid by B at a later time T₁, allowing the buyer to receive the commodity upfront at time T₀.

2a. (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 contact.

• (A.X.B; P|T₀, T₁) represents a sale contract between A (seller) and B (buyer) to buy/sell a commodity X for the a 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.

3a. (A.X.B; P|T₀, T₁) is essentially a salam contract as per Cambridge Note 3 on Salam.

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. amount of) X to A.         

3. (A.X.B; B.X.A |T , T ) 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.

3. (A.X ,B; B.X .A) represents exchange of an asset X between

4. (A.X ,B; B.X .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 and amount X₂ of X to A; such that X1 = X2 or X1 ≠ X2.

5. (A.X ,B; B.X .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 and 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 A; such that X₁ 0≠ 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 and 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 X of X to B in exchange for B transferring and amount X₂ of X to A, such that X₁ ≠ X₂, irrespective of whether T 0 = T1 or T0 ≠ T1

Cambridge Note 3 on Murabaha

1. (A.X.B; PMUR ,∏MUR , 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 ∏MUR for T as the date of payment of price.
2. (A.X[1].B; PMUR, ∏MUR, 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, ∏MUR 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 with two commodity brokers, 1 and 2

• (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.

•  ([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.

• (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 on 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 installments 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 +…+ r3 , 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 contracts 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 a Party A and a 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 a Party A and a 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 a 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’- 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’-parallelistisna’ 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 sakk issued by an issuer A on asset to be bought by investors 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 relationships 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 (promise) 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 Pm1.