Shari'ah Standards: Contracts, Prohibited Elements, and Zakah
Core concepts
AAOIFI Shari'ah Standards codify contract mechanics for Islamic financial institutions. Candidates must know the anatomy of the main nominate contracts: murabaha (cost-plus sale requiring disclosure of cost and profit, ownership before sale, and no penalty profit), mudarabah (capital from one party, effort from the other, profit shared by agreed ratio, loss borne by capital provider absent misconduct), musharakah (joint capital and profit/loss sharing), ijarah and ijarah muntahia bittamleek (lease with transfer), salam and istisna' (forward and manufacture sales with their payment and specification rules), sukuk (asset-backed, not pure receivables), and takaful. Underlying all of them are the prohibitions: riba (excess in exchange and deferment), gharar (excessive uncertainty), maysir (gaming), and haram subject matter.
Traps
Questions love the boundary cases. A late-payment penalty in murabaha must go to charity, not to the bank's income. Profit in mudarabah cannot be a fixed amount or a percentage of capital. A salam contract requires full advance payment and specified quality, quantity, and delivery date; istisna' does not. Sukuk holders must bear real asset risk; guaranteeing returns converts them into ribawi bonds. Takaful contributions are donations (tabarru'), not premiums, and surplus distribution follows the contract.
Rule of thumb
Ask three questions of any structure: (1) Is there a genuine asset or service with real risk transfer? (2) Is any return tied to an uncertain outcome rather than a fixed promise? (3) Does money flow as a sale, lease, or partnership rather than a loan? If all three point to genuine trade or sharing, the structure is likely compliant.
Worked example
A bank buys a machine for 100,000 and sells it to a client for 110,000 payable in installments. If the client defaults, the bank may charge a penalty, but that amount is donated to charity and is not recognized as income. The 10,000 is profit from a sale, not interest, because the bank owned and risked the asset before selling.