In the August 2016 issue of ISFIRE, we starter with a one-pager to introduce standardization of natation in Islamic economics, bnking and finance (IEBF). We issued Note 1 on murabaha in August 2016 (“ISFIRE Note 1 on Murabaha”), followed by Note 2 on salam (“ISFIRE Note 2 on Salam”) in October 2016, Note 3 on mudaraba (“ISFIRE Note 3 on Mudaraba”) in December 2016, and Note 4 on Ijara (“ISFIRE Note 4 on Ijara”) in February 2017. In this issue we are reproducing the previous 4 notes along with our Note 5 on musharaka (“ISFIRE Note 5 on Musharaka”). We believe that standardisation of notation will help develop consistent pedagogical tools to be used for education and training in IEBF. We aim to hold a special workshop on the Standardisation of Notation in IEBF in 2018 to finalise all these standards and more in a more formal way. In this respect a Board on Standardisation of Notation in Islamic Economics, Banking and Finance is under formation. Interested individuals are invited to submit their expressions of interests to Professor Humayon Dar by emailing on hdar@isfire.net.
Note 1: Murabaha
1. (A.X.B; PMUR, Π 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 ΠMUR for T as the date of payment of 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 with 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.
Note 2: Salam
1. (A.X.B; PSAL|T0, T) 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 T or on a specific date at the end of T.
2. ([A.X.B; PSAL1|T0], [B.X.C; PSAL2|T1], T) 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 T or on a specific date at the end of T. 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 T or on a specific date at the end of T.
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 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.
Note 3: Mudaraba
1. (A.K.B; Π, ; -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 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 = 1.
2. (A.K.B; Π0, ; Π1, 0; -Π, 1; T) is a mudaraba contract that stipulates that the capital-providing party (Party A) will receive 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 loss, -Π, A shall have to bear it with = 1.
3. If a mudaraba contract is notated with (A.K.B; , T), it shall always be deemed as a short version of (A.K.B; Π, ; -Π, 1; T).
Note 4: 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 fidzimma 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 lumpsum 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.
Note 5: Musharaka
1. (A.KA.KB.B, Π, ; -Π, bi; T) is a musharaka contract between a Party A and a Party B whereby both parties contribute capital, KA a nd K B, respectively, to a venture, in such a way that A receives percentage of the profit, Π, if any, and B, therefore, receives (1- ) percentage of the profit, Π. In case of loss, i.e., -Π, both parties shall bear loss in accordance with bi, whereby i = A or B; bA = KA/K and bB = KB/K, and K = KA + KB. T is the time period for musharaka; and b may differ.
2. (A.KA.KB.B, Π, bi; 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 bA percentage of the profit, Π, whether positive or negative, and B receives bB percentage of the profit. In other words, b = .
3. If a musharaka contract is notated with (A.KA.KB.B; , b; T), it shall always be deemed as a short version of (A.KA. KB.B, Π, ; -Π, bi; T).
