Islamic Finance & Risk Management

0|Islamic Finance & Risk Management
Islamic Finance
Risk Management
S. M. SHARIFUL AMIN
ID: 112.0549.060
5/5/14
BUS698: Field Study
Prepared for:
Dr. Mahboob Rahman
MBA Program | North South University
Prepared by:
S. M. SHARIFUL AMIN || ID: 112.0549.060
Spring 2014 | BUS 698 | Field Study | Section 1
MBA Program | North South University
Submission Date: 5th May 2014
To
Dr. Mahboob Rahman
MBA Program
North South University.
Subject: Submission of Field Study report.
Dear Sir,
I am glad to submit the field study report titled Islamic Finance & Risk Management
that you asked us to conduct at the very beginning of the semester. It is my great pleasure to
work for this paper and gain an in-depth knowledge on Islamic Finance and Risk Management.
As requirement of the course and your suggestions guidance, I have closely studied the issues
concerned.
I hope you will find the study interesting and informative. In this course I appreciate
having this project. Before doing this report I was really blank regarding Islamic Finance issues.
If you need any assistance in interpreting this report, please contact me at mail:
smsharifulamin@gmail.com or cell: 01612304256.
Sincerely yours,
S. M. Shariful Amin.
ID: 112.0549.060
Spring 2014 | BUS 698 | Field Study | Section 1
MBA Program | North South University.
Executive summery
Global Islamic assets held by commercial banks stood at $1.3B in 2011, but the industry's
forecast growth of some 40% over two years will see this figure rise to $1.8B in 2013, according
to research by Ernst & Young. the Islamic banking industry in Saudi Arabia with an estimated
$207 billion of Islamic assets was ranked first in 2011 followed by Malaysia with total assets
of $106 billion and UAE third with total assets of $75 billion.
Islamic finance is governed by the Islamic law. Islamic Law bans interest, short selling,
speculation, put option, call option, future contract. Guide form Hadith to sale in advance,
"Whoever pays in advance the price of a thing to be delivered later should pay it for a specified
measure at specified weight for a specified period."
Three different types of Futures markets can be considered for an Islamic economy:
SALAM-based futures market for commodities for which a regular market exists; ISTISNA'based futures market basically for the infra-structural and developmental projects; JO'ALA-based
futures market for service based activities.
Conventional financing and risk management transfer the risk and this how babble get
fatter and get explore and global financial crisis come into sight. Whereas Islamic finance and
risk management system eradicate the risk.
Table of Contents
Introduction ..................................................................................................................................... 1
Conventional Finance & Risk Management ................................................................................... 2
Message of Islamic Finance & Risk Management: ........................................................................ 4
Possible Types of Islamic Futures Markets .................................................................................... 6
The SALAM Contract..................................................................................................................... 7
Definition .................................................................................................................................... 7
The Nature of SALAM ............................................................................................................... 7
a)
SALAM as a Sale: ........................................................................................................ 7
b)
SALAM as Indebtedness .............................................................................................. 9
Elements of the SALAM Contract:........................................................................................... 10

Shari'ah Conditions For The SALAM Contract: ...................................................................... 10
The ISTISNA Contract ................................................................................................................ 13
Definition .................................................................................................................................. 14
Elements of The ISTISNA Contract ........................................................................................ 14
Features of The ISTISNA Contract ......................................................................................... 14
The JO'ALA Contract ................................................................................................................... 16
Definition .................................................................................................................................. 17
Elements of The JOALA Contract .......................................................................................... 17
Features Of The JOALA Contract ........................................................................................... 18
Conclusion .................................................................................................................................... 19
Islamic Finance & Risk Management
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Introduction
Islamic financial industry is growing rapidly. Global Islamic assets held by commercial
banks stood at $1.3B in 2011, but the industry's forecast growth of some 40% over two years will
see this figure rise to $1.8B in 2013, according to research by Ernst & Young. Yet, Islamic
instruments, particularly in the area of hedging and risk management, are not at pace with the
industrys growth. Islamic financial institutions face a variety of types of risks associated with
Islamic modes of investment and finance.
Islamic finance is governed by the Islamic law, which bans interest, short selling and
speculation, derivative products (such as: put option, call option, future contract) and stipulates
that income must be derived as profits from shared business risk rather than guaranteed return.
Islamic law derives from
a)
the Shariahah (or Shariah), which comprises the Quran and the sayings and actions
of the prophet Mohammed recorded in a collection of books known as the sahih hadi
th, and
b)
the fiqh, which represents Islamic jurisprudence based on a body of laws deducted
from the Shariah by Islamic scholars.
In principle, futures and options under derivative may be compatible with Islamic law if they
a)
are employed to address genuine hedging demand on asset performance associated

with direct ownership interest,
b)
disavow mutual deferment without actual asset transfer, and

c)
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eschew avertable uncertainty (gharar) as prohibited sinful activity (haram) in a bid to

create an equitable system of distributive justice in consideration of public interest
(mas lahah).
Shariah-compliant derivatives would also maintain risk sharing between contract parties
by forgoing the zero-sum proposition of many conventional derivative transactions in favor of
win-win situations from changes in the value of the underlying asset.
However, the de facto application of many derivative contracts is still objectionable,

mainly because of the possibility of speculation (or deficient hedging need) and the absence of
entrepreneurial investment violate of the tenets of distributive justice and equal risk sharing
subject to religious restrictions on the sale and purchase of debt contracts as well as profit taking
without real economic activity and asset transfer.
This repost concentrated for possibility of Islamic finance. In Bangladesh derivative

market is not allowed in advance stage only forward market and spot market is allowed. Under
forward contract Bangladesh Bank allow only foreign currency USD commodity forward market
is completely absent is Bangladesh.
Conventional Finance & Risk Management:

From late 1900s derivatives have become increasingly important in finance. Futures and
options are actively traded on many exchanges throughout the world. Many different types of
forward contracts, swaps, options, and other derivatives are entered into by financial institutions,
fund managers, and corporate treasurers in the over-the counter market. Derivatives are added to
bond issues, used in executive compensation plans, embedded in capital investment
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opportunities, used to transfer risks in mortgages from the original lenders to investors, and so
on. We have now reached the stage where those who work in finance, and many who work
outside finance, need to understand how derivatives work, how they are used, and how they are
priced.
A derivative can be defined as a financial instrument whose value depends on (or derives
from) the values of other, more basic, underlying variables. Very often the variables underlying
derivatives are the prices of traded assets. A stock option, for example, is a derivative whose
value is dependent on the price of a stock. However, derivatives can be dependent on almost any
variable, from the price of hogs to the amount of snow falling at a certain ski resort.
Future market is the most effective way for risk management. Their aim is to use futures
markets to reduce a particular risk that they face. This risk might relate to fluctuations in the
price of oil, a foreign exchange rate, the level of the stock market, or some other variable. A
perfect hedge is one that completely eliminates the risk. Perfect hedges are rare.
Now move on to consider forward and futures foreign currency contracts from the
perspective of a Bangladeshi investor. The underlying asset is one unit of the foreign currency
e.g. USD. Bangladesh Bank allows forward contract to buy USD in foreign exchange market to
for risk management issue. Derivative market is yet to develop in Bangladesh.
Although Bangladesh Bank allow forward contract to risk management it is not out to
risk free and Bangladesh firms also pay massive losses for lack of proper risk management
policy approved by Bangladesh Bank.
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Message of Islamic Finance & Risk Management:

In the Arabic language, the term hedging is known as tahawwut which origins from the
word hata . The linguistic meaning of the word hiyatah includes precaution, protection, attention
and/or patronage. The technical meaning of the word tahawwut in the field of finance is: the
adoption of processes and arrangements and the selection of contractual formats that guarantee
the reduction of risks to a minimum while maintaining good possibilities for return on
investment
Islamic finance is not only for Muslims. It is for entire humanity: We have send you
solely for the mercy of all worlds (21:107). This imposes a serious challenge to Muslim
economists, namely to successfully deliver the message of Allah ( s.w.t) to humanity, and
positively contribute to world economic stability and prosperity.
Formulation of contract involving debt in the Quran, the verses 282-283 of the second
chapter al-Baqarah, it had been stated O you who believe! When you contract a debt for a stated
term, put it down in writing. Have a scribe write it down justly between you. No scribe should
refuse to write; let him write as Allah has taught him, let the debtor dictate and let him fear
Allah, his Lord and not diminish what he owes. If the debtor is feebleminded, weak, or unable
himself to dictate, let his guardian dictate justly. Call in two men as witnesses. If two men are not
there, then call a man and two women out of those you approve as witnesses, so that if one of the
two women errs, the other can remind her. The witnesses should not refuse when they are called
on for evidence. Do not disdain to write the debt down, be it large or small, along with the time it
falls due. This way is more equitable in the sight of Allah, more reliable as evidence and more
likely to prevent doubts arising between you. But if the merchandise is there and you hand it
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over, there is no blame on you if you do not write it down. Have witnesses present whenever you
make a commercial contract; and let no harm be done to either scribe or witness, for if you did
cause them harm, it would be a crime on your part. Be mindful of Allah and He will teach you.
Allah has full knowledge of everything. If you are on a journey and cannot find a scribe,
something should be handed over as security.
Hedging and risk management is Quran, in the 12th chapter of the Quran, verses 47-49,
Prophet Yusuf answered: You shall sow for seven consecutive years as usual. Store all that you
reap, left in the ear, apart from the little you eat. After that will come seven years of hardship
which will consume all but a little of what you stored up for them. After that will come a year in
which the people will have abundant water and will press (products from grapes, olives etc.).
From the verses we can see how Prophet Yusuf suggested to the Egyptians to cultivate their
plantation for the fertile seven years and to stoke a majority part of their produce as a preparation
for a more critical time, which was the draught season in the following seven years. As a result,
Egypt was able to survive when the dry season hit for seven years and the risk of famine was
reduced since a big portion of food was stored during the first seven prosperous years. This is
clear evidence that strategic steps were taken in order to prevent and reduce expected risks, since
a risk that is not well-managed can bring harm to certain parties. Although the above verses are
mostly directed to the benefits of saving for the future, but it is also linked to the idea of the
future being uncertain. Risks are also part of the uncertain future.
Allah commend in the second chapter, verse 195: Spend in the cause of Allah; do not
contribute to your destruction with your own hands, but do good, for Allah loves those who do
good. This commend can be apply in hedging practice because the hedging method also
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requires a person or a corporate entity to pay a particular cost for purchasing financial
instruments that can be used in hedging investments or commerce from unforeseen risks.
A Bedouin Arab who asked the Prophet Muhammad on which is better; to leave his
camel untied and ask for the protection of Allah for his camel, or to tie it. The Prophet told him
to tie his camel first and then have tawakkal (trust and dependence: not to leave things entirely to
Allah without making any effort) to Allah. Islam teaches us to always be ready in facing any
unexpectedness. Without prior preparation (hedging practice), we may have to face even worse
risks.
The Prophet (peace be upon him) came to Medina and the people used to pay in advance
the price of dates to be delivered within two or three years. He said (to them), "Whoever pays in
advance the price of a thing to be delivered later should pay it for a specified measure at
specified weight for a specified period."
Possible Types of Islamic Futures Markets

Based on the three Islamic concepts of contract relating to future delivery, three different
types of Futures markets can be considered for an Islamic economy:
a) Salam-based Futures Market for commodities for which a regular market exists.
b) Istisna'-based Futures Market basically for the infra-structural and developmental

projects.
c) Jo'ala-based Futures Market for service based activities.
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The SALAM Contract

Definition
Literally, the word Salam is synonymous to the word salaf (lending) and to make Salam
is to give or lend something to somebody'. A Salam transaction is so called because the principal,
(i.e. price) is to be paid when the concerned parties sit together to conclude the contract.
Therefore, the Salam principal is salaf since it has to be paid in advance.
The Nature of SALAM

Salam is an exchange contract that results in future obligation of the receiver of the
finance and in this sense has both selling as well as borrowing implications.
a) SALAM as a Sale:
The general consensus among fuqaha' is that at the stage of signing the contract, Salam
is a sale as the author of al Majmu of the Shaft 'e school says: "Salam, therefore is a sale and
its contract is based on the same requirements and conditions of a ale contract".
Ibn Qudamah of the Hanbali school also says: "It is a sort of sale on which the rules of a
sale contract apply".
As for the Hanafi fuqaha', they indicate that "its elements are the same as those of bay'
(sale), i.e., "offer" and "acceptance" and a Salam contract may be concluded by using the word
bay' according to the most accepted view.
The Maliki fuqaha' divided sale contracts, from the view point of the time lag between
payment of price and delivery of the commodity into four types. The fourth type, according the
Maliki fuqaha' is "when delivery of the commodity alone is postponed and that is Salam" .They
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have also reported that some classical fuqaha' showed their dislike for using the word Salam to
refer to this contract, as this contract is in fact no more than a type of sale. Ibn Hazm has a
different view point regarding this issue. He says: "Salam is not a sale". He then explains the
difference between Salam and sale.
However, in spite of the fact that the majority of the fuqaha' consider Salam as type of
sale, yet they disagree on the idea that a Salam contract can be effected by mentioning the world
bay'.
There are two different viewpoints in this respect:
The Hanafi, Hanbali; Maliki and some Shafi'e fuqaha' believe that Salam
takes place by mentioning the word Salam and the word bay'. Ibn Qudamah in alMughni says. "It is a sale contract which takes its contractual form by use of terms that
are appropriate for a sale contract and by mentioning the word Salam". He also says: "It
is rightful as well to .effect a Salam contract by using the word bay' and by any other
word that suits a bay' contract". Ibn Abidin also says: "It has the same elements of bay'
and it can be concluded by using the word bay". The author of al Majmu adds "It can be
concluded by using the words salaf or Salam while there are two opinions regarding the
use of the word bay"
The view point of some Shafi 'e fuqaha' and Ibn Hazm as indicated 'by
the author of Mughni al Muhtaj is that "mentioning contract as per the most accepted
view". Ibn Hazm does not consider it a sale at all, and therefore he does not share the
view that it can be concluded with the word bay'.
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b) SALAM as Indebtedness
It is well known that when a Salam contract is effected, the commodity in question
becomes a debt burden on the seller as all fuqaha' agree. Ibn Qudamah says in al Mughni "...
that is, because the commodity sold remains as a debt and if the price is to be deferred also, the
contract will lead to exchange of debt against debt which is prohibited as per the unanimous
belief of the fuqahan" Ibn Abidin says: "Salam is allowed in what can be precisely described,
because being an in kind debt, it cannot be known except by description". The author of al
Majmu also confirms that The first condition regarding commodity sold in Salam is that it
(temporarily) remains as a lrability on the seller.
There is, therefore, no dispute that Salam is meant to involve a debt component. It is
worth mentioning here that in spite of their unanimous belief that Salam is a lending and
borrowing transaction, yet , fuqaha' were in sharp disagreement regarding the applicability of
some conditions of debt to Salam particularly with regard to transfer of debt and to guarantees as
we shall see below:
Transferring a Salam i s debt (whether by the debtor or the creditor) is
prohibited according to both the Shafi 'e and the Hanbali schools. The author of al
Majmu says: "Transferring a Salam i s debt is not allowed because such a debt is not
confirmed. The Salam contract is vulnerable to termination if thecommodity ceased to
exist. Debt transfer is allowed only when compensatory arrangements (in case of
default) could be resorted to, whereas such arrangements are not permissible in the case
of Salam" Ibn Qudam also says: "Transferring a Salam's debt is not allowed because
such transfer is allowed only for a confirmed debt. Being vulnerable to annulment, a
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Salam's contract does not result in a confirmed debt"
Regarding guarantees in Salam,
whether mortgage or collateral, Ibn
Qudamah summarizes in al Mughni wa al Sharhal Kabir the opposing viewpoints of

fuqaha' which comprise prohibition, dislike and permissibility. The latter is widely
accepted among fuqaha'.
Elements of the SALAM Contract:

There are three elements of this contract:
1) The commodity sold/purchased
2) The purchaser or the one who is paying the price now.
3) The seller or the one who agrees to deliver a specific commodity at a determined
future date.
Shari'ah Conditions For The SALAM Contract:

A Salam (Forward) contract in Islamic framework is subject to following main Shari'ah
conditions:
1)
Price must be paid by the buyer in advance and in lump sum.
2)
Using debt owed to the purchaser by the seller as price of the Salam
commodity is prohibited first because it will violate the principle that price must be
received by the seller in advance and secondly, and more importantly, it implies
exchanging debt for debt which is prohibited. The practice of paying the Salam
commodity by debt may lead to exploitation of Farmer and will defeat the purpose of
helping the Farmer to finance his production.
3)
Depositing the received price with the purchaser is permissible if the seller
receives it at the time of signing the contract and then deposits it with the purchaser.

4)
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Price should be determined and fixed in advance at the time of signing the
contract though it may or may not be the price currently prevailing in the , market.
5)
The Salam commodities according to all Fuqaha' is anything that can be
sold and which can be specifically described.

6)
The Salam commodity can be goods as well as services of an real asset.
7)
The characteristics to be mentioned in describing the commodity sold
should include those which could apparently affect its price without including other
unnecessary details in order not to make Salam contract impracticable.
8)
Salam contract is not permitted when commodity sold is money or another
currency.
9)
Commodity sold should be of known quantity.
10)
Commodity sold should be a thing that can possibly be delivered.
11)
The two objects exchanged should not be such that their exchange will
lead to "Riba". For example exchange of currencies cannot be made in the form of a
Salam contract because it will violate the principle of exchanging hand to hand (and hand
to hand means no Sabin).
12)
The contract should be binding and with no option especially contractual
13)
Purchaser cannot resell or transfer the ownership of the Salam commodity
option.
before it is delivered to him. He cannot dispose of the commodity through any such
action that leads to the ownership transfer like Ba'i Murabaha, tawliyah and wadi'ah,
hawalah etc. (This is the opinion of majority of the schools of thought including Hanafi,
Shafi'i and Hanbali. Malik school, however, permit resale or transfer of ownership
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before delivery is made provided the Salam commodity is not a food item). There is,
however, permission to sell a parallel Salam on the basis of a Salam already purchased.
14)
There is, however, no objection issuing a parallel Saloom contract against
the Salam commodity to be received in future. The two parallel contracts, however, will
be independent with independent obligations.
15)
If the seller does not deliver or tries to evade the delivery of the
commodity of Salam tract in time while the commodity is available in the market, then
this will be treated as refusing or evading to pay a debt. A legal sanction through court
can be obtained against him. (It is, however, not permissible to include any clause in the
contract to impose a fine for delay.)
16)
If the seller is unable to deliver the commodity, the following can be done:
a.
The seller agrees with the buyer to postpone the delivery till the next crop
(output) comes.
b.
If buyer does not agree, the seller will return him the advance paid to him
(without any increase).

c.
The contract can be canceled by mutual agreement.
Three points require serious attention in the concept of Salam trade from the point of
view of Futures and their markets.
Firstly, delivery of the goods is mandatory and compulsory. There is no
way to get around it. This is completely opposite to the practice in the contemporary
Futures trade. Though the delivery is legally binding but there is a mechanism to absolve
the traders of the obligation to make or take delivery. This will not be possible in Islamic
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framework.
Secondly, reselling of a Salam commodity before it is received is not
permitted in Islam, whereas contemporary Futures market have not only made it
permissible but have separated the Futures market from commodity markets in order to
focus only on selling and reselling commodities without receiving them.
Thirdly, Salam contract strictly require advance payment of the price of
the goods. The contemporary Futures market, on the contrary do not require any payment
to the farmer. They require only a small deposit, usually percent of the price, with the
Futures exchange as a security. This deposit is not paid to farmer.
The ISTISNA Contract

The istisna contract lets one buy a described manufactured item that the seller does not
own at the time of contracting, whether the item is made by the seller or another manufacturer.
The istisna contract is a unique feature of the Hanafi school, for the other three schools (Maliki,
Shafii, and Hanbali) consider it a salam sale and apply to it the salam rules. Because a salam
sale is a sale of a described item the not in the sellers custody, the three schools besides the
Hanafi attach to the istisna contract a condition of paying the entire price at the contracting
time. The Hanafi school says that the istisna contract has its own ruling, and is not considered as
a salam sale would be. On the basis of the Hanafi opinion, contemporary scholars have ruled that
the istisna contract is valid; that the payment of the full price at the contracting time is not
obligatory; and that the price can be paid in installments. Furthermore, istisna is a committing
contract based on fulfillment of the purchase specifications by the manufacturer.
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Definition
The word Istisna means requesting someone to construct, build or manufacture an asset.
Istisna is an agreement to sell to a customer a non-existent asset that is to be manufactured or
built according to the agreed specifications and delivered on a specified future date at a
predetermined selling price.
Elements of The ISTISNA Contract

The essential elements of the Istisna contract are:
i)
Legal capacity of contracting parties;
ii)
Offer and acceptance; and
iii)
Subject matter of the contract must be lawful which includes the
works and asset specification.
Features of The ISTISNA Contract

The features of an Istisna' contract are as below:
1)
Istisna' contract is a sale contract. It is neither treated as a hire contract
treated as a promise to deliver. It is treated as a sale contract.

2)
The subject matter of the contract is the commodity ordered by the buyer
to be manufactured and not the work or services of artisan or manufacturer and that is
what distinguishes it from the hire-contract.
3)
The subject matter of the contract is deemed to be non existent at the time
of contracting and the purpose of the contract is to manufacture it and bring it into
existence and that is the only justification of the permission of such a contract as an
exception to the general.
4)
The realm of this contract is goods that are subject to manufacturing; it
does not include natural goods like fruits, cereals and the like as these are in the realm of
P a g e | 15
Salam contracts if there is a need to sell them before they come into existence.
5)
The article to be manufactured constituting the subject-matter of sale
should be duly described in a clear manner that would not leave any doubt or uncertainty
about it. The same care is required in determining and fixing the price.
6)
The price need not be paid in advance in Istisna' contracts contrary to the
case of Salam contracts. The price, however, has to be precisely and definitely known in
advance. The price may be totally or partially advanced, totally or partially deferred or
paid in installments.
The following distinguishing features, particularly in comparison to Salam contract, need

to be noted in case of Istisna' contract:
Firstly, these contracts cannot be done in such commodities that are normally available in
the market or are not required to be customized. In other words these contracts cannot be done
where there is no uncertainty about the demand and some demand is always expected to exist.
These contracts are allowed only for such products which are not primary goods and which will
be produced only when there is a specific definite demand already established.
The examples include, buildings, bridges, factories, etc. This may include even such
mundane items as tailored clothing. Only the buyers, therefore, will initiate a Futures contract in
this case unlike the conventional Futures which can be initiated by either buyers or sellers.
Secondly, unlike Salam Sale the payment of price in this case can be deferred until the
delivery of the product. The price, however, can be paid in installments as may be mutually
agreed. Thus in this context it is in line with the contemporary Futures market where the prices
P a g e | 16
are not paid in advance for Futures delivery. Despite this feature, this is still not a concept that be
acceptable to or could be accommodated by the contemporary Futures market.
Thirdly, this contract is basically a production contract unlike Salam contract which is
basically a trading contract. Thus a seller agreeing to provide a product in future under this
contract will have to be a producer or will establish a contract-with a producer before entering
into such a contract.
Under Salam contract, this is not necessary. Since the Salam goods are generally
available in the market, the seller does not have to be a producer. He can purchase from the
market to supply the promised goods.
The JO'ALA Contract

Scholars of Islamic jurisprudence are divided on whether the Joala contract is
permissible in Islamic Shariah. According to the majority of the Malikite, Shafiite, Hambalite
and Shiite scholars, Joala is a permissible contract to be adapted in transactions. On the other
hand, the majority of the Hanafi and Dhahirri scholars take an opposite view that the Joala
contract is not compatible with Islamic Shariah. Hanafi scholars argue that this contract is illicit
because it has elements of gambling (Qimar) and risk (Mukhatara) on one hand, while it also
deals with an unknown person on the other hand. The Hanafi scholars consider the Joala
contract as null and void (Batil) if the agent ( Majuul) is not determined. However, the Dhahiri
scholars do not consider the Joala as a contract but as a promise which is preferable to be kept.
The concept of Jo'ala is similar to that of Istisna'. Whereas in Istisna' the seller provides a
physical commodity, in Jo'ala the seller provides a service rather than a physical commodity. All
P a g e | 17
other aspects of Jo'ala are same as of Istisna'. In Jo'ala deal, a seller will offer a definite service to
be provided whereas the buyers will pay a definite price for this service. In many instances,it
may be difficult to distinguish whether it is an Istisna' deal or a Jo'ala deal.
For example, consider asking a tailor to make a particular dress where the client pays the
tailor an advance only to cover the purchase of raw material, remaining payment (for the service
of the tailor) to be made after the good is delivered. This activity can be done under either of the
two concepts, though conventionally, this activity is regarded as a Jo'ala activity.
Definition
The Joala is a contract composed of three basics, the Jaeel (principal), the Maj'uul
(agent) and the Ju'ul (remuneration or compensation) in which a Jaeel (p rincipal) hires a
Maj'uul (agent) to perform a given task for a given Ju'ul (a compensation in monetary terms or
otherwise as it is specified in the contract) under the following conditions:
a.
If the Maj'uul completes successfully the task agreed upon, the
Jaeel pays him the agreed Ju'ul (compensation or remuneration).

b.
If not, the Maj'uul gets nothing.
Elements of The JOALA Contract

These contracts concentrate on three elements:
Uncertainty about some aspects of the market (prices, demand or output)
is constraining the production or exchange of goods/services.
The uncertainty is dealt with in a way so as to minimize its effect on that
aspect of the market that is constraining the exchange/production of the goods/services
P a g e | 18
concerned. When it is the uncertainty of prices, the prices and the factors effecting it are
the main focus for the Futures contract. When the uncertainty is about demand,
determining and defining the exact nature and form of demand is the focus of the
contract. When uncertainty is about the supply or output, then it is the output/supply
which is the main focus of the contract. The objective in all these being to avoid the
possibility of dispute because of the uncertainty about certain elements of the contract.
Advance payment of price when the output is normally available in the
market and hence certain to be delivered. When there is uncertainty of the output to be
delivered because the output is not available in the market, the payment of price can be
deferred until the delivery of the output.
Features Of The JOALA Contract

The main features of this contract may be summarized as follows:
1)
The agent may accomplish the task alone or in partnership with others in
the framework of this contract. He also may delegate the task to a tierce person to do it
for him. The principal pays the agent his remuneration. The agent in his turn will pay as
mutually agreed to his partners or the agent he delegated. The agent can also sign a fresh
Joala contract (a parallel Joala contract to the first one) with a new agent to perform the
task for a given Juul. Here the remuneration of the second agent will be naturally less
than that of the first agent; otherwise he will not sign a new Joala contract. The first
agent will then get a margin from this new Joala contract. The first agent in this case
plays the role of the principal ( Jaeel) while the second agent serves as the Majuul
(agent).

2)
P a g e | 19
In the Joala contract sometimes an agent may be specified or sometimes
not. In case the agent is not specified at the first hand, the Jaeel (the principal) will pay
the compensation as he announces to the person who does the job. However, this kind of
situation may not work in the contemporary setup but Fuqaha envision a possibility of
such a case.
3)
The Jaeel (principal) may contract more than one Majuul (agent) to
perform the task .The remuneration will then be shared by the agents as agreed.
4)
In the Joala contract the nature and amount of remuneration should be
specified in clear terms so that there will be no ambiguity in this respect . It also requires
the nature of the task to be well specified.
5)
In practice, the remuneration may in general be agreed upon to be part of
the capital lost or a fraction of the output. In case of disagreement, the agent will be paid
a wage like a paid employee. In the case of mining for instance, the Majuul may be paid
a fraction of the production of the mineral extracted as a remuneration. In the case of debt
recovery, the agent or firm specialized in debt recovery may get a percentage of the debt
recovered as Juul.
Conclusion
In 2008 the world economy faced its most dangerous crisis since the Great Depression of
the 1930s which begun through housing babble. This recession had begun in the United States in
December 2007, which made this already the third longest recession in the U.S. since World War
II.
If world economy follow conventional financing and risk management than this type of
P a g e | 20
crisis will be emerge after a certain period of time. Conventional financing and risk management
transfer the risk and this how babble get fatter and get explore. Whereas Islamic finance and risk
management system eradicate the risk.
P a g e | 21
Reference
Al-Suwailem, Sami/ Hedging in Islamic Finance, 2006
Hammad, Nazeeh, Salam Contract, Islamic Research and Training Institute, Islamic
Development Bank, Jeddah, 1994.
John C. Hull.8th ed /Options, futures, and other derivatives
M. Fahim Khan / Islamic Futures And Their Markets With Special Reference To Their Role In
Developing Rural Financial Market Research Paper No.32
Muhammad Anas Zarqa / ISTISNA FINANCING OF INFRASTRUCTURE PROJECTS
Nor Fahimah Mohd Razif, Shamsiah Mohamad and Noor Naemah Abdul Rahman /
Permissibility of Hedging in Islamic Finance
Umar, Muhammad Abdul Halim, Shari'ah, Economic and Accounting Framework of Bay al
Salam in the Context of its Contemporary Application (translated by M. Mehdi), Islamic
Research & Training Institute, Islamic Development Bank, Jeddah, 1992.
Zarqa, Sh. Mostapha Ahmad, Istisna' Contract, Islamic Research & Training Institute, Islamic
Development Bank, Jeddah, 1994.

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BUS698: Field Study

SALAM as a Sale: ........................................................................................................ 7

SALAM as Indebtedness .............................................................................................. 9

Elements of the SALAM Contract:........................................................................................... 10