Standardisation Of Notation In Islamic Economics, Banking And Finance

In the August 2016 issue of ISFIRE, we started with a one-pager to introduce the standardisation of notation in Islamic economics, banking and finance (IEBF). We issued Note 1 on murabaha in August 2016 (“ISFIRE Note 1 on Murabaha”), which was followed by Note 2 on salam (“ISFIRE Note 2 on Salam”) in October 2016. The Note 3 on mudaraba (“ISFIRE Note 3 on Mudaraba”) was issued in December 2016. In this issue, we are reproducing all the previous 3 notes along with our Note 4 on ijara (“ISFIRE Note 4 on Ijara”). We believe that standardisation of notation will help develop consistent pedagogical tools to be used for education and training in IEBF.

Note 1: 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, ∏MUR, T) represents a commodity murabaha with two commodity brokers, 1 and 2.
4. (A.X[1].B; PMUR, ∏MUR, 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, ∏MUR 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.

• (A.X[1].B; PMUR, ∏MUR, 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, ∏MUR 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|T 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 salam-parallel-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 0 ≠ 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; ∏, ; -∏, 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, ∏, if any. K is the capital contribution (money) by A; while T is the mudaraba time period. In case of loss, i.e., -∏, A shall have to bear it with = 1.

• (A.K.B; ∏0, ; ∏1, 0; -∏, 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, ∏0; any profit over and above this threshold, i.e., ∏1, will be retained by the managing party, i.e., the share of A will be zero (0). However, in case of loss, -∏, A shall have to bear it with = 1.

• If a mudaraba contract is notated with (A.K.B; , T), it shall always be deemed as a short version of (A.K.B; ∏, ; -∏, 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 r , r , …, r , 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 fi- 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 r , r , …, r , 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